Canada Revenue Agency: 3 Ways to Prevent the 15% OAS Clawback
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Canadian retirees are allergic to tax bites, especially those that will significantly reduce their retirement income. The Old Age Security (OAS) clawback is the most notorious because the pension amount reduces if your income exceeds the Canada Revenue Agency’s (CRA) minimum income recovery threshold.
A retiree will get zero benefits if income reaches the maximum income recovery threshold. For the recovery tax period of July 2020 to June 2021, the minimum and maximum limits are $79,054 and $128,149. If your income in 2020 were $90,000, you would have to repay $1,641.90 or 15% of the excess of $10,946.
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The Tax-Free Savings Account (TFSA) is one of two smart savings and investment vehicles in Canada. It came later than the Registered Retirement Savings Plan (RRSP) but has become more popular than its elder sibling. Unlike the RRSP, you can keep contributing to your TFSA past age 71.
You can invest your TFSA contributions or funds in bonds, ETFs, GICs, mutual funds, and stocks. All gains, profits, and dividends from these eligible investments are tax-free. You can withdraw at any time and not pay taxes at all. However, there are set rules to follow if you want to be free of the Canada Revenue Agency (CRA).
All of our clients have chosen to maintain their assets in a managed account where investment management fees are charged to the account. There is no annual administrative fee, and no commissions for buying or selling within the accounts. With a managed account, the fees are typically charged to each respective account. For example, if a client has a non-registered account, Registered Retirement Savings Plan (RRSP), and a Tax-Free Savings Account (TFSA), then each of these accounts would be charged a fee, based on the market value of those accounts. One of the benefits with managed accounts is that the fees are 100 per cent transparent and you have the option to pay the fees for the TFSA and RRSP from your non-registered account. This can be automated, or this can be manual. Before we get into the differences between the automated process, manual process and benefits, we will give you a bit of the tax history surrounding the payment of investment management fees from non-registere