ELI5 summary
How the recovery tax is calculated
The Old Age Security recovery tax is 15% of the amount by which your net income exceeds the threshold, up to the full pension. The threshold is indexed each year; for the payment period that runs from July 2026 to June 2027, it is $93,454 of 2025 net income. The pension is fully clawed back somewhere around $150,000 for those aged 65 to 74 and a little higher for those 75 and over, because their pension is 10% larger.
Net income here is line 23600 of your return: all taxable income minus deductions such as RRSP contributions, but before non-refundable credits. Two consequences:
- RRSP and RRIF withdrawals, CPP, employer pensions, interest, taxable capital gains and grossed-up dividends all count. Eligible dividends count at 138% of the cash received, which makes them surprisingly expensive for the clawback.
- TFSA withdrawals, the non-taxable half of capital gains, return of capital and gifts do not count.
Worked example
Marcus, 70, has 2025 net income of $110,000: $40,000 from a company pension, $16,000 CPP, $9,000 OAS, $35,000 RRIF minimum and $10,000 of interest. Excess over $93,454 is $16,546, so the recovery tax is 15% × $16,546 = $2,482, deducted from his OAS from July 2026 to June 2027. If he had held the interest-bearing investments in a TFSA and drawn the same $10,000 from it, his net income would have been $100,000 and the clawback $982.
Show the math
Recovery tax = min(OAS received, 0.15 × max(0, net income − threshold)). Service Canada estimates it from the prior year’s return and reduces monthly payments; the exact amount is settled on the current-year return (line 42200), so overpayments are refunded and shortfalls are collected. The clawback is deductible in computing net income the following year, which slightly softens a repeat.
Tools that reduce it
1. Fill the TFSA first in retirement. Money withdrawn from a TFSA is invisible to the test. Retirees with both RRIF and TFSA balances usually take the RRIF minimum and top up spending from the TFSA.
2. Split pension income. From age 65, up to half of RRIF, annuity and employer pension income can be allocated to a spouse on the return. Two incomes of $70,000 pay no clawback; one of $140,000 loses most of the pension.
3. Draw the RRSP down before 65. Withdrawals in the years between retirement and OAS, taxed at low rates and reinvested in a TFSA, shrink the RRIF minimums that would later push income over the line. The trade-off is paying some tax earlier; it works when the rate now is lower than the combined tax-plus-clawback rate later.
4. Defer OAS. Each month of deferral past 65 adds 0.6%, so starting at 70 pays 36% more for life. Deferral also means no clawback exposure until 70, useful for someone with a large RRIF drawdown or a business sale in their late 60s.
5. Time capital gains. A cottage or investment sale creates a one-year spike. Spreading the sale over two years, or completing it before 65, can avoid losing an entire year’s OAS.
6. Prefer capital gains over interest and dividends in taxable accounts. Only half of a capital gain is income; the dividend gross-up inflates income by 38%.
What not to do
Refusing income to protect OAS is usually a mistake: the clawback is 15%, so an extra dollar of income still leaves you with most of it after tax. The goal is to choose which dollars are income and when, not to earn less.
Government of Canada: OAS recovery taxKey takeaways
- 15% of net income above $93,454 (2025 income) comes off next year’s OAS.
- TFSA withdrawals do not count; RRIF withdrawals, pensions, dividends and gains do.
- Pension splitting, TFSA-first spending, early RRSP drawdown and OAS deferral are the main levers.
- An extra dollar of income still leaves you ahead; manage timing, not ambition.