OAS – Old Age Security

Public pensions for seniors based on residency in Canada

Old Age Security is the largest pension plan run by the Government of Canada, paid to over six million people. Eligibility is based on age and years of Canadian residency, and while not directly based on income, benefits are reduced over a certain income level.

No-one pays directly into OAS. Rather, pension recipients are paid out of current tax revenue, making it one of the government’s largest costs at over $50 billion annually.

In 2022, the government announced a permanent 10% increase to the OAS pension beginning in the month of a pensioner’s 75th birthday. This 10% increase does not affect the calculation of a pensioner’s Guaranteed Income Supplement (GIS).

Who is eligible to receive OAS?

You must be at least age 65 to receive an OAS pension, and:

    • If applying as a current Canadian resident, you must be either a Canadian citizen or legal resident, and have resided in Canada for at least 10 years since the age of 18.
    • If applying from outside Canada, you must have been a Canadian citizen or legal resident the day before you left, and must have resided in Canada for at least 20 years since the age of 18.

Amount of the OAS pension – Taxable

The OAS pension is paid monthly, with amounts indexed each calendar quarter.

    • For the third quarter of 2024, the full benefit is:
      • $718 monthly, which annualizes to about $8,620, for those age 65 to 74, or
      • $790 monthly, which annualizes to about $9,482, for those age 75 and over.
    • The full pension is for those who have resided in Canada for at least 40 years after age 18. A reduction may apply if the person was not continuously in Canada for the 10 years preceding pension approval.
    • A partial pension at the rate of 1/40th per year of residence after age 18 is available if the person resided in Canada for at least 10 years after age 18.

Application process and timeline

Canadian residents who have paid into the Canada Pension Plan receive a letter from Service Canada the month after turning age 64, advising that they are automatically enrolled for OAS the month after turning 65.

Otherwise, a person should apply to Service Canada, in paper or online, at least six months prior to the intended start month. Someone who has already reached age 65 may apply and receive up to 11 months of retroactive payments, with the first retroactive month as the start age for the continuing OAS pension.

Deferring OAS up to age 70, with a premium

A qualified individual may defer commencement of the OAS beyond age 65, up to age 70. The monthly pension is increased 0.6% for every month taken after age 65, rising as much as 36% if one waits to age 70.

    • For the third quarter of 2024, that could increase the pension to as much as:
      • $977 monthly ($11,636 annual equivalent) for those up to age 74, or
      • $1,074 monthly ($12,893 annual equivalent) for those age 75 and over.

Old Age Security pension recovery tax – The clawback

For each dollar of income over an indexed annual threshold, there is a 15% OAS recovery tax – or clawback. The clawback is based on net income in a reference calendar year, applied in the OAS program year following the tax reporting due date of that reference year, generally April 30th following the respective year-end.

Related benefits – Income-tested and non-taxable

Guaranteed income supplement (GIS)

The GIS is a monthly benefit added to the OAS pension of a low-income pensioner resident in Canada.

Spouse’s Allowance

If you are 60 to 64 years of age and your spouse or common-law partner is receiving the OAS pension and is eligible for the GIS, you may be eligible to receive this benefit.

Allowance for the Survivor

If you are 60 to 64 years of age and widowed, you may be eligible to receive this benefit.

IPPs – Individual pension plans

A business owner’s option for retirement savings

As a successful business owner, you likely maximize your annual registered retirement savings plan (RRSP) contributions and still have more to invest. So, is there is a way for you to make even more use of tax-sheltered retirement savings tools?

As it turns out, the Income Tax Act allows you, as the owner of a corporation, to set up an individual pension plan (IPP) for yourself as an employee of the business. By doing so, your corporation will be able to make larger tax-deductible contributions than available under RRSP rules, which in turn means larger deposits into retirement tax-sheltering for you as an employee.

Larger contributions with an IPP

Every worker is entitled to RRSP contribution room based on 18% of the previous year’s earned income. There is a dollar limit to that, which is indexed from year to year. The 2024 limit is $31,560, reached at 2023 income of $175,333. Any RRSP room not used in a year can be carried forward to make contributions in future years.

Unlike this direct calculation of RRSP contribution room, an IPP is a ‘defined benefit’ arrangement where the amount to be contributed is based on the benefit that will be required to be paid out of it. For both RRSPs and IPPs, investment growth is tax-sheltered while in the plan, with tax being deferred until payments come out to the annuitant/pensioner.

