Nearly every Canadian relies on both Canada Pension Plan (CPP) and Old Age Security (OAS) benefits in retirement. There are some distinct differences between both the CPP and OAS. With every client we have the discussion to map out the strategy for when they should collect both the CPP and OAS.
OAS is a monthly payment you can receive if you are 65 and older. Unlike CPP, you cannot apply to receive OAS benefits before the age of 65. With both OAS and CPP, you will receive a higher monthly amount if you defer collecting these pensions beyond age 65. The maximum deferral age for both is age 70. We will go through the numbers for OAS below.
Couples are able to complete a CPP sharing application to assist with income splitting throughout retirement. OAS does not have the ability to be split or shared with your spouse. Typically, the amounts for OAS are identical anyways so this would not usually result in any net benefit, even if sharing was an option.
With Canada Pension Plan (CPP), you must apply to obtain benefits. With OAS, the process may, or may not, be similar to CPP. If you are talking to your friends that already have OAS, they may have told you that they were automatically enrolled — that is likely true. You may be talking to another friend that tells you that they had to apply for it — that also is likely true.
As a potential OAS recipient, the process may be confusing — do you have to apply for these benefits or not? OAS is based on residency — how many years have you lived in Canada after the age of 18? If you have lived your entire life in Canada and if Service Canada has enough information about you, then you may be automatically enrolled in OAS. In other cases, where the information they have is not 100 per cent clear, you will likely have to apply for OAS.
If you are over 65, and have not yet received OAS, then you may be able to apply and get a retroactive payment for up to a maximum of 11 months from the date Service Canada receives your application.
If you are under 65, extra care should be taken with respect to OAS. For some of our clients, we recommend that they defer collecting OAS.
To ensure they are not amongst the recipients that will be automatically enrolled, we will assist them in drafting a letter to Service Canada requesting that OAS benefits do not begin at age 65. Later in this article we will outline a few of the scenarios where we will recommend that clients defer OAS.
Basic CPP and OAS benefits
When discussing OAS with clients approaching age 65, we will outline the benefits.Let’s first start by looking at the current maximum monthly payment amounts.
Every January, April, July and October, the OAS payment amounts may be adjusted upward to reflect the increase in the cost of living as measured by the Consumer Price Index (CPI). The monthly payments will not decrease if CPI decreases. In September 2020, the maximum monthly payment was $613.53.
Currently, the maximum monthly CPP retirement amount starting the pension at age 65 is nearly double OAS at $1,175.83.
OAS is subject to repayment
From a taxation standpoint, both CPP and OAS are taxable.
One of the major differences between CPP and OAS is that CPP is not income tested. You will receive the CPP benefit if your income is $20,000 or $200,000. On the other hand, OAS is subject to repayment if taxable income exceeds certain levels.
A term often used for repayment is “clawback.” The OAS pension is one of those benefits subject to the clawback. For 2020, OAS begins getting clawed back once net income before adjustments exceeds $79,054. OAS is fully clawed back in 2020 once net income reaches $128,136.
|2020 Net Income||OAS Monthly Maximum||OAS Annual Maximum||OAS Repayment||OAS After Repayment|
Note: For illustration purposes, we assumed monthly OAS is $613.53 throughout 2020
For clients who have annual net income above $128,136, we will always recommend that they defer their OAS. If you do nothing, and Service Canada automatically enrols you, then you will have the full OAS annual maximum amount fully clawed back. We recommend that you write to Service Canada, before you turn 65, to request the deferral of OAS.
Benefit of OAS deferral
In 2012, CRA adjusted the OAS rules to allow people to defer taking OAS until the maximum age 70. For every month of deferral after age 65, your OAS monthly maximum increases 0.6 per cent a month. In the chart below, we made the assumption that OAS is indexed at two per cent annually over the next five years (actual numbers in the future will be different than the amounts in the table below). We also increased the monthly payment by 7.2 per each year (0.6 per cent x 12 months) of deferral.
|Age||Year||Original OAS Monthly Maximum (no deferral)||OAS Annual Maximum (no deferral)||OAS Monthly Maximum Inflation Adjusted||Inflation Adjusted Maximum (deferral)||OAS Annual Maximum (deferral)|
Many people have the fear of outliving their savings. One way to help protect against this fear is to defer OAS. The maximum deferral results in OAS being 36 per cent higher if you defer for five years (7.2 per cent x five years).
