Minimize Old Age Security Clawbacks With The Right Investment Strategy


Old Age Security Clawback Explained

Several years ago, Canada added a clawback system to its tax regime. One of the most disliked is the Old Age Security (OAS) clawback. Currently, anyone collecting OAS must pay back all or a portion of their OAS payments and any net federal supplements if their annual income for the previous year exceeds the threshold limit.

If you live in Canada and receive an OAS pension, and your income is more than the threshold amount of $79,054 in 2020, you are required to pay a recovery tax back to the government in 2021. To calculate your total income, the CRA includes the following:

  • Employment income
  • Payments from company pension plans
  • CPP and OAS payments
  • Withdrawals you make from your various Registered Income Funds (RIF, LIF, RLIF).
  • Investment income and dividend payments received from any investments that are held in a non-registered account

The recovery tax is calculated by subtracting the threshold amount ($79,054) from your total income from all sources and applying a 15% recovery tax to the difference.



Once your total income from all sources hits $128,137, you will have your entire OAS clawed back by the government.

Investments & Tax Treatments

One easy way to minimize OAS clawbacks is to max out your TFSA because the CRA does not include withdrawals from your TFSA in the calculation of your total income. Once your TFSA has been maxed out, you will want to take a hard look at your non-registered investments to ensure that they are as tax efficient as possible. Any income generated from your non-registered investment will count towards your income level to determine your OAS clawback.

Did you know that:

  • Canadian dividends are grossed-up by 38% by the CRA when calculating the income level used to determine your OAS clawback. If you earned $25,000 in dividends, the government would count it as $34,500 towards your income.
  • Regular interest income, which is not grossed up by the CRA, is treated on a 1:1 basis, so $25,000 in interest income would count as $25,000 income.
  • Investment payments classified as Return of Capital (ROC) are not included in determining income for the OAS clawback. Often, distributions received from Real Estate Investment Trusts (REITs) are classified as ROC and as such their distributions provide an extremely tax-efficient cash flow stream for investors.


Susie, Bob, and Tom each earn the same income (remember income = employment income, company pension, CPP, OAS, and RIF/LIF/RLIF payments) and receive the same dollar value ($25,000) of distributions from their investment.

The only difference between them is the type of distributions they receive from their non-registered investment.


As you can see from our example, Susie must pay back more than $3,000, while Tom pays back nothing. The reason is, that Susie’s investment distributions were in the form of dividends, and Tom’s REIT distributions were considered a return of capital, which is not included in determining income. Tom did not exceed the threshold and will therefore not be required to have his OAS payments clawed back.

Why are REIT Distributions not included in the OAS Clawback calculation?

One of the primary advantages of investing in a Real Estate Investment Trust (REIT) is the tax treatment afforded the distributions that are paid out by the REIT. A REIT is allowed certain non-cash deductions such as depreciation, which typically lowers the REIT’s taxable income without reducing the cash available for distributions. This permits the REIT to make cash distributions to the investor over its taxable income. Any distribution over the REIT’s net income is classified as a Return of Capital (ROC) for tax purposes in the hands of the investor. Unlike interest, dividends, and capital gains, income classified as ROC is not taxable and is not included as income for the OAS clawback purposes. The younger the REIT and the more active it is at purchasing buildings, the higher the ROC component of total distributions will be.

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