An actuarial calculation is required to make the IPP contribution determination, based on factors such as the employee/pensioner’s age, past employment income and projected future employment income, and the amount and terms of the eventual pension to be paid. Up until about the age of 40, RRSP rules provide more contribution room, but an IPP allows increasingly greater room as you move beyond that age.

Additional administration

An individual RRSP can be set up with fairly simple administration and low cost. An IPP has more complexity and higher cost, but for qualified candidates this is more than compensated by the added flexibility the IPP provides for retirement savings. As well, all fees involved in arranging an IPP are deductible to the employer corporation.

As a conscientious business owner, you will want to do a cost-benefit analysis with your investment advisor and tax professional. With larger start-up and periodic maintenance costs, an IPP will likely only come into consideration for those at higher income levels, generally at least $100,000. Still, sometimes it may be desirable to establish one while at a lower income level, in anticipation of moving up in income as the business builds.

A trustee must be appointed to manage the IPP under a formal pension agreement, and tax filings are more involved than for RRSPs. An actuarial report must be prepared when the IPP is established and triennially (every three years) thereafter, and provincial pension reporting may be required.

Provincial Developments

Pension rules protect pensioners from potential mismanagement of funds by employer-sponsors. Given the connection between pensioner and employer in an IPP, some provinces allow IPPs to opt out of pension rules, exempting the employer from mandatory contributions, and reducing reporting obligations and associated fees.

Provinces currently allowing opt-out are British Columbia, Alberta, Manitoba, Ontario and Quebec.

IPPs that have opted out of provincial oversight still employ actuarial rules to determine the maximum amount of contributions that may be made to a plan. All IPPs must be registered with the Canada Revenue Agency, and must fulfill annual tax reporting obligations.

Source and timing of contributions

On startup of the IPP, it is possible to fund past employment service as far back as 1991. The allowed amount is calculated by an actuary, then funded by:

    1. Transferring-in existing RRSP holdings;
    2. Making a deductible employee/personal contribution up to the amount of unused RRSP room; and,
    3. Making a deductible employer contribution for the remainder.

Ongoing, annual employer contributions by your corporation are also deductible. There is no income inclusion or tax benefit reported by the employee in the year those employer contributions are made.

The triennial actuarial test may reveal at some point that more has accumulated in the plan than is necessary for it to meet its pension obligation, based on the continuing contribution schedule. This would usually be a result of investment returns exceeding earlier expectations. When there is such a surplus, the employer/corporation’s funding will be temporarily reduced or suspended until things are back in line.

On the other hand, if the triennial test indicates a shortfall then the employer/corporation may be required to make further contributions. This built-in top-up feature allows an IPP to be replenished if investments underperform expectations, something that is not available under RRSP rules.

Per the information in the callout box on the first page, for an IPP that has opted out of provincial pension oversight the employer is exempt from mandatory annual contributions. For such plans, unused contribution room in a year may be carried forward to be used in future years at the discretion of the IPP trustee.

For all IPPs, the employer may be able to make a final deductible contribution before the pension begins if the actual conditions at that time differ from the assumptions used to fund the plan. This is called terminal funding.

Allowable investments

An IPP can usually invest in the same types of investments allowed for RRSPs. The rules are a little more restrictive, however, in that no more than 10% of the assets may be in any one security. This restriction does not normally apply to pooled investments like mutual funds, which themselves hold a basket of securities.

Pension payout time

There are three options on retirement:

    1. Take the pension pursuant to the terms in the pension agreement;
    2. Use the accumulated value in the IPP to purchase an annuity from an insurance company; or,
    3. Commute the value to make a tax-free transfer into a locked-in retirement income fund. Often the commuted value will exceed the tax-free transfer limit, owing to the generous IPP contribution rules. The excess is taxable, but there are no restrictions on the pensioner’s use of the net amount after the tax is paid.

As a final point, IPPs may be entitled to greater creditor protection compared to RRSPs, though this may not be the case if the IPP has opted out of provincial pension supervision. This may be an important issue for an entrepreneur looking to balance business and personal financial risk.

FHSA – First home savings account

The newest way to build a down payment for a new home

Housing cost is one of the largest budgeting outlays for the average family. For those looking to make the move from being renters to owners, it can be challenging to both cover current shelter needs and save toward a down payment on a first home.

First proposed in the 2022 Federal Budget and brought into effect in 2023, the First Home Savings Account (FHSA) entitles eligible taxpayers to:

    • Tax-deductible contributions,
    • Tax-free investment growth, and
    • Tax-free withdrawals for a first home purchase.

