OAS clawback (recovery tax)

The OAS clawback (recovery tax) reduces your OAS by 15 cents for every dollar of net income above the annual threshold — about $95,323 for the 2026 tax year — until it reaches zero (around $155,000 for ages 65–74). Most retirees never earn enough to trigger it.

• How the recovery tax works, step by step
• The two 2026 thresholds (and why there are two)
• What counts as net income
• The full-clawback ceiling
• Who actually needs to worry about this
• What commonly triggers it
• Levers to reduce clawback
• The 75+ interaction, deferral, and GIS
• FAQs

OAS is taxable and income-tested through a mechanism formally called the OAS recovery tax. Each year the calculation is:

• Take your net income for the year.
• Subtract the recovery-tax threshold for that year.
• Multiply the excess by 15%.
• That result reduces your OAS, capped at the total OAS you would receive.

Worked example. Suppose your net income is $115,000 in 2026 and the threshold is $95,323. The excess is $19,677. Fifteen percent of that is about $2,952, so roughly $2,952 of your annual OAS is clawed back — about $246/month less OAS. If your income were high enough that 15% of the excess exceeded your entire OAS entitlement, you would lose all of it.

The clawback involves two related numbers, which is a common source of confusion:

• The tax-year threshold (~$95,323 for 2026). This is the income line used when your 2026 tax return reconciles the recovery tax for the 2026 tax year. It is the figure our engine uses when projecting a 2026 income.
• The payment-period threshold (~$93,454). OAS payments from July 2026 to June 2027 are adjusted based on your 2025 income and the earlier year's threshold. This is what determines how much OAS is withheld at source during that payment year.

In practice the recovery tax is reconciled on your tax return, so the tax-year figure is the one that ultimately matters for planning. The payment-period threshold mostly affects timing — whether OAS is reduced up front or settled at filing.

The recovery tax is based on net income (roughly line 23400, net income before adjustments — net world income for residency purposes). Key points:

• Included: CPP/OAS, RRIF and RRSP withdrawals, employment and self-employment income, eligible and non-eligible dividends (at their grossed-up value, which can push income higher than the cash received), interest, rental income, and the taxable half of capital gains.
• Not included: TFSA withdrawals and GIS. This is the single most important planning fact about the clawback.

The dividend gross-up deserves a special warning: eligible dividends are included in income at 138% of the cash amount, so a portfolio tilted toward Canadian dividends can trigger more clawback than the cash it actually pays.

OAS is fully eliminated once 15% of your excess income equals your entire annual OAS. Because the 75+ age group receives 10% more OAS, their full-clawback ceiling is higher. For 2026 the approximate full-clawback points are around $155,000 (ages 65–74) and $161,000 (75+). If you defer OAS to receive a larger cheque, your ceiling rises accordingly, because there is more OAS to claw back.

It is worth saying plainly: most retirees never face the clawback. A net income above ~$95,000 in retirement generally requires a sizeable pension, large RRIF withdrawals, significant investment income, or a one-time event like selling a property. If your retirement income is in the $40,000–$80,000 range, the clawback is not your problem — longevity and sustainable withdrawals are. Do not distort a sound plan to avoid a tax you will never pay.

The clawback becomes a genuine planning constraint for higher-income retirees, people with generous defined-benefit pensions, and anyone facing a large taxable event in a single year.

• Large RRSP/RRIF withdrawals concentrated in one year.
• Mandatory RRIF minimums climbing with age on a large registered balance.
• Capital gains from selling a rental, cottage, or a big rebalancing of a portfolio.
• A generous or fully indexed defined-benefit pension stacked with CPP and OAS.
• Canadian eligible dividends, because the gross-up inflates reported income.
• Both spouses drawing large pensions without income splitting.

None of the following is personal advice, but these are the standard tools a planner would model. Test each against your own numbers in the cash-flow tool and scenario comparator.

• Draw from the TFSA. TFSA income does not count, so funding part of your spending from a TFSA keeps net income down.
• Smooth RRIF withdrawals. Spreading withdrawals evenly across years — or an early “RRSP meltdown” in your 60s before OAS starts — can avoid a spike that triggers clawback. The withdrawal sequencer compares these orders.
• Pension income splitting. Moving up to 50% of eligible pension income to a lower-income spouse (Form T1032) can keep both partners below the threshold.
• Use the younger spouse's age for RRIF minimums. This lowers the mandatory withdrawal and the taxable income it creates.
• Time capital gains. Realizing a large gain in a lower-income year, or spreading a sale across tax years, can keep any single year under the threshold.
• Consider deferring OAS while income is still high in your late 60s — you avoid clawing back a benefit you would partly lose anyway, and you receive a larger cheque later.

At 75 OAS increases by 10%, which slightly raises both your benefit and your full-clawback ceiling. Deferring OAS to 70 raises your monthly amount by up to 36%, which is valuable if you expect a long life but means there is more OAS exposed to recovery tax if your income is high.

For lower-income seniors, the mirror image of the clawback is the GIS reduction: the Guaranteed Income Supplement is reduced as other (taxable) income rises, often by 50 cents per dollar. Because TFSA withdrawals do not count as income for GIS either, the same TFSA-first logic that manages clawback for high earners also protects GIS for low earners.