The Old Age Security (OAS) clawback can significantly reduce your government benefits in retirement. With the 2025 clawback threshold set at $90,997, many middle and upper-middle-class retirees face partial or complete loss of their OAS benefits. Here are five proven strategies to legally minimize or avoid the clawback.
⚠️ Understanding the OAS Clawback
The OAS recovery tax (clawback) begins when your net income exceeds $90,997 (2025 threshold). For every dollar above this threshold, you lose $0.15 of your OAS benefit. At $148,451 (2025), your entire OAS benefit is clawed back.
Strategy 1: Income Splitting with Your Spouse
Pension Income Splitting
One of the most effective strategies for couples is pension income splitting. You can split up to 50% of eligible pension income with your spouse, potentially keeping both partners below the clawback threshold.
Example: The Johnsons
Situation: John receives $100,000 in pension income, while Mary has only $30,000 in retirement income.
- Without splitting: John faces OAS clawback on $9,003 above the threshold
- With splitting: John allocates $35,000 to Mary, reducing his income to $65,000
- Result: Both stay below the clawback threshold, saving $1,350 annually in OAS clawback
Eligible Income for Splitting
- Registered pension plan payments
- RRIF withdrawals (after age 65)
- Life annuity payments
- RRSP annuity payments (after age 65)
Strategy 2: Strategic RRIF Withdrawal Planning
The timing and amount of your RRIF withdrawals can significantly impact your OAS clawback. Consider these approaches:
Front-Load Withdrawals
Withdraw more than the minimum from your RRIF in your early retirement years (before age 71) when you may have lower overall income.
Income Smoothing
Spread your RRIF withdrawals over multiple years to avoid large income spikes that trigger clawback.
| Age | Minimum Withdrawal % | Strategic Withdrawal % | Benefit |
|---|---|---|---|
| 65-69 | 4.0% | 5.5-6.0% | Reduces future minimum requirements |
| 70-74 | 5.28% | Minimum only | Maintains income consistency |
| 75+ | 5.82%+ | Minimum only | Avoids forced high withdrawals |
Strategy 3: Tax-Free Savings Account (TFSA) Maximization
TFSA withdrawals don't count as income for tax purposes, making them powerful tools for OAS clawback avoidance.
The TFSA-First Approach
- Prioritize TFSA withdrawals for discretionary spending in retirement
- Delay RRIF withdrawals beyond minimum requirements when possible
- Use TFSA room to shelter investment growth from future taxation
2025 TFSA Contribution Room
- Annual limit: $7,000
- Lifetime contribution room (since 2009): $95,000
- Unused room carries forward indefinitely
- Withdrawal room is restored the following year
Strategy 4: Corporate Retirement Planning
For business owners and incorporated professionals, corporate structures offer unique opportunities to manage retirement income and avoid OAS clawback.
Individual Pension Plans (IPPs)
IPPs allow business owners to:
- Make larger tax-deductible contributions than RRSPs
- Create predictable pension income streams
- Split pension income with spouses
- Potentially reduce overall retirement income through structured payouts
Salary vs. Dividend Optimization
In your pre-retirement years, consider:
- Higher salaries to maximize CPP contributions and pension income splitting opportunities
- Retained earnings in the corporation for tax-efficient withdrawal in retirement
- Capital gains strategies using the lifetime capital gains exemption
Strategy 5: Advanced Investment Strategies
Tax-Efficient Investment Allocation
Where you hold different types of investments can impact your taxable income and OAS clawback risk.
| Account Type | Best Investments | OAS Impact |
|---|---|---|
| TFSA | High-growth stocks, REITs | No impact - tax-free |
| Non-registered | Canadian dividends, capital gains | Preferential tax treatment |
| RRSP/RRIF | Bonds, GICs, foreign stocks | Fully taxable on withdrawal |
Capital Gains Harvesting
In years when your income is below the clawback threshold, consider:
- Realizing capital gains to reset your cost base
- Rebalancing your portfolio for tax efficiency
- Converting some investments to dividend-paying stocks for preferential tax treatment
Timing Considerations
The Five-Year Window
OAS clawback is based on the previous tax year's income, giving you planning opportunities:
- Year 1 (Age 64): Reduce income through RRSP contributions, income deferral
- Year 2 (Age 65): OAS begins, manage first year's clawback risk
- Years 3-5: Implement ongoing income management strategies
Provincial Considerations
Some provinces offer additional benefits that may be affected by income levels:
- Provincial drug coverage programs
- Property tax deferrals
- Senior-specific tax credits
Common Mistakes to Avoid
❌ Avoid These Pitfalls
- Waiting too long: Start planning at least 5 years before age 65
- Ignoring your spouse: Consider combined family income, not just individual income
- One-size-fits-all: Strategies must be tailored to your specific situation
- Ignoring other benefits: Don't focus solely on OAS - consider GIS and provincial benefits
- Tax-tail wagging: Don't let tax avoidance override sound investment principles
Professional Guidance
OAS clawback planning involves complex interactions between multiple income sources, tax rules, and government benefits. Consider working with professionals who can help:
Fee-Only Financial Planner
Overall retirement income strategy and coordination
Tax Professional
Tax-efficient withdrawal strategies and income splitting
Estate Lawyer
Trust structures and advanced estate planning strategies
Action Steps for 2025
Calculate Your Risk
Project your retirement income from all sources and determine your clawback exposure.
Review Your Asset Allocation
Optimize where you hold different types of investments for tax efficiency.
Implement Income Splitting
If married, explore pension income splitting opportunities with your spouse.
Maximize TFSA Usage
Ensure you're using available TFSA room and prioritizing tax-free withdrawals.
Plan Your Withdrawal Strategy
Develop a year-by-year plan for withdrawing from different account types.
Key Takeaway: OAS clawback planning requires a holistic approach that considers all your income sources, your spouse's situation, and the timing of withdrawals. Start planning early, implement multiple strategies, and consider professional guidance to maximize your retirement income and preserve your government benefits.