OAS clawback: how to avoid losing your retirement benefits

OAS clawback has you stressed out? Your hard-earned retirement benefits shouldn't disappear just when you need them most. Yet many Canadian seniors face exactly this situation with the OAS clawback — a mechanism that can significantly reduce your Old Age Security payments when your income exceeds certain thresholds.

The good news? With strategic planning and the right approach to accessing funds, you can protect your benefits while maintaining your lifestyle. This guide explores:

• How the OAS clawback actually works and who's at risk
• Proven strategies to reduce or eliminate the recovery tax
• Smart ways to access funds without triggering additional taxable income

P.S. — if you’re near the threshold and need cash this year, consider funding big expenses (repairs, helping family, debt payoff) with sources that don’t increase taxable income, like TFSA withdrawals or home equity borrowing. For Ontario homeowners, Lotly’s secured home loans and HELOCs can be one option to access equity while keeping your OAS plan intact. Book a free consultation to learn more. 

What is OAS clawback and how does it work?

The OAS clawback (officially called the "recovery tax") is a mechanism that gradually reduces Old Age Security benefits when a senior's income exceeds the government's established threshold. It's designed to target OAS benefits toward lower and middle-income seniors, but it can catch many retirees by surprise.

Understanding how this recovery tax works is the first step toward protecting your benefits. The clawback isn't a simple yes-or-no proposition — it operates on a sliding scale that increases as your income rises.

The mechanics of the OAS recovery tax

For the July 2026 to June 2027 period, the OAS clawback threshold starts at $93,454 in net income (based on your 2025 income). Once your income exceeds this amount, your OAS benefits are reduced by 15 cents for every dollar above the threshold. This continues until your benefits are eliminated, which (for July 2026 to June 2027) happens when your income reaches $152,062 (age 65–74) or $157,923 (age 75+).

Here's how the calculation works:

1. Determine your net income for the year (line 23400 on your tax return)
2. Calculate how much your income exceeds $93,454
3. Multiply the excess by 15%
4. This amount will be deducted from your annual OAS payments

For example, if your annual income is $103,454 (exactly $10,000 over the $93,454 threshold), your OAS clawback would be $1,500 ($10,000 × 15%). This means you'd lose $125 from your monthly OAS payment ($1,500 ÷ 12 months).

When and how the clawback is applied

An important detail many seniors miss: the recovery tax isn't applied immediately. The CRA uses your income from the previous tax year to calculate clawbacks for the following benefit period (July to June).

For instance, if your 2025 income exceeds the threshold, the resulting clawback will reduce your OAS payments from July 2026 to June 2027. This delay creates both challenges and opportunities for planning.

Understanding your risk for OAS clawback

Before implementing strategies to avoid the clawback, you need to assess whether you're at risk. Many retirees are surprised to find their benefits reduced because they didn't realize which income sources count toward the threshold.

The OAS clawback is based on your "net income before adjustments" (line 23400 of your tax return), which includes:

• Employment and self-employment income
• Pension income (CPP/QPP, employer pensions)
• RRSP and RRIF withdrawals
• Interest and dividends (with dividend gross-up)
• Capital gains (50% taxable portion)
• Rental income
• Other taxable benefits

Notably absent from this list are:

• TFSA withdrawals
• Loans (including home equity loans)
• Return of capital
• Principal residence sale proceeds (in most cases)

Common income triggers that push seniors over the threshold

Many seniors find themselves facing clawback due to these common scenarios:

• Required RRIF withdrawals: After age 72, mandatory minimum withdrawals can push your income over the threshold
• Capital gains realization: Selling investments with significant appreciation
• Dividend income: Remember that eligible dividends are "grossed up" by 38% for tax purposes, potentially pushing you over the threshold faster than expected
• One-time income events: Inheritance, property sale, or other windfall

Case example: The clawback cliff

Consider this example: Martha has a steady annual income of $88,000, safely below the clawback threshold. When faced with a $20,000 home repair, she withdraws the funds from her RRIF, pushing her annual income to $108,000.

This single decision triggers a $2,181.90 OAS clawback ($14,546 over threshold × 15%), effectively adding about 10.9% to the "cost" of her home repair. Had Martha accessed these funds through a non-taxable source like a secured home loan, she could have preserved her full OAS benefit.

7 effective strategies to avoid OAS clawback

Now that you understand how the clawback works and whether you're at risk, let's explore proven strategies to protect your benefits.

Income splitting with your spouse

One of the most powerful tools for Canadian couples is pension income splitting. This allows you to allocate up to 50% of eligible pension income to a lower-income spouse, potentially bringing both spouses below the clawback threshold.

