Aug 17, 2026
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Picture this: It’s July, and a retiree checks their Old Age Security (OAS) deposit, expecting the usual amount. Instead, the OAS benefit payment is smaller than usual. After calling the bank and doing a bit of digging through last year’s tax return, the reason becomes clear: Their income crossed the government’s threshold, triggering the OAS recovery tax, commonly called the OAS clawback.
What was meant to be a stable monthly retirement benefit now comes with an unexpected reduction, tied directly to last year’s income. It’s confusing and frustrating and comes with little warning to Canadian retirees. We’re here to explain how the clawback works, how it’s calculated and what Canadians can do before year-end to reduce or avoid it.
What is the OAS clawback?
Before explaining anything, it is important to understand that the OAS clawback is a tax on your retirement income. It’s the informal name for the Old Age Security pension recovery tax. This is a mechanism used by the CRA to reduce OAS payments for higher-income seniors.
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Once a retiree’s net income exceeds the set annual threshold, part of or potentially all of their OAS will be repaid to the government through reduced payments.
Officially, this is called the OAS pension recovery tax. It applies to Canadians aged 65 and older who receive OAS and have net income above the annual limit set by the government. For the 2025 tax year, the threshold is $93,454. For the 2026 tax year, it rises to $95,323.
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To qualify for the OAS itself, Canadian seniors must have resided in Canada for at least 10 years after the age of 18, if still in Canada. If they live abroad, that threshold rises to 20 years. Unlike the Canadian Pension Plan (CPP), the OAS is not impacted by years of employment. The amount of OAS benefit received is based on residency and annual income, and can absolutely be reduced even if they fulfill all the requirements.
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How is the OAS clawback calculated?
The OAS clawback is calculated using a straightforward formula that is based on prior-year income:
- Determine your net world income (from your tax return)
- Subtract the annual threshold as set by the CRA
- Multiply the excess by 15%
- Divide the result across 12 months of reduced OAS payments
The clawback reduces OAS deposits starting in July and continues through June of the following year, based on the previous year’s income.
Hypothetical situation
A retiree has a total net income of $105,000 in 2025. For that year, the threshold is $93,454, so we subtract that figure from the annual income.
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That leaves $11,546 in excess income.
Multiply that excess by 15%, and it gives you $1,731.90 annually that you owe in clawback. This equals about $144 per month and will be deducted from OAS payments from July 2026 to June 2027.
For higher-income retirees, the OAS clawback can completely eliminate the government benefit. As per 2025 thresholds, OAS will be clawed back completely between July 2026 and June 2027 once income exceeds:
- $152,062 for ages 65 to 74
- $157,923 for ages 75+
These figures are set by the federal government and adjusted by the CRA to account for the annual cost of living expenses.
Which income sources trigger the clawback?
Most forms of taxable income in Canada will count towards the annual OAS threshold. These include the following:
- Employment income
- Canada Pension Plan (CPP) benefits
- Registered Retirement Income Fund (RRIF) withdrawals
- Registered Retirement Savings Plan (RRSP) withdrawals
- Interest income
- Rental income
- Capital gains (50% inclusion)
- Eligible dividends (grossed up to 138%)
Some income sources do not count, which is where you can really make a difference in your retirement plan. These sources include:
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- Tax-Free Savings Account (TFSA) withdrawals
- Most gifts and inheritances
- Certain life insurance proceeds
The dividend gross-up is something to take note of. Since eligible dividends earned in most accounts are “grossed up,” the taxable amount can be significantly higher than the dividends themselves. This can have unintended consequences, such as bumping a retiree over the threshold into a new tax bracket.
Why is the OAS clawback one of the most expensive tax zones in Canada?
The OAS clawback effectively adds a 15% reduction on top of the regular income tax. This means that for every dollar earned above the threshold, it is taxed twice. The first time through normal federal and provincial taxes, and the second time through the OAS repayment.
For a retiree with a marginal tax rate of about 40%, the clawback can push this to roughly 55%. In other words, they would only make $0.45 for every dollar earned over the OAS threshold.
Let’s take it one step further. Add in RRIF withdrawals and dividends, and you can see how quickly that 55% combined marginal tax rate begins to balloon even more.
How can Canadians legally reduce or avoid the OAS clawback?
