Understanding Old Age Security (OAS) in Canada

Old Age Security (or OAS) is one the two main components of Canada’s government-sponsored retirement income system—the other being the Canada Pension Plan (CPP). There are also federal and provincial supplements which are available to lower-income seniors. While many retired Canadians receive both OAS and CPP benefits every month, the two plans are quite different. The only determinants of the amount of Canada Pension Plan benefits receivable are one’s contribution amount and the age at which one elects to begin receiving benefits; other sources of available income or one’s overall income level are not considered. Eligibility for OAS, on the other hand, is based on Canadian residency. Essentially, a person aged 65 and older who has lived in Canada for at least forty years after the age of 18 is eligible for full OAS benefits. Where the length of Canadian residency after age 18 is less than forty years, a partial pension is earned at the rate of 1/40th of the full monthly pension for each full year lived in Canada. OAS benefits are fully indexed to inflation.

The differences between the CPP and OAS extend to how each program is financed. The CPP, like all contributory pension plans, is financed out of contributions made and income earned from the investment of those contributions. OAS, on the other hand, is paid from general federal government tax revenues. And, as the Canadian population ages, the cost of OAS to the federal government has continued to increase.

Several years ago, the federal government determined that it was no longer willing to maintain OAS as a program of universal entitlement. The conclusion reached was that the priority for benefits would be Canadian seniors whose income from all sources fell below a government-determined ceiling. That change meant that many Canadians, whose residence history would otherwise qualify them for full OAS benefits, must repay some benefits received.

The mechanism through which that limitation of benefits was to be achieved was the OAS “recovery tax”. The “clawback”, as it is known to virtually everyone but the federal government, is simple in concept. Where a person receiving OAS benefits has income for the year over a prescribed ceiling, 15% of that excess is deducted from the recipient’s OAS entitlement, up to the full amount of any OAS benefit otherwise receivable. For 2015, that income ceiling is $72,809, and the clawback is calculated as follows:

If the OAS recipient’s income in 2015 is $85,000, then the repayment would be 15% of the difference between $85,000 and $72,809:

$85,000 – $72,809 = $12,191

$12,191 x 0.15 = $1828.65

In this case, the OAS recipient would have to repay $1828.65 of benefits received in 2015. Where a taxpayer is subject to the OAS clawback, amounts owed are deducted from his or her OAS payments in the following benefit year. So, for example, a retiree who is subject to the clawback because his or her income for 2015 was greater than the OAS clawback threshold of $72,809 will have his or her benefits reduced during the “recovery tax period” from July 2016 to June 2017. The deduction will be spread over those 12 monthly pension payments, and the retiree will receive an Advisory Letter informing him or her of any recovery tax deductions which will be withheld from their OAS payments.

If, as in above example, the clawback amount for 2015 is $1828.65, a deduction of approximately $153 per month would be deducted from OAS pension payments starting in July 2016.