OAS Clawback in 2025: How It Works and How to Minimize It

If you’re approaching 65 with a healthy RRSP and a decent pension, one of the nastier surprises in Canadian retirement tax planning is the Old Age Security (OAS) clawback — officially called the OAS recovery tax. It reduces OAS by 15 cents for every dollar of net income above a threshold, and for high-income retirees it can erase the entire benefit.

For the 2025 tax year, the clawback threshold is $93,454, and OAS is fully clawed back at roughly $151,668 (for those under 75) or $157,490 (for those 75+, who receive the enhanced 10% OAS top-up).

Here’s exactly how the recovery tax is calculated, plus seven practical strategies retirees use to minimize it.

How the Recovery Tax Is Calculated

The OAS clawback is levied under Part I.2 of the Income Tax Act. The formula:

Recovery tax = 15% × (net world income − $93,454), up to a maximum equal to your total OAS received

It’s based on line 23400 (net income before adjustments) on your T1 return, not taxable income. That means RRSP deductions reduce the clawback, but capital loss carry-forwards (claimed later on line 25300) do not.

Worked Example — Retiree With $120,000 Net Income

Raj, 68, receives the full OAS of about $8,732 for 2025 (12 × $727.67). His net income is $120,000 from CPP, pension, RRIF withdrawals, and dividends.

• Excess over threshold: $120,000 − $93,454 = $26,546
• Recovery tax: 15% × $26,546 = $3,982
• OAS retained: $8,732 − $3,982 = $4,750

Raj effectively loses 45.6% of his OAS. Combined with his ~31% federal+provincial marginal rate, his true marginal tax rate on the next dollar is roughly 46% — higher than his stated bracket.

Fully Clawed Back

If Raj’s net income rose to $151,668: 15% × ($151,668 − $93,454) = $8,732 = full OAS gone.

How the Clawback Is Collected

The CRA doesn’t wait until you file your return. Based on your prior-year tax return, Service Canada reduces your monthly OAS cheque starting in July for the next 12 months (July to June). If your income drops unexpectedly (e.g., a big capital gain didn’t repeat), you reclaim the excess withholding when you file.

This creates a lag: high income in 2024 triggers reduced OAS in July 2025 – June 2026, not the calendar year you might expect.

Seven Strategies to Minimize OAS Clawback

1. Pension Income Splitting

Couples can split up to 50% of eligible pension income (RPP pensions at any age, RRIF withdrawals at 65+). Shifting income from the higher-earning spouse to the lower-earning one often moves both below the $93,454 threshold.

Example: Paul has $110,000 net income, Mary has $40,000. Splitting $35,000 brings Paul to $75,000 (no clawback) and Mary to $75,000 (still no clawback) — saving $2,482 in recovery tax annually.

2. Delay OAS to Age 70

Deferring OAS past 65 increases the monthly amount by 0.6% per month (7.2% per year), up to 36% more at age 70. If your 60s are your highest-income years (e.g., large RRSP drawdown before CPP/OAS start), delay OAS until income drops.

3. Draw Down RRSPs in Your 60s

Between ages 60 and 71, voluntarily withdraw from your RRSP while you’re below the OAS threshold. You’ll pay tax at lower rates now and shrink the mandatory RRIF withdrawals after 71 (which are what typically push people over the clawback line).

4. Use TFSAs Aggressively

TFSA withdrawals are not included in net income. A $50,000/year TFSA drawdown produces zero clawback exposure. Contribute every available dollar ($7,000 for 2025) every year.

5. Realize Capital Gains Strategically

Capital gains are only 50% taxable (for gains up to $250,000 annually; the 2/3 inclusion proposal was scrapped for 2025). But gains still count in net income. Time large dispositions for years when you’re already over the full clawback ceiling — the marginal clawback cost is zero once you’ve lost all OAS.

6. Corporate-Class Funds and Return of Capital

If you hold non-registered investments, return of capital (ROC) distributions from certain mutual funds, ETFs, and REITs don’t count as income when received — they reduce your adjusted cost base. For retirees living off portfolio income, this can materially lower net income for OAS purposes.

7. Spousal RRSPs Before Retirement

In the accumulation years, contributing to a spousal RRSP for the lower-earning spouse shifts future retirement income to them. Three-plus years after the last contribution, withdrawals are taxed in the lower-income spouse’s hands.

What Doesn’t Help

Common misconceptions:

• GIS vs OAS: Guaranteed Income Supplement uses different thresholds and is separately clawed back — low-income planning for GIS is completely different
• Tax credits: Non-refundable credits (age amount, pension income credit) reduce tax, not net income, so they don’t help with OAS
• Charitable donations: Reduce tax but not net income — no OAS benefit

The 75+ Enhancement

Since July 2022, OAS recipients aged 75 and over receive a 10% increase in their monthly OAS payment. For 2025, this raises the maximum annual OAS from about $8,732 to roughly $9,605, and shifts the full-clawback ceiling up to around $157,490.

Key Takeaways

• OAS clawback starts at $93,454 net income in 2025 and reaches 100% at ~$151,668
• The recovery tax is 15 cents per dollar — combined with normal tax, marginal rates hit ~46%
• Income is measured at line 23400 (net income), so RRSP deductions help but many credits don’t
• Pension splitting, TFSA use, and RRSP drawdowns before 71 are the three biggest levers
• OAS clawback is deducted from your monthly cheque based on the prior year’s return

Model your exposure with the OAS Clawback Calculator, and explore drawdown sequencing with the Retirement Income Calculator or CPP/OAS Start Age Calculator.