The “sacred trust” of our universal pension scheme, the OAS program, consists of three separate components: Old Age Security (“OAS”), Guaranteed Income Supplement (“GIS”) and Spouse’s Regular or Survivor’s Allowance.
While this is fairly uncomplicated, there are a few things that you should know.
OAS provides a basic retirement income to everyone who meets the residency requirements for eligibility and has attained age 65. This benefit is good for life, and will last until the individual is deceased. There are two sets of eligibility rules, “Old Rules” and “New Rules”.
The Old Rules were in effect until July 1, 1977. Under these rules, a person was entitled to either a full pension or no pension. In order to qualify for a full pension, a person must have either:
- Lived in Canada for 40 years after the age of 18; or
- Lived in Canada for the 10 consecutive years immediately preceding the OAS application; or
- If the person did not meet either of the two previous requirements, but did live in Canada for the entire year immediately preceding the application, he or she could make up the 10 year requirement by substitution of 3 years of Canadian residence between the ages of 18 and 65 for each year missing from the 10-year requirement
The New Rules came into effect on July 1, 1977. Under these rules, a person still qualifies for a full pension after 40 years of residence in Canada after age 18. However, if this requirement is not met, the person may be eligible for a pro-rated pension based on a minimum of 10 years residence after the age of 18. People who were at least 25 on July 1, 1977 and who had previously lived in Canada, are allowed to apply for OAS under either the Old or New Rules, whichever is more beneficial. There is a 40 year transition period for the New Rules. After July 1, 2017 they will apply to everyone.
The OAS payments will continue after a person leaves Canada as long as the person has lived in Canada for at least 20 years after the age of 18. If the 20 year requirement is not met, payments will cease in the seventh month after leaving Canada and resume in the month of return to Canada.
An application form should be filed 6 months before age 65 in order to guarantee receiving benefits in the month you turn 65.
The periodic OAS monthly benefit amount can be found here.
Pension benefits are increased quarterly to match increases in the CPI. The benefits are fully taxable.
Starting on July 1, 2013, people turning 65 after this date have a window of time—5 years—to “opt into” OAS, receiving a premium reward for deferral.
This is a significant change in that you now need to be deliberate in your pension planning–before, the OAS automatically fell into your hands at age 65. Now, you must choose! The government is sending out letters to people entering their 65th year to explain this change. The do-nothing default action is that you will take your OAS pension at 65. You must be proactive if you wish to defer it. Thus, you ought to review this decision during your 64th year in a financial planning context.
Under new law, anyone born after March 31, 1958 will have to wait until age 67 to be eligible to receive OAS. Anyone born between April 1, 1958 and December 31, 1962 will experience a phased-in age bump between age 65 and 67. Anyone born before April 1, 1958 will still qualify at age 65.
Entitlement to guaranteed income supplement for low income retirees (GIS) will parallel the qualifying time for OAS.
Once a pensioner’s net income (including OAS benefits) exceeds a threshold amount ($56,968 for 2002), the OAS begins to be “clawed back”. The clawback rate is 15% of the amount which exceeds the threshold amount. The clawback thresholds are indexed annually and can be found here.
The mechanics of the clawback are handled in multiple ways on your tax return:
- The amount to be clawed back is reassessed with each income tax return filed and is either withheld from the OAS payments beginning the next July or added to the income tax payable the following year.
- The entire OAS is added to net income via a T4OAS
- The amount clawed back (either withheld or repaid) is deducted from net income to arrive at taxable income
- The amount of the clawback not withheld at the source is added to the income tax payable
- The amount of the clawback withheld at the source is reported on the T4OAS as an income tax deduction
The introduction of the clawback creates, effectively, an extra tax for high-income retirees and those whose income is periodically higher than normal, e.g. thanks to capital gains. The clawback test is applied separately to each of a retired couple, not on a family basis; therefore, one may be victimized but not the other.
The existence of the clawback can provide legal opportunities for tax planning to mitigate its sting:
- Income splitting strategies which shift income to a spouse who either doesn’t collect OAS yet, or doesn’t have sufficient income to fall into its clutches
- If you are still working at age 65, it may be wise to delay your application. The application may be approved retroactively to age 65, but for no longer than twelve months. The retroactive amount will be taxable in the calendar year received. If you manage things properly, your income will be less in this year due to your retirement and you may fall under the clawback trigger amount
- If you have triggered a large one-time capital gain, it may be prudent to realize some compensating capital losses elsewhere in your portfolio
- If you have several one-shot income increments, it may be wiser to realize them all in one year, and thus be hit by the clawback only once, rather than several times
- It may be wise to save and utilize some RRSP contribution room after age 65 to counter clawback years; your tax break on the contribution will be higher than just your marginal tax bracket
Guaranteed Income Supplement (GIS)
GIS is a federal supplement for low-income seniors. It is available to all recipients of full or partial OAS who meet low-income requirements. There is an income test based on both spouses’ previous year’s tax return. If spouses “involuntarily separated” due to residence in nursing home, for example, each spouse’s income is considered separately. After the initial application, in most cases, filing an income tax return automatically renews the GIS as long as eligibility requirements are still met. You must be a Canadian resident to qualify. Payments cease after an absence from Canada of 6 months. You can re-qualify upon returning to Canada. You can find the GIS rates and income cutoff levels on the Human Resources website.
Regular or Survivor’s Allowance
The applicant must be aged 60 to age 64 and be the spouse, widow or widower of an OAS pensioner. You must have lived in Canada for at least 10 years after the age of 18. Again, more details are available on the Human Resources website.
Updated Fall, 2013