OAS claw back: Your taxes are higher than you think.

Most Canadians earn less than $100,000, but if you had a professional career, worked for 30+ years, earned a pension and saved diligently to build up an investment portfolio, a $100,000+ income at retirement is achievable. OAS, CPP, a pension, RRIF income and investment income can all add up to a six figure income number, and if you live in Vancouver, you may have benefitted significantly from downsizing your high priced home, releasing cash to enhance your retirement income. But it’s what’s left after-tax that counts.

Canadians support a progressive tax system where you pay an increasing amount of tax the more you earn, with your marginal tax rate going up within each successive tax bracket. A British Columbia resident in 2026 pays tax at a 19.60% rate on the first $50,363 of net income, 21.70% on additional income up to $58,523, 28.20% on further income up to $100,728 and reaching 31.00% at an income level of $115,648. There are seven more higher tax brackets with the top rate of 53.50% kicking in at $265,545, an income level earned by less than 2% of tax filers.

Conscientious investors manage their tax bill, and it’s the marginal tax rates highlighted above that are a barometer of how much tax you are paying. For retirees receiving OAS it may be higher than you realize. This is because a 15% surtax is applied to OAS recipients earning between approximately $95,000 to $155,000 per annum by way of an OAS claw back.

For every $1 you earn over $95,323 in 2026, the government reduces (claws back) your OAS by 15 cents. OAS received is reduced to zero at an income of $154,708. An example: assuming you earn $115,000, your marginal tax rate is 31%, but OAS claw back raises it by 15% to 46%, assessed on income above $100,728 (see above). A 46% marginal rate bracket otherwise occurs at an income higher than $190,000, but in this example, you are incurring it at a lot less income than that. In fact, at an income of $154,700 where OAS is 100% clawed back, the effective marginal tax rate is 55.70% which is higher than the top tax rate in B.C. of 53.50%.

This will be a shocking realization to some, but you may think it doesn’t apply to you because your annual income is below the OAS claw back threshold. However, it could still apply in a particular year if you incurred capital gains on selling an investment as capital gains is added to your net income calculation. In this case, any OAS claw back incurred would be applied in the following year.

What to do

• Look at ways to keep your Net Income calculation (line 23600 on tax return) as low as possible in the OAS claw back range of $95,323 to $154,708 (preferably below it so as to completely avoid any OAS claw back).

• Make sure you take advantage of all income splitting opportunities with your spouse as each can earn $95,000 before the OAS claw back applies. Accountants and tax preparation software should make the most tax-efficient allocation.

• Deduct all allowable investment expenses (such as investment counselling fees) against your Net Income calculation.

• If you expect OAS claw back to apply in the future but you are still working today, consider making RSP contributions but deferring the deduction until an OAS claw back year. RSP deductions do reduce your Net Income calculation. Compare marginal tax rates in the year of making the contribution and the OAS claw back year to ascertain the most advantageous year to deduct.

• If you are looking to take capital gains in your investment account, consider splitting it over more than one taxation year, if this doesn’t compromise the management of your portfolio of securities. Remember, only one half of capital gains is taxable and capital gains realized in tax deferred accounts such as RSPs are not taxable.

Caution: Your Net Income calculation (line 23600 on tax return) applies a 38% gross-up amount to Canadian dividends, but, unfortunately, the corresponding dividend tax credit is not deducted on this line rather it is applied later in your income tax filing return. The result is an inflation in the net income calculation above what you have actually earned.