OAS Clawback: 7 Strategies to Avoid It in 2026

Understanding the OAS Clawback

OAS is a universal benefit paid to all Canadians aged 65 and over who have lived in Canada for at least 10 years. However, the federal government imposes a recovery tax (clawback) on retirees whose net income exceeds a certain threshold. In 2026, this threshold is $90,997.

The recovery rate is 15%: for every dollar of net income above $90,997, the government recovers 15 cents of OAS. OAS is fully eliminated when income reaches approximately $148,065. In 2026, the maximum OAS benefit is approximately $8,560 per year ($713 per month).

The clawback is calculated based on the previous year's tax return. If your net income in 2026 exceeds the threshold, your OAS will be reduced starting in July of the following year.

The Real Cost: An Effective Tax Rate Over 60%

The clawback trap is that the 15% recovery adds to the marginal tax rate. In the clawback zone, a Quebec retiree faces a combined effective rate that can exceed 60%. Here is the breakdown:

At $100,000 income, the combined federal-Quebec marginal rate is approximately 47.5%. Add the 15% OAS recovery and the effective rate climbs to 62.5%. Concretely, for every $1,000 above the threshold, you pay $475 in tax plus $150 in lost OAS — $625 total. You keep only $375.

Impact Table: OAS Lost by Income Level (2026)

Who Is at Risk?

The most affected retirees are those with net income between $80,000 and $150,000. Typical at-risk profiles include:

Retirees with a generous defined benefit pension (RREGOP, private sector) exceeding $40,000. Retirees making significant annual RRSP or RRIF withdrawals. Retirees selling non-registered investments generating capital gains. Incorporated professionals paying themselves substantial dividends in retirement.

Even a one-time event — selling a rental property, an exceptional RRSP withdrawal, selling accumulated shares — can trigger a clawback for that year.

7 Strategies to Reduce or Eliminate the Clawback

1. RRSP Meltdown Before Age 65

The most effective strategy is to convert your RRSP to a RRIF at age 60 and make systematic withdrawals between ages 60 and 64, before OAS begins. The goal is to reduce the RRSP/RRIF balance enough so that mandatory withdrawals at 65+ do not push income above $90,997. Every dollar withdrawn before 65 is a dollar that will not contribute to the clawback later. Ideally, you target a marginal tax rate between 37% and 45% during the meltdown period — well below the 60%+ effective rate in the clawback zone.

2. Maximize the TFSA (Tax-Free Withdrawals)

TFSA withdrawals do not appear anywhere in the net income calculation. They affect neither taxes, nor OAS, nor GIS. A retiree with $100,000 in a TFSA can withdraw $10,000 per year with zero impact on OAS. The optimal strategy is to contribute to the TFSA during working years (or convert RRSP to TFSA through strategic withdrawals) to build a tax-free savings pool for retirement. Since 2009, cumulative TFSA room can exceed $95,000 in 2026.

3. Pension Income Splitting (50% at Age 65+)

Starting at age 65, a retiree can split up to 50% of eligible pension income (RRIF, RPP annuity, prescribed annuity) with their spouse using form T1032. If a retiree has net income of $110,000 including $40,000 from a RRIF, they can transfer $20,000 to their spouse, bringing income down to $90,000 — below the clawback threshold. This strategy is purely tax-based: no money actually changes hands.

4. Prefer Capital Gains Over Interest Income

Capital gains benefit from a 50% inclusion rate (on the first $250,000). A $10,000 capital gain adds only $5,000 to net income, compared to $10,000 for interest income. For clawback calculations, this difference is significant. A non-registered portfolio should favour growth stocks and low-distribution ETFs rather than bonds and GICs.

5. Defer OAS to Age 70 (+36%)

OAS deferral provides a 0.6% increase per month, or 7.2% per year, up to a maximum of 36% at age 70. If your income is high between ages 65 and 69 (for example due to mandatory RRSP withdrawals) but will decrease after 70, deferral is doubly advantageous: you avoid the clawback during high-income years AND you receive a 36% enhanced OAS when your income is lower. An OAS enhanced by 36% represents approximately $970 per month instead of $713.

6. Optimize Dividend Timing (Incorporated Professionals)

For incorporated professionals, the timing of dividend payments is crucial. Dividends are grossed-up in the net income calculation (15% for eligible dividends). An eligible dividend of $50,000 adds $57,500 to net income for clawback purposes. The strategy is to pay dividends before age 65 or after the RRSP is depleted, and to pay a reasonable salary during clawback years — salary is not grossed up. Alternatively, funds can be left in the corporation and distributed gradually.

7. Prescribed Annuity (Only Interest Portion Taxable)

A prescribed annuity levels the taxable portion over the entire contract duration. Unlike a non-prescribed annuity where the interest portion is high at the beginning, a prescribed annuity spreads taxable income evenly. For example, an annuity paying $20,000 per year might have only $4,000 as the taxable portion. Only that $4,000 is included in net income for OAS calculation purposes. This is a powerful tool for retirees with significant non-registered assets.

Example: Year-by-Year Planning

Jean, age 60, expects retirement income of $105,000 per year at age 65 (RPP $55,000 + RRIF $30,000 + investments $20,000). Without planning, he would lose approximately $2,100 in OAS annually.

Ages 60-64: Jean makes $25,000/year in RRSP withdrawals to reduce his future RRIF. He contributes $7,000/year to his TFSA with a portion of these funds. At age 65, his mandatory RRIF withdrawal is now $15,000 instead of $30,000. He splits 50% of his pension income (RPP + RRIF) with his spouse. His net income drops from $105,000 to approximately $87,500 — below the threshold. He keeps 100% of his OAS, over $8,500 per year.

Over 20 years of retirement, this planning saves him more than $40,000 in preserved OAS, in addition to tax savings from income splitting.

Key Points for Advisors

OAS clawback planning should ideally begin 5 to 10 years before retirement. The most effective strategies (RRSP meltdown, TFSA maximization) require time. Income splitting and OAS deferral are tools available even at the last minute, but their impact alone is more limited.

Each situation is unique. The 15% recovery rate is fixed, but the marginal tax rate varies by province and bracket. In Quebec, the combined effective rate in the clawback zone ranges from 58% to 65% depending on the exact income level.

Frequently Asked Questions