Eligible pension income includes:

• Payments from registered pension plans
• RRIF withdrawals (age 65+)
• Annuity payments from RRSPs or deferred profit-sharing plans (age 65+)

Income splitting is implemented through Form T1032 when filing your taxes. No physical transfer of funds occurs — it's purely a tax calculation.

Pro tip: Income splitting can save thousands in combined tax and OAS clawback. For a couple where one spouse has $110,000 in pension income and the other has $40,000, splitting could save over $3,000 in combined tax and preserved OAS benefits.

Maximize TFSA contributions

The Tax-Free Savings Account is perhaps the most powerful tool for avoiding OAS clawback because withdrawals don't count as taxable income. While RRSP/RRIF withdrawals increase your taxable income and potentially trigger clawback, TFSA withdrawals have no impact.

For 2026, the annual TFSA contribution limit is $7,000, with a cumulative limit of $109,000 for those who were 18 or older in 2009, when TFSAs were introduced. If you haven't maximized contributions in previous years, you have "catch-up" room available.

Strategic approach: Consider gradually converting some RRSP/RRIF funds to your TFSA (within contribution limits). While this creates taxable income in the short term, it establishes a tax-free income source for the future.

Strategic RRSP/RRIF withdrawals

Timing is everything when it comes to registered account withdrawals. Consider these approaches:

• Early RRSP withdrawals: If you're retired but not yet 65, consider withdrawing from your RRSP before OAS eligibility begins. This reduces your RRSP balance and thus lowers mandatory RRIF withdrawals later.
• Strategic RRIF planning: Use the younger spouse's age to calculate minimum withdrawals, reducing the required amount.
• Smooth income across years: Rather than taking large withdrawals in some years and none in others, aim for consistent annual withdrawals to stay below the threshold.

Example: Instead of withdrawing $30,000 from your RRIF in one year (potentially triggering clawback), withdraw $10,000 annually over three years to stay below the threshold.

Tax-efficient investment strategies

The type of investment income you earn affects your taxable income differently:

• Interest income: 100% taxable
• Eligible dividends: Grossed up by 38% (though eligible for dividend tax credit)
• Capital gains: Only 50% taxable
• Return of capital: Not taxable when received (reduces adjusted cost base)

For non-registered accounts, consider investments that generate capital gains rather than interest or dividends. Corporate class mutual funds can also be tax-efficient, as they can convert interest and dividend income into capital gains.

Tax-loss harvesting is another strategy: selling investments with paper losses to offset capital gains, thereby reducing your net taxable income.

Timing of income and deductions

Strategic timing of when you recognize income or claim deductions can help manage your annual taxable income:

• Control capital gains realization: Time the sale of appreciated assets to years when your income is lower
• Bunch medical expenses: Concentrate eligible medical expenses in a single tax year to maximize the medical expense tax credit
• Strategic charitable donations: Make larger donations in years when your income is higher
• Defer CPP/QPP: If appropriate for your situation, delaying CPP/QPP can reduce income in early retirement years

Using home equity wisely

For many seniors, their home represents their largest asset. Accessing this equity can provide tax-free cash flow without increasing taxable income that might trigger OAS clawback.

Home equity solutions provide funds as loans rather than income, making them invisible to the OAS clawback calculation. This creates a powerful planning opportunity for seniors with significant home equity.

Lotly's secured home loans offer a flexible way to access tax-free funds without affecting OAS eligibility. Unlike traditional banks that focus primarily on income and credit scores, Lotly welcomes diverse income sources (including pensions and benefits) and all credit profiles, making it particularly well-suited for seniors.

Case example: John and Margaret needed $50,000 for home renovations and to help their grandchild with education costs. Withdrawing from their RRIFs would have pushed them both over the OAS threshold, resulting in combined clawbacks of $3,750. Instead, they obtained a secured home loan through Lotly, accessing the funds without affecting their taxable income or OAS benefits.

Consider corporate structures (for business owners)

For seniors who own businesses, corporate structures can offer tax-planning opportunities:

• Retained earnings: Keep excess profits in the corporation rather than distributing them as income
• Dividend timing: Control when dividends are paid to manage annual income
• Corporate investment accounts: Hold investments inside the corporation to defer personal taxation
• Estate planning: Use corporate structures as part of a comprehensive estate plan

While post-2018 tax changes have limited income sprinkling strategies, there are still legitimate ways for business owners to manage income flow.

