The OAS Clawback's Hidden Tax Rate, and How to Plan Around It

Take an Ontario retiree whose net income already sits above the OAS clawback threshold and hand them another $10,000. At their combined federal and Ontario marginal rate, they pay a large share of it in income tax. They also give back $1,500 of Old Age Security. That leaves them with far less of the $10,000 than most people expect. A taxpayer with a far higher income can keep more of their next dollar than that.

The OAS recovery tax, the clawback, works like a hidden bracket. It sits on a specific band of income and nowhere else. Once you see that, the job is to control which year your income shows up in and which line of the return it lands on. For anyone within a few years of 65, and especially anyone who controls how they pay themselves, that changes some ordinary decisions.

The hidden rate lives in one band

CRA recovers 15 cents of OAS for every dollar of net income above the threshold, which sits in the mid $90,000s ($93,454 on 2025 income, $95,323 on 2026 income) and is indexed each year. The benefit is fully gone at roughly $152,000 to $158,000 on 2025 income, depending on age. Below the threshold there's no clawback. Above the top, there's nothing left to claw back, so the extra 15% disappears too.

So the effective rate climbs sharply inside that band and drops back down above it. The middle-income retiree takes the hit, and someone whose OAS is already gone at a much higher income doesn't.

One lumpy year does the damage

The clawback looks at net income on line 23600, one calendar year at a time, and applies it to the following benefit year. Income earned in 2025 sets your OAS payments from July 2026 through June 2027.

That makes spikes expensive. Sell a rental property, cash out a large RRSP, or take a big dividend from your company, and a single year can wipe out a full year of OAS. The same income spread over three or four years might never cross the threshold at all.

Some practical levers:

• Spread capital gains. When you sell on terms and collect payments over time, a capital gains reserve can spread the taxable gain over several years.
• Use RRSP room before 65. A contribution lowers net income in the year you claim it, and if you have room left at 64 or 65, that deduction can pull income back under the threshold.
• Split eligible pension income with a spouse to even out two net incomes.
• Draw from a TFSA in high years. The Government of Canada confirms TFSA withdrawals don't count as income for OAS. RRIF withdrawals do.

Corporate owners have extra control, and extra trade-offs

If you own an incorporated business, you choose when profit leaves the company. Keeping earnings inside instead of paying a large dividend can keep your personal income below the band. Watch the other side, though: once the corporation's passive investment income passes $50,000, its small business deduction shrinks by $5 for every dollar over. Your accountant should run both numbers together.

There's a mortgage trade-off too. Lenders qualify you on the income you report. A self-employed owner who cuts personal income to protect $1,500 of OAS may then fail the debt-service test on a refinance or a purchase. For uninsured mortgages, OSFI's stress test uses the contract rate plus 2 percentage points or 5.25%, whichever is higher. If that pushes you to a private lender, the extra interest can cost far more than the OAS you saved. If a purchase or refinance is coming in the next two years, settle the financing plan before you settle the tax plan, and keep two years of returns and notices of assessment ready.

Some investors decide the full benefit, roughly $9,000 to $10,000 a year, isn't worth complicated planning. That's a reasonable choice when it's made on purpose. The costly version is when the decision gets made for you, by one year's income landing all at once.