Want to beat the OAS clawback? Move south

Do you have a Canadian client who is planning to move south of the border?

Then here’s some good news. He can apply for OAS in the U.S. and won’t be subject to the standard clawback thanks to the Canada-U.S. Treaty.

“Sometimes people don’t apply for [OAS] after they move to the U.S. because they didn’t realize there was a treaty provision,” says Robert Keats, president of KeatsConnelly.

Further, the average annual premium for individual health insurance in the U.S. last year cost US$2,196, finds eHealth. So having OAS can actually pay for most healthcare costs, adds Keats.

“You’ve got the Canadian government paying for Canadians’ medical [benefits] in the U.S.”

Applying for OAS simply requires filling out an application for Canadian Old Age, Retirement, and Survivors Benefits through the Canadian government. Also, clients must file taxes and provide proof of U.S. residence.

Daren Raoux, senior manager, tax, Deloitte presents four hypothetical scenarios of a Canadian couple with $100,000 in gross income: $6,500 in OAS, $11,000 in CPP and $82,500 in other retirement income.* How much will they pay in taxes in Canada vs. the U.S.?

No surprises here. The U.S. comes out on top, he says.

However, to see the real impact of the OAS clawback, Raoux looks at the tax on OAS income from a marginal rate perspective.

• For the Alberta couple, tax on OAS amounts to $5,444 (83.75% tax rate).
• For the Ontario couple, tax on OAS amounts to $5,566 (85.6% tax rate).
• For the Florida or Arizona couple, combined Federal/state tax on OAS amounts to $1,381 (21.25% tax rate).

Overall, a Canadian couple in the U.S. pays between $4,063 and $4,185 less tax on the gross $6,500 OAS income than a Canadian couple in Canada.

*Note: For purposes of the example, we’ve ignored the impact of any possible pension-splitting election in Canada **Canadian dollars