OAS clawback: 7 strategies to avoid it 2026

How the OAS clawback works

The OAS clawback applies when individual net income exceeds $90,997 in 2026. For every dollar above this threshold, 15 cents of OAS is recovered by the federal government. The maximum OAS in 2026 is $743.00/month ($8,916/year) for those aged 65-74.

OAS is fully eliminated when net income reaches approximately $148,000. At $100,000 income, the clawback would be approximately $1,350 per year ($9,003 x 15%). At $120,000, approximately $4,350 clawed back. At $140,000, approximately $7,350 clawed back.

The clawback is calculated on the previous year's tax return. The recovered amount is deducted from OAS payments from July to June of the following year. The effective marginal tax rate for a retiree in this zone can reach 50 to 64% when combining income tax and the OAS clawback.

Strategy 1: RRSP meltdown before 65

The RRSP meltdown involves withdrawing RRSP funds between ages 60 and 72, while income is lower, to reduce the RRSP balance before mandatory RRIF withdrawals push income above the clawback threshold.

Example: a client with a $500,000 RRSP at age 60. If no action is taken, mandatory RRIF withdrawals at 72 could generate $30,000 to $40,000+ per year, adding to QPP and employer pensions, easily exceeding the threshold. By withdrawing $30,000 per year from 60 to 65, they reduce the RRSP by $150,000 and pay a lower tax rate.

Strategy 2: maximize the TFSA

TFSA withdrawals are not included in net income and do not affect the OAS clawback. A client who has maximized their TFSA over the years has tax-free capital available to meet needs without increasing taxable income.

The optimal strategy is to progressively transfer funds from the RRSP to the TFSA: withdraw from the RRSP (taxable), pay the tax, and place the balance in the TFSA. Over the long term, future returns will be tax-sheltered and will not affect OAS.

Strategy 3: pension income splitting

Eligible pension income splitting allows transferring up to 50% of eligible pension income to the lower-income spouse. Eligible sources include employer pension plan annuities and RRIF withdrawals (after age 65).

Example: a 68-year-old client with $100,000 in pension income and a spouse with $20,000. By splitting $50,000 of pension, the client's income drops to $50,000 (below the threshold) and the spouse's income rises to $70,000 (also below the threshold). Both avoid the clawback entirely.

Strategy 4: capital gains management

Only 50% of capital gains are included in taxable income (for the first $250,000). By favouring investments that generate capital gains rather than interest (taxed at 100%), net income is reduced for the same economic return.

Additionally, capital gains can be planned: defer the sale to a year when income is lower, spread sales over several years, or use accumulated capital losses to offset gains.

Strategy 5: defer OAS to age 70

If the client has high income at age 65 that would trigger the clawback, deferring OAS to age 70 avoids losing the pension during high-income years. At 70, OAS is enhanced by 36% (0.6% per month x 60 months), reaching approximately $1,010/month.

If income decreases after 70 (end of employment, reduced RRSP withdrawals), the client could receive the enhanced OAS without any clawback. This is a double benefit: a higher amount and no clawback.

Strategy 6: corporate dividends and salary

For business-owner clients, the choice between salary and dividends affects net income and therefore the clawback. Non-eligible dividends (small business) are grossed up by 15% but receive a tax credit. Eligible dividends are grossed up by 38%.

Warning: the dividend gross-up increases the net income used to calculate the OAS clawback. An actual dividend of $60,000 can generate a grossed-up net income of $82,800 (eligible dividends). Leaving funds in the corporation and withdrawing only what is needed can be more advantageous.

Strategy 7: prescribed annuity

A prescribed annuity (annuity contract with an insurer) spreads the taxable portion of each payment evenly over the life of the annuity. Instead of paying tax primarily on interest at the beginning, taxable income is distributed evenly, which can keep net income below the clawback threshold.

This strategy is particularly useful for clients with significant non-registered capital generating interest income. By converting this capital into a prescribed annuity, only a fraction of each payment is taxable, significantly reducing net income.

Frequently Asked Questions