10 Oct

OAS Clawbacks

In some cases having your OAS clawed back is unavoidable, but in certain cases where your net income is surpassing the OAS net income threshold, the clawback can be mitigated or eliminated altogether.

Of course, if you are facing this situation it means you have made good choices during your accumulation years, but why pay more taxes than you need to?

In a case where you have a sizable portfolio within a non-registered account, one tool to explore is corporate class mutual funds. These are structured in a way to offset interest income against management fees within the mutual funds.

Interest income can be considered bad investment income as it is taxed 100% of your marginal tax. Corporate class mutual funds can also carry forward losses from bad years against gains in the current year and can also convert investment income into capital gains!

But not all corporate class mutual funds are the same. Some corporate structures no longer have losses on the books and took advantage of capital yield- which are no longer available since 2013- converting the investment income to dividend income. These are grossed up and can result in larger clawbacks!

Canadian dividends are grossed-up; the gross-up is part of the government’s attempt to ensure equal tax treatment for those who earn income through a corporation versus those who earn the same income personally. A dividend tax credit, which reduces tax payable on dividend income, is also part of this broader objective. But the credit applies after the calculation of OAS clawback, leaving many seniors with a smaller OAS benefit than they expected.

If only there was one solution for all, but many other strategies can be implemented to help reduce or eliminate OAS clawbacks- each case is unique.