Tax Letters: Another reason to consider working beyond age 65Date: November, 2013
Increasing the potential value of your OAS benefit
Old age security (OAS) is a benefit that is paid to eligible Canadian seniors who either apply for the benefit, or are automatically enrolled in the program. The value of the benefit is currently approximately $6,600 per year (it is adjusted quarterly for inflation) but is reduced or eliminated where income exceeds certain thresholds. For 2013, the OAS benefit is generally reduced where net income exceeds $70,954 and is completely eliminated where income exceeds $114,793. Therefore, if your income exceeds $114,793, applying for OAS is of no benefit.
Beginning on July 1, 2013, you may choose to delay receipt of OAS for up to five years beyond the normal benefit start date of age 65. In exchange, for each month of delay, your monthly pension payment will increase by .6%. If you delay for the maximum period of time allowed, you will only receive your pension at age 70, but your annual receipt will be 36% higher than it otherwise would be. In other words, based on the current annual OAS benefit calculations (i.e. ignoring inflation adjustments), an individual who defers OAS receipt for 5 years can receive $8,976 per year from the age of 70 and onwards, rather than $6,600.
Whether this tradeoff is beneficial will depend on your particular situation including your life expectancy, your current and future income level, and your expected rate of return. However, in situations where current income is above the OAS threshold ($114,793 for 2013) but is anticipated to be below the threshold in the future, the benefit of delay is clear. Under these circumstances, if you apply for OAS today, your benefit will be eliminated because your income is too high. If, on the other hand, you delay your application for OAS, although you will not receive a current OAS benefit, your potential OAS entitlement increases. In future years when your income is lower (say $70,000), your OAS benefit will not be clawed back and your OAS entitlement will be higher (by .6% per month of delay, up to a total of 36%) than it otherwise would have been.
As you can see, there is a benefit to delaying receipt of your OAS benefit to the extent that your income currently exceeds the OAS threshold (and so the benefit is fully clawed back) but is expected to be below the minimum OAS threshold in the future (and so the benefit is not clawed back at all). These conditions may be met under the following circumstances (this is not an exhaustive list):
- An individual has chosen to work beyond the “normal” retirement age of 65.
- An individual incurs a capital gain, which he/she does not anticipate incurring again in the future.
- A business owner chooses to extract corporate funds in excess of the OAS threshold after the age of 65 but plans to cease doing so in a future year.
- An individual retires at age 65 and receives limited retirement payments (e.g. has unused sick leave credits that are paid out over a year or two).
If you have started to receive OAS payments but wish to benefit from the deferral, you may write to Service Canada to request to cancel your OAS pension. You may do so provided that you have been receiving pension benefits for less than 6 months. Once your request is approved, you will be required to repay the benefits that you received. You can reapply for OAS at a later date. Your deferral benefit will be calculated based on the number of months between July 2013 and the earlier of the date that you start to receive OAS and the month of your 70th birthday.
With some careful planning (particularly where private companies are involved), there may be an opportunity to receive a larger OAS benefit at a future date. Each situation is different and, as always, consultation with your professional advisors at Crowe Soberman LLP is recommended.
This article was prepared by Marissa Verskin who is a senior manager in Crowe Soberman’s Tax Group. If you have any questions relating to this article, we encourage you to contact Marissa via email or 416.644.3307.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article.