You won’t find the word “clawback” in Canadian tax legislation. Type that term and “Canada” into your favourite internet search engine however, and the top hit you are likely to see is a link to a Service Canada webpage outlining the Old Age Security recovery tax, but again no appearance of the word itself on the page. (Even unemotional algorithms may assume we mean the OAS clawback.)
In reality though, clawbacks may be quite emotional for those affected, and can apply to a larger universe than strictly for the reclamation of OAS benefits, potentially even at modest income levels. And they can reduce both income benefits/supplements and otherwise claimable tax credits.
A taxpayer will usually be familiar with the concept of marginal tax rate (MTR), being the rate of tax paid on the next or last dollar earned. Once clawbacks come into play, it is equally important to understand the marginal effective tax rate (METR), which is the MTR plus those lost income benefits and tax credits.
OAS recovery tax
The OAS recovery tax may be felt by those over the age of 65 receiving taxable annual income in excess of $70,954. For every dollar of income beyond that level, the 15% recovery tax reduces OAS benefits. As OAS benefit amounts are indexed quarterly, the upper end for full clawback pushes out a little each quarter, presently at $114,793 in Q4 2103.
The contribution to METR must take into consideration that the lost OAS benefits would have been taxable income. Thus one cannot simply add the 15% clawback rate to the taxpayer’s MTR. Rather, the rate is be multiplied by [1-MTR] to arrive at the increase to METR.
The Guaranteed Income Supplement (GIS) is administered alongside the OAS program, and is also subject to recovery, but at a 50% rate. Full clawback of GIS (which is directed at alleviating poverty) occurs at a fairly low income level. For example, a single senior will receive no GIS if taxable income (not including OAS) is over $16,704.
Age 65 tax credits
The age credit is available to claim against federal taxes due, as well as against each respective province’s taxes. In both cases, the claim is available to those who have reached age 65.
This is a non-refundable tax credit. The federal government and each of the provinces prescribe the amount that the credit is calculated upon, which is then multiplied by the appropriate tax credit rate (basically the lowest bracket rate). Federally the amount is presently $6,854 and the credit rate 15%, yielding a maximum credit value of $1,028. The provincial credit values range from $224 to $511.
The clawback rate is 15%, federally and provincially. The contribution to METR is measured by multiplying the clawback rate times the credit rate. Federally this comes out to 2.25% applied on income between $34,562 and $80,255. The provincial clawback rates are between 0.6% and 3.0%, with varying income ranges, though roughly tracking the federal range.
GST credit and other provincial programs
The Goods and Sales Tax (GST) credit is a refundable credit that is paid quarterly. The amount of the entitlement varies according to spousal situation and dependants.
For a single individual with no dependants, the maximum quarterly payment is $101, or $404 annually. The 5% clawback rate begins to apply at net income of $34,562, with full clawback by income of $42,641.
In addition, a number of provinces have their own refundable credits, which in turn may be subject to clawback treatment.
TABLE: $37,500 INCOME LEVEL
Prov. MTR GST Age-65 METR
BC 20.1% + 5.0% + 3.0% = 28.1%
AB 25.0% + 5.0% + 3.8% = 33.8%
SK 26.0% + 5.0% + 3.9% = 34.9%
MB 27.8% + 5.0% + 3.9% = 36.6%
ON 20.1% + 5.0% + 3.0% = 28.1%
QC 28.5% + 5.0% + 5.3% = 38.8%
NB 24.4% + 5.0% + 3.7% = 38.5%
NS 29.9% + 5.0% + 3.6% = 37.5%
PE 28.8% + 5.0% + 3.7% = 37.5%
NL 27.5% + 5.0% + 3.4% = 35.9%
TABLE: $75,000 INCOME LEVEL
Prov. MTR OAS Age-65 METR
BC 29.7% +10.6% + 2.3% = 42.5%
AB 32.0% +10.2% + 2.3% = 44.4%
SK 35.0% +19.8% + 2.3% = 47.0%
MB 39.4% +19.1% + 2.3% = 50.7%
ON 32.9% +10.1% + 2.3% = 45.3%
QC 38.3% +19.2% + 2.3% = 49.9%
NB 35.5% +19.7% + 2.3% = 47.4%
NS 38.7% +19.2% + 2.3% = 50.1%
PE 38.7% +19.2% + 2.3% = 50.1%
NL 35.3% +19.7% + 2.3% = 47.3%