Understanding clawbacks

You will not find a single instance of the word “clawback” in Canada’s tax legislation. But if you do an Internet search for “Canada clawback,” the first result will likely be a link to a Service Canada webpage outlining the Old Age Security (OAS) recovery tax. Visit that page and you’ll again see no reference to “clawback.”

Clawbacks can be an emotional matter for those affected and can apply more broadly than the reclamation of OAS benefits, potentially even at modest income levels. And they can reduce both income benefits/supplements and otherwise claimable tax credits.

Most are familiar with the concept of a marginal tax rate (MTR)—the rate of tax paid on the next or last dollar earned. Once clawbacks come into play, it’s equally important to understand the marginal effective tax rate (METR), which is the MTR plus those lost income benefits and tax credits.

OAS recovery tax

The OAS recovery tax can apply to those 65 and older receiving taxable annual income in excess of $70,954. For every dollar of income beyond that level, the 15% recovery tax reduces OAS benefits. As OAS benefit amounts are indexed quarterly, the upper end for full clawback pushes out a little each quarter, currently (Q4 2013) at $114,793.

The contribution to METR must take into consideration that lost OAS benefits would have been taxable income. So you cannot add the 15% clawback rate to the taxpayer’s MTR. Rather, the rate must be multiplied by [1-MTR] to arrive at the increase to METR. The Guaranteed Income Supplement (GIS) is administered alongside the OAS program, and is subject to recovery, but at a 50% rate. Full clawback of GIS (which is directed at alleviating poverty) occurs at a fairly low income level. For example, a single senior will receive no GIS if taxable income (not including OAS) is more than $16,704.

Age 65 tax credits

The age credit can be claimed against federal and provincial taxes by those 65 and older. It’s a non-refundable tax credit. The federal government and each of the provinces prescribe the amount upon which the credit is calculated, which is then multiplied by the appropriate tax credit rate (basically the lowest bracket rate).

Federally, the current amount is $6,854 and the credit rate 15%, yielding a maximum credit value of $1,028. Provincial credit values range from $224 to $511.

The clawback rate is 15%, federally and provincially. The contribution to METR is measured by multiplying the clawback rate by the credit rate.

Federally this comes out to 2.25% applied on income between $34,562 and $80,255. The provincial clawback rates are between 0.6% and 3.0%, with varying income ranges, though roughly tracking the federal range.

Provincial programs

The GST credit is a refundable credit paid quarterly. The entitlement amount varies according to spousal situation and dependants.

For a single person with no dependants, the maximum quarterly payment is $101, or $404 annually. The 5% clawback rate begins to apply at net income of $34,562, with full clawback at $42,641.

Also, some provinces have their own refundable credits that may be subject to clawbacks.

$37,500 INCOME LEVEL

Prov.	MTR	GST	Age 65	METR
BC	20.1%	+ 5.0%	+ 3.0%	= 28.1%
AB	25.0%	+ 5.0%	+ 3.8%	= 33.8%
SK	26.0%	+ 5.0%	+ 3.9%	= 34.9%
MB	27.8%	+ 5.0%	+ 3.9%	= 36.6%
ON	20.1%	+ 5.0%	+ 3.0%	= 28.1%
QC	28.5%	+ 5.0%	+ 5.3%	= 38.8%
NB	24.4%	+ 5.0%	+ 3.7%	= 38.5%
NS	29.9%	+ 5.0%	+ 3.6%	= 37.5%
PE	28.8%	+ 5.0%	+ 3.7%	= 37.5%
NL	27.5%	+ 5.0%	+ 3.4%	= 35.9%

$75,000 INCOME LEVEL

Prov.	MTR	OAS	Age 65	METR
BC	29.7%	+ 10.6%	+ 2.3%	= 42.5%
AB	32.0%	+ 10.2%	+ 2.3%	= 44.4%
SK	35.0%	+ 19.8%	+ 2.3%	= 47.0%
MB	39.4%	+ 19.1%	+ 2.3%	= 50.7%
ON	32.9%	+ 10.1%	+ 2.3%	= 45.3%
QC	38.3%	+ 19.2%	+ 2.3%	= 49.9%
NB	35.5%	+ 19.7%	+ 2.3%	= 47.4%
NS	38.7%	+ 19.2%	+ 2.3%	= 50.1%
PE	38.7%	+ 19.2%	+ 2.3%	= 50.1%
NL	35.3%	+ 19.7%	+ 2.3%	= 47.3%

Doug CarroLl, JD, LLM (Tax), CFP, TEP, is vice president, Tax and Estate Planning, at Invesco Canada.