Comparing financial products and their impact on OAS

Different financial products have varying impacts on your taxable income and potential OAS clawback. This comparison can help you make informed decisions:

RRSP/RRIF withdrawals

• Impact on taxable income: increases taxable income
• Effect on OAS clawback: may trigger clawback
• Best for: required minimum withdrawals; careful planning needed

TFSA withdrawals

• Impact on taxable income: no impact on taxable income
• Effect on OAS clawback: no effect on clawback
• Best for: tax-free income that preserves benefits

Dividend investments

• Impact on taxable income: increases taxable income (with gross-up)
• Effect on OAS clawback: may trigger clawback
• Best for: lower-income seniors below threshold

Capital gains

• Impact on taxable income: 50% taxable
• Effect on OAS clawback: lower impact than interest/dividends
• Best for: strategic selling to control timing

Secured home loan

• Impact on taxable income: no impact on taxable income
• Effect on OAS clawback: no effect on clawback
• Best for: accessing funds while preserving benefits

Reverse mortgage

• Impact on taxable income: no impact on taxable income
• Effect on OAS clawback: no effect on clawback
• Best for: seniors who don't want monthly payments

Annuities

• Impact on taxable income: increases taxable income
• Effect on OAS clawback: may trigger clawback
• Best for: guaranteed income needs with proper structuring

Examples: Before and after OAS clawback strategies

Let's examine how implementing various strategies can reduce or eliminate OAS clawback in real-world scenarios.

Case study 1: Retired couple using income splitting

Before strategy:

• Robert's income: $110,000 (including $70,000 eligible pension income)
• Susan's income: $40,000
• Robert's OAS clawback: $2,481.90 (($110,000 - $93,454) × 15%)
• Susan: No clawback

After income splitting strategy:

• Robert allocates 50% of eligible pension income ($35,000) to Susan
• Robert's revised income: $75,000
• Susan's revised income: $75,000
• Both below the clawback threshold
• OAS clawback saved: $2,481.90 annually

Case study 2: Senior using TFSA and strategic RRIF withdrawals

Before strategy:

• David's income: $95,000 (including $30,000 RRIF withdrawal)
• OAS clawback: $231.90 (($95,000 - $93,454) × 15%)

After strategy:

• David withdraws only $25,000 from RRIF (keeping income at $90,000)
• Takes additional $5,000 from TFSA for spending needs
• Revised income: $90,000
• OAS clawback: $0
• Annual savings: $231.90

Case study 3: Homeowner using home equity instead of registered account withdrawals

Before strategy:

• Patricia's income: $88,000
• Needs $25,000 for home repairs and medical expenses
• If withdrawn from RRIF: Income would be $113,000
• Resulting OAS clawback: $2,931.90 (($113,000 - $93,454) × 15%)

After strategy:

• Patricia obtains a $25,000 secured home loan through Lotly
• Income remains at $88,000
• OAS clawback: $0
• Annual savings: $2,931.90

Home equity: a powerful tool against OAS clawback

Home equity deserves special attention as a strategy to avoid OAS clawback — it's often overlooked despite being one of the most effective approaches.

How accessing home equity provides tax-free funds

When you access your home equity through a loan product, the funds you receive are not considered income — they're loan proceeds. This fundamental difference means these funds don't appear on your tax return and don't count toward the OAS clawback threshold.

For seniors with significant home equity, this creates a powerful alternative to withdrawing from registered accounts which would trigger taxable income and potential clawbacks.

Comparison of different home equity products

Several options exist for accessing home equity:

Secured home loans:

• Provide lump-sum funding based on available equity
• Require regular monthly payments
• Often have more flexible approval criteria than traditional banks
• Typically faster approval and funding process

Home equity lines of credit (HELOCs):

• Revolving credit that can be drawn as needed
• Interest-only payment options
• Typically require stronger credit and income qualifications
• Usually offered by traditional banks

Reverse mortgages:

• No monthly payments required
• Loan is repaid when the home is sold or the owner passes away
• Generally higher interest rates
• Age restrictions (55+ typically)

How Lotly's secured loans work for seniors concerned about OAS clawback

Lotly's secured loans are particularly well-suited for seniors concerned about OAS clawback for several reasons:

• Flexible qualification criteria: Diverse income types are accepted, including pensions and government benefits
• All credit scores welcome: Approval isn't limited by traditional credit score cutoffs
• Transparent process: Clear explanation of rates, terms, and fees
• Quick funding: Typically about two weeks from application to funding
• Loan amounts from $5,000 to $1,000,000: Flexibility to meet various needs

The application process is straightforward:

1. Complete a simple online form with basic information
2. Speak with a loan expert who explains options and requirements
3. Submit required documents
4. Receive a tailored offer with transparent terms
5. After approval, receive funds within approximately two weeks

Example: A Toronto homeowner with $85,000 in annual income needed $40,000 for home renovations and to help a family member. Withdrawing from their RRSP would have pushed them well over the OAS threshold. Instead, they obtained a secured home loan through Lotly, accessing the funds they needed while preserving their full OAS benefit, saving approximately $4,700 in clawback over the next benefit year.