Eligibility

The FHSA is open to Canadian residents age 18 to 71. To open an account, an individual cannot be living in a home owned by that person (solely or jointly) in the year the account is opened, or in any of the four preceding calendar years. This includes a home owned by a spouse or common law partner (CLP).

No tax will apply on FHSA withdrawals used for the purchase of a new home, but only one property will qualify for this special treatment over an individual’s lifetime.

Contribution treatment and dollar limits

Tax treatment

Like a registered retirement savings plan (RRSP), FHSA contributions are tax-deductible. Alternatively, an individual may choose to transfer existing RRSP funds to a FHSA on a tax-free rollover basis, though such a transfer will not restore RRSP contribution room.

Dollar limits

The lifetime contribution limit is $40,000, subject to a base annual FHSA participation room of $8,000. Both new contributions and existing RRSP transfers count toward both the annual limit and lifetime limit.

A limited carryforward rule allows unused room to be added to a later year’s FHSA participation room. In the year that a person opens their first FHSA, their FHSA participation room that year is $8,000. In following years, the FHSA carryforward is $8,000 less all contributions and transfers made to all FHSAs in the prior year. That means that up to $16,000 could be contributed in a given year (other than the year the first FHSA is opened), though that would be the result of having made no contributions in the immediately preceding year.

An individual is allowed to open as many FHSAs as desired, but the annual and lifetime limits apply to transfers and contributions across all accounts. For someone who begins contributing the maximum $8,000 annual amount as soon as their first FHSA is opened, the lifetime $40,000 limit could be reached in five years.

Timing of deductions

Despite the similarities to RRSPs, there are important distinctions as to when deductions may be claimed:

    • Whereas RRSP contributions in the first 60 days of a year may be deducted against the previous year’s income, FHSA contributions are deductible in the calendar year when made.
    • Still, like RRSP contributions, if the person does not wish to take the deduction presently, it may be carried forward to use in any future year.
    • Once there has been a qualifying withdrawal for a new home purchase, no further FHSA contributions may be made (and accordingly no new deductions allowed), but past deductions may still be used or carried forward.

Tax-sheltering investment income

Like many other registered accounts, including RRSPs and tax-free saving accounts (TFSAs), investment income and growth while within a FHSA are not taxable.

Withdrawals

Withdrawals to assist in the purchase of a first home are non-taxable, as long as you are not living in a home as your principal residence that year or in the preceding four years. Note that, unlike the criteria for opening a FHSA, you may be living in a home owned by a spouse or common law partner and still qualify for the tax-free withdrawal – understanding that the withdrawn amount must then be applied to a new home purchase. As well, both spouse/CLPs may use their FHSAs on the same purchase, if both meet the withdrawal criteria.

Tax will apply on FHSA withdrawals taken for any purpose other than a home purchase. However, this can be deferred by transferring into a RRSP, or to a registered retirement income fund (RRIF). Such transfers will not replenish FHSA room, but also will not require or reduce an individual’s RRSP room. Eventual withdrawals from the RRSP or RRIF will be taxable in the normal course.

Coordination with the RRSP home buyers’ plan

The RRSP home buyers’ plan (HBP) allows individuals to take up to $35,000 from a RRSP without tax applying in the year of withdrawal. Beginning in the second year following the first HBP withdrawal, withdrawn amounts must be returned to a RRSP over the course of up to 15 years. Repayments are not deductible, while any unrepaid amount is taxable in the year it is due.

As originally proposed in 2022, an individual was not permitted to use both the HBP and FHSA for the purchase of the same qualifying home. This restriction was removed by the time the rules came into force in 2023.

Plan closure

All FHSAs must be closed by December 31 of the earliest of:

    • the year following the first qualifying withdrawal for a first home purchase,
    • the 15th anniversary of the first FHSA opening, and
    • the year the individual turns age 71.

Amounts remaining in any FHSAs at the end of the defined period will be treated as income for that year.

Treatment at death

A detailed discussion of FHSAs at death is beyond the scope of this summary article, as there are many variables that can come into play. In general, any remaining account value will be treated as income of the estate, unless directed otherwise in the FHSA contract or in the deceased’s Will:

    • If a spouse or common law partner is named as either successor holder or beneficiary, options may include receiving the amount as a taxable distribution, or transferring tax-deferred to the survivor’s own FHSA (if the survivor meets the qualifying criteria at that time), RRSP or RRIF.
    • For any other named beneficiary, any amount received will be taxable income to the beneficiary in the year received. Not that this distinguishes FHSAs from RRSP/RRIF where the named beneficiary is entitled to the gross proceeds, but the amount is treated as taxable income in the deceased’s final year.