Canadian seniors who collect Old Age Security (OAS) pensions have to keep an eye on their net world income. As soon as earnings top a minimum threshold, the Canada Revenue Agency (CRA) implements a 15% OAS pensions recovery tax that reduces the OAS payments in the following year. One way to generate additional investment income without putting OAS at risk is to use a Tax-Free Savings Account (TFSA) to hold the investments.
OAS clawback details
High-income retirees are at risk of getting their OAS cut, or even eliminated if they earn too much money. The CRA uses net world income for the calculation. This means that all taxable income from company pensions, the Canada Pension Plan (CPP), OAS, Registered Retirement Savings Plan (RRSP) withdrawals, and Registered Retirement Income Fund (RRIF) payments count toward the total. Income from taxable investment accounts, rental properties, or a part-time job also goes into the calculation.
In the 2023 tax year, the OAS clawback threshold is $86,912. Every dollar above that amount triggers a 15-cent reduction in the OAS payment for the July 2024 to June 2025 period.
An income of $87,000 sounds like a lot for a retiree, but it is easy to hit that amount if a person has a generous company pension and also receives full CPP and OAS. Once you take income tax out of the total and factor in the sharp rise in living costs, the budget can still get tight at the end of the month for some people who earn this much money in retirement.
One way to reduce or avoid the OAS clawback is to maximize investments inside a TFSA before holding income-generating investments in a taxable account.
TFSA limit
The TFSA limit is $6,500 in 2023. That brings the maximum cumulative TFSA contribution room to $88,000 per person. In 2024, the TFSA limit will be at least another $6,500 and might get bumped to $7,000.
TFSA contribution room can be carried forward, and withdrawals open equivalent new space in the following calendar year.
All interest, dividends, and capital gains earned inside the TFSA are tax-free and are not counted toward the net world income total. For someone who is at or near the OAS clawback threshold, the impact of shifting income investments from taxable accounts to a TFSA can be significant.
Best investments for passive income?
In the current market conditions, Guaranteed Investment Certificates (GICs) from many financial institutions offer rates above 5.5%, and some great dividend-growth stocks offer yields near 8% today. For example, TC Energy (TSX:TRP) has increased its dividend annually for more than two decades and currently has a dividend yield of 7.9%.
The bottom line on the OAS clawback
Retirees can quite easily get an average yield of 6% right now on a diversified portfolio of GICs and top Canadian dividend stocks. At this rate, a TFSA of $88,000 would generate $5,280 per year in tax-free income that won’t cause a clawback in OAS pension payments.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.
The S&P/TSX composite index was up 0.05 of a point at 24,224.95.
In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.
The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.
The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.
The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.
This report by The Canadian Press was first published Oct. 10, 2024.