Yes! The TFSA is one of the most powerful financial tools that Canadian retirees can use for retirement planning. Withdrawals do not count toward net income, and any capital gains or dividends remain tax-free.
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Let’s say that a retiree figures they’ll need about $20,000 annually and chooses to withdraw from their TFSA rather than their RRIF. While that could prevent thousands from losing OAS benefits, it is important to begin contributions early for sufficient savings in retirement.
The TFSA is great for retirees who were able to start utilizing the TFSA from a young age. It also tends to benefit lower-income retirees due to the flexibility and lack of tax deductions.
Does pension income splitting help?
Absolutely. Pension income splitting allows up to 50% of eligible pension income to be transferred to the lower-income spouse. This includes RRIF withdrawals.
Remember that splitting too much can also result in the lower-income spouse taking on so much that they also end up in a higher tax bracket.
Can RRSP withdrawal timing reduce future clawback?
Surprisingly, yes! This is referred to as the RRSP Meltdown strategy: retirees begin withdrawing assets from the RRSP before the age of 65. This reduces future RRIF withdrawals after the age of 71, which are a major driver of OAS clawbacks.
This strategy can be effective for retirees in relatively low tax brackets before OAS kicks in. Of course, the downside to this strategy is that withdrawals from your RRSP are immediately taxed, which can be more expensive depending on current income levels.
Does deferring OAS help?
Yes, choosing to defer OAS payments for a few years can be beneficial in the long-run. The monthly payment increases by 0.6% per month and up to 36% higher if deferred until age 70.
It should be noted that deferring your OAS payments does not eliminate the clawback. The future repayment of OAS is still determined by income, and a higher OAS payment can potentially trigger the clawback.
Should RRSPs be drawn down earlier?
It can be, but the timing and precision of this strategy usually require some professional advice. This strategy depends heavily on your current marginal tax rates, as well as your expected retirement income. This can be effective, but often requires balancing of TFSA utilization and pension income splitting with a spouse.
OAS clawback checklist — what to do before December 31
- Estimate your current-year net income using your Notice of Assessment and investment statements
- Compare projected income against the OAS threshold ($93,454 for 2025)
- If close to the threshold, consider using TFSA withdrawals instead of taxable accounts
- Review whether pension income splitting could reduce household net income
- Model RRSP and RRIF withdrawals carefully to avoid pushing income above the threshold
- If already facing clawback, consider filing Form T1213 with Canada Revenue Agency to adjust withholding and avoid a large tax-time repayment
This checklist is informational. For personalized planning, a fee-only financial planner or tax adviser may be appropriate, especially if you have a high-income or complex financial situation.
FAQs
What is the OAS clawback threshold for 2026?
The OAS clawback threshold for the 2026 tax year is $95,323. This applies to OAS payments from July 2027 to June 2028 and is based on 2026 net world income. The figure is set annually by the CRA.
Do TFSA withdrawals affect OAS?
No. TFSA withdrawals are not included in net income and do not affect the OAS clawback calculation. This makes the TFSA a key planning tool for retirees near the income threshold, but also for all retirees hoping to increase their retirement savings and reduce future taxation.
Is the OAS clawback the same as a tax?
It is officially called a recovery tax by the Canada Revenue Agency. It reduces OAS payments based on prior-year income and is separate from income tax applied to OAS itself.
At what income does OAS get fully clawed back?
For the July 2026 to June 2027 benefit year, OAS is fully eliminated for individuals aged 65–74 with 2025 income above $152,062 and for those aged 75+ with income above $157,923, as set by the Federal Government’s guidelines.
Can you avoid the OAS clawback by deferring OAS to age 70?
No. Deferring OAS increases the monthly benefit but does not eliminate the clawback. Income level at the time of payment still determines whether repayment is required.
Does OAS count as income for clawback purposes?
Yes. OAS is taxable income and is included in net income calculations for the following year’s clawback. This can create a compounding effect for higher-income retirees.
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Noel Moffatt is a Canadian fintech expert with a passion for simplifying personal finance. Based in St. John’s, NL, he draws on his background in finance, SEO, and writing to deliver clear explanations and actionable advice. Noel is dedicated to equipping readers with the knowledge and tools they need to make informed financial decisions, striving to make personal finance more accessible and understandable through his in-depth articles and reviews.
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