OAS clawback

If I received and subsequently invested a loonie for every client who has bemoaned the dreaded clawback of Old Age Security benefits because their retirement income is too high, the income ultimately generated from that investment alone could be enough to wipe out my own entire OAS benefits!

The OAS program is an important component of many Canadians’ retirement income and includes the basic OAS pension, the Guaranteed Income Supplement, the Allowance, and the Allowance for the Survivor. The program, as we know it today, came into force in 1952 and has been amended several times since. It’s financed from the Government of Canada’s general tax revenues.

The current 2010 maximum OAS monthly benefit is about $518, which translates into just over $6,200 annually. Pensioners with an individual net income above $66,733 must repay part or, in some cases, the entire maximum OAS pension amount.

This repayment, which is normally deducted from the monthly payments before they’re issued, is referred to as the OAS clawback. For 2010, the full OAS pension is eliminated when a pensioner’s net income is $108,152 or above.

Perhaps two of the biggest sources of heartache for OAS-deprived seniors:Annual, required minimum Registered Retirement Income Fund withdrawals; and The impact of grossed-up Canadian dividends.

Gaisford v. Human Resources

Indeed, these two issues caused so much grief to George Gaisford that in June, he took the Minister of Human Resources and Skills Development, whose department administers the OAS program, to Tax Court (Gaisford v. Human Resources, 2010 TCC 332).

In 2007, Mr. Gaisford received a T5 slip and a T3 slip from RBC Direct Investing Inc. These slips indicated that he received a total of $2,917 of actual dividends, which translated to $4,229 of taxable dividends (using the 45% gross-up factor applicable to Canadian eligible dividends). He argued that only the actual amount of dividends he received should be included in his income for purposes of the clawback calculations.

Additionally, in 2007, Mr. Gaisford also received approximately $4,700 from his RRIF. He argued the amount in his RRIF was his money and should not be included in his income when paid to him, and therefore should not negatively affect his OAS payments. Not surprisingly, the Judge dismissed both arguments.

The Judge explained that the amount Mr. Gaisford received from his RRIF represented an amount that had not been previously taxed, either because he would have received a deduction in computing his income when he made a contribution to his RRSP, or because the amount was paid from income earned while the amount was held by the RRSP or RRIF.

As for the dividends, since the income for calculating the OAS payments is based on the net income as computed under the Income Tax Act (which includes the 45% gross-up), the higher, taxable amount must be included in the OAS calculation.

The Judge attempted to explain this seeming inequity by reminding the taxpayer that “dividend income is not taxed in the same manner as interest income. While dividends are grossed-up so that a greater amount is included in income than was actually received, the individual is also entitled to claim a dividend tax credit. As a result, the amount of income tax that would be paid in relation to an actual dividend of $2,917 will be less than the amount of income tax that will be paid in relation to interest income of $2,917.”

Changes coming?

Nonetheless, the Judge’s explanation may not sit well with your clients.

To this end, the Investment Funds Institute of Canada (IFIC), in its 2011 Pre-Budget submission to the House of Commons Standing Committee on Finance, recommended the use of actual dividends received, not the grossed-up amount of 125% for ineligible dividends or 145% for eligible dividends, in the means-tested net income calculation for OAS and GIS benefits.

Explains the IFIC, “Some seniors try to avoid dividend income due to the dividend gross-up, meaning seniors with the same income may have different net income for purposes of social benefits calculations and hence receive substantially and unfairly varying net benefits.”

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.