If at age 65 you decide to not collect OAS immediately, and wait until age 70, you will receive over $3,300 ($11,507.79 - $8,128.24) more each year beginning in your 70th year. The person that begins collecting at age 65 would have received approximately $38,312 ($7,362 + $7,509 + 7,659 + $7,813 + $7,969) before the person who chose to begin collecting at age 70.
When preparing a financial plan for clients, we will always outline our recommendations for applying for both CPP and OAS. The decision to collect OAS is integrated into many other financial decisions. Once all of the relevant information, projections, and assumptions are summarized, then a rational decision can be made for whether to begin collecting OAS at age 65 or deferring.
Genetics a key factor
With all of our clients, we ask for a family tree to obtain information about their parents. Providing the date of birth and current age, or date of death, enables us to have a discussion about genetics.
With some decisions about CPP, it may be advantageous to defer collection if you feel that you will live longer than an average life expectancy. If both of your parents lived into their 90s, and you are in great health, then deferring collecting OAS to age 70 will result in a higher monthly amount and a better long term financial decision.
On the flip side, if you have health concerns and feel that you will have less than average life expectancy then collecting at age 65 may be a prudent decision.
One of the key decision factors to collect OAS is whether or not you need the funds for cash flow. In other situations we are mapping out the most tax efficient strategy throughout your lifetime, and this dictates the timing of when to collect OAS. If you need funds for cash flow then we nearly always recommend collecting OAS at age 65 if you are not subject to the repayment.
RRSP conversion to RRIF
In many cases, we convert our clients’ RRSP accounts to a RRIF well before the required age of 71. We process the withdrawals in a way that, when OAS is applied for, the payments (minimums or higher) will not result in the OAS being repaid. In some situations, we may pull extra funds out of a RRIF between ages 60 and 69 depending on our clients’ other taxable income, and defer OAS until age 70.
In other cases, we will defer RRIF withdrawals to age 72 if taxable income is already near the OAS clawback threshold. If you are subject to a partial OAS clawback then you should discuss with your Portfolio Manager what strategy is best to consider.
Tax Free Savings Account (TFSA)
Every individual who is subject to the clawback should open up a TFSA to shelter as much income from tax. Maximizing the TFSA every year may assist you in keeping more of your OAS in the future.
Many of our clients have either active companies or holding companies. The integration of the income from these corporations must be integrated into decisions of when to collect OAS. We will have a discussion with our clients’ accountants to review the financial plan.
Excessive taxes on final estate
For some of our clients, we advise them to forget about the concept of collecting OAS. For some clients, it will make sense to pull more out of their RRSP or RRIF even if they get clawed back to help reduce the amount that their estate will have to pay in taxes.The top tax bracket (B.C. 20.5 per cent and Federal 33.0 per cent) is 53.5 per cent. Add all the other costs and it could easily be 56 per cent.
If a client has $1,000,000 in a RRIF we will always do an estate calculation to inform them of the tax liability if they were to pass away. Paying $560,000 in combined taxes, probate, executor, accounting and legal fees would result in the net estate being only $440,000.
Taking money out of a RRIF early may mean higher taxes in the short term, and possibly losing some or all of your OAS, but you are minimizing having your estate being taxed at an excessive rate. The big picture decision for many clients is to forget about OAS and manage withdrawals and taxable income at an acceptable level today to minimize estate taxes.
Gifting assets early
If you are having some of your OAS clawed back you may want to consider gifting securities, or money, early to adult children. By gifting assets to adult children or grandchildren during your lifetime, they may be able to purchase a personal residence or pay down non-deductible debt on their home. The tax benefit to you is that your income may be low enough to receive partial or full OAS. Give a bit now and get a little more OAS.
If you ultimately want some funds from your estate to go to charity, you may want to consider gifting assets gradually over time, and not leave everything as an estate payout. If your income continues to grow, this may allow you to obtain full credit for your donations and keep your income low enough to obtain partial or full OAS.
In some cases, we have clients who have had an irregular spike in their taxable income in a year. If this occurs when they are 65 then we will recommend that they defer OAS. In some cases they are already collecting OAS and have income above $79,054. In these cases it may be worth considering making an RRSP contribution (if you are eligible and have the deduction limit), to reduce taxable income and keep more of your OAS. If you are eligible and have RRSP deduction room, discuss with your portfolio manager whether you should make an RRSP contribution.
There are numerous scenarios that should be considered in deciding when to begin collecting OAS. It is important that you integrate the timing of when to collect OAS with other forms of taxable income.
Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director, wealth management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138. greenardgroup.com