Long-term strategies to minimize OAS clawback

While immediate tactics can help you avoid clawback this year, long-term planning is essential for sustained benefit protection.

Pre-retirement RRSP withdrawal strategies

If you're approaching retirement but not yet receiving OAS, consider:

• Strategic RRSP meltdown: Gradually withdrawing from RRSPs before age 65 to reduce future mandatory withdrawals
• RRSP to TFSA conversion: Withdraw from RRSP (paying tax now) and contribute to TFSA for tax-free growth and withdrawals later
• Income smoothing: Plan withdrawals to maintain a consistent income below the threshold

Strategic conversion of RRSPs to RRIFs

When converting your RRSP to a RRIF:

• Timing matters: You must convert by the end of the year you turn 71, but you can convert earlier if it fits your strategy
• Consider spousal RRSPs: These can help balance income between spouses
• Plan for minimum withdrawals: Understand how these will impact your future taxable income

Asset location optimization

Where you hold different investments can significantly impact your taxable income:

• TFSAs: Ideal for investments with the highest expected returns
• RRSPs/RRIFs: Best for fully taxable income, like interest and foreign dividends
• Non-registered accounts: Preferred for Canadian dividend-paying stocks and investments that generate capital gains

Timing of CPP/OAS application

When you start receiving CPP and OAS can affect your clawback situation:

• Delaying CPP: Increases your benefit by 0.7% per month after age 65 (up to age 70)
• Delaying OAS: Increases your benefit by 0.6% per month after age 65 (up to age 70)
• Strategic timing: If you have other income sources, delaying these benefits can reduce clawback in early retirement years

Multi-year tax planning approach

Rather than planning year by year, take a multi-year or even decade-long view:

• Income forecasting: Project your income for the next 5-10 years
• Identify opportunities: Look for years when income might be lower to accelerate income or defer deductions
• Regular reviews: Revisit your plan annually as tax laws and personal circumstances change

When to seek professional help

While many clawback strategies can be implemented independently, certain situations warrant professional guidance.

Complexity indicators that suggest professional help is needed

Consider working with a financial professional if:

• Your income is consistently near or above the clawback threshold
• You have multiple income sources with different tax treatments
• You own a business or have corporate assets
• You have substantial assets in various account types (registered, non-registered, TFSA)
• You're planning major financial changes (selling property, receiving inheritance)

Types of professionals who can assist

Different professionals offer specialized expertise:

• Financial planners: Comprehensive retirement and income planning
• Tax specialists: Detailed tax minimization strategies
• Estate planning attorneys: Incorporating tax planning into your estate plan
• Mortgage brokers or specialists: For home equity solutions

Questions to ask potential advisors

When selecting a professional, ask:

• What experience do you have with OAS clawback strategies?
• How do you stay current with changing tax laws and thresholds?
• What specific strategies would you recommend for my situation?
• How do you charge for your services?
• Can you provide references from clients in similar situations?

Cost-benefit analysis of professional advice

Professional advice typically costs $150-$300 per hour or a flat fee for a comprehensive plan. When evaluating this expense, consider:

• Potential annual savings from avoided clawback
• Peace of mind from having an expert-designed strategy
• Time saved from researching and implementing strategies yourself
• Additional benefits beyond clawback avoidance (overall tax efficiency, estate planning)

For many seniors facing significant clawbacks, professional advice can pay for itself many times over.

Ready to protect your OAS benefits? Lotly can help

Navigating OAS clawback doesn't have to be overwhelming. With strategic planning and the right financial tools, you can preserve your benefits while maintaining your lifestyle and meeting your financial needs.

Secured home loans offer a powerful way to access funds without triggering additional taxable income. Lotly's flexible approval criteria, transparent process, and quick funding make it an ideal option for seniors looking to protect their OAS benefits.

Key takeaways:

• Understand your clawback risk by calculating your income relative to the $93,454 threshold (2026) and identifying which income sources count toward this limit.
• Implement tax-efficient strategies like income splitting, TFSA maximization, and strategic RRSP/RRIF withdrawals to keep your income below the threshold.
• Consider home equity solutions, such as Lotly's secured home loans, to access funds without creating taxable income that could trigger a clawback.
• Take a multi-year approach to income planning, looking for opportunities to smooth income and minimize clawback over time.

If you're ready to see your options, Lotly makes it simple. One form, real solutions, and a team that's on your side. Book a free consultation to see how you can access the funds you need while protecting your OAS benefits.

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