The Canadian  Old Age Security (OAS) pension is a monthly payment you can get if you are Canadian or a legal resident for at least 20 years beginning at age  65 and older.

If you have a net income greater than $79,045 (in 2020 this changes every year) some or if your net income is more than $129,600, all your payments are clawed back.

Simple Rules, Complex Implementation

What makes this a worthy blog topic for me is the how the government manages the clawback provisions.  I was unable to find a clear and simple full explanation of the process and in fact even the Governments site on the topic is unclear.

The problem stems from the fact many recipients will be subject to a  monthly recovery tax (really akin to a withholding tax) even though they will have no clawback.

The confusion stems from the timing of how the recovery tax is calculated versus the timing of the actual clawback determination (i.e., whether any amounts need to be paid back.)

Clawback Determination

Annually as part of the Canadian income tax submission those receiving OAS calculate, based on their actual net income for the reported year, whether any OAS payments they received are subject to be retuned to the government.

The tax return includes a formula for this calculation and includes amounts due (or refund if applicable – see the recovery tax section for details)

Recovery Tax Implementation

The communication of how the recovery tax can be avoided is where my complaint lies.  Granted the communication of how it is calculated is relatively straightforward.

Simply put, the net income reported on your return one or two years before the year you begin receiving the benefit is used to determine if you are eligible for recovery tax.  For many this means the government will implement the tax.

And here is the Rub

Often your net income in the years before you retire is higher than in retirement (i.e., the year you start OAS) so this calculation leads to  a recovery tax being charged, which you will get as a refund when you complete your tax return .

For me the paying of this  unnecessary withholding  tax, which happens virtually automatically,  without explaining clearly that it can be avoided by submitting a request form to the CRA is dirty pool.  But what do I expect from the government.  Yuck.