How the OAS Clawback Works — And How to Avoid It

Are you approaching retirement and worried about losing part of your Old Age Security (OAS) benefits? With rising retirement income from RRSPs, pensions, and dividends, many Canadians unknowingly trigger an OAS clawback.

In this article, we’ll explain how the clawback works, how dividend income impacts your OAS eligibility, and what smart strategies can help you minimize it.

Consider the following example:

Claudia decided to retire at age 65, but she wasn’t ready to slow down completely. She incorporated a metal fabricating business to create art and supplement her income. Having paid into OAS for over 40 years, she expected to receive the full monthly benefit of $727.67 in 2025.

In her first year of retirement, Claudia’s income included:

• Net business income: $20,000
• Registered pension income: $60,000
• OAS/CPP pension benefits: $15,000
• Canadian eligible dividends: $20,000

Claudia knew that OAS benefits are income-tested, meaning they decrease as income rises. In 2025, OAS benefits are clawed back at a rate of 15% on net income over $93,454 (Line 23400 on the T1 General), and fully eliminated at $151,688.¹

OAS Clawback Estimate: How the Numbers Add Up

Based on Claudia’s reported income, here’s how her Old Age Security (OAS) clawback was calculated:

• Total net income: $115,000
• OAS clawback threshold (2025): $93,454
• Excess income subject to clawback: $21,546
• Clawback calculation: $21,546 × 15% = $3,232

Claudia expected a clawback of just over $3,200 — a modest reduction to her OAS payments.

However, when she filed her tax return, she was shocked to see a much higher clawback: $4,372, or roughly $95 more per month than anticipated.

So what caused the increase? The answer lies in how Canadian dividend income is taxed — and the hidden impact of the dividend gross-up on net income.

Why Dividend Income Can Increase Your OAS Clawback

Canadian dividends are often viewed as a tax-efficient source of retirement income. They offer the potential for capital growth and regular payouts, and are taxed at lower rates than interest income in every province and territory.

But when it comes to Old Age Security (OAS) clawbacks, dividend income can create a hidden problem: the gross-up mechanism.

In 2025:

• Eligible dividends are grossed up by 38%
• Non-eligible dividends are grossed up by 15%

This means the income reported on your tax return is higher than the actual cash received, which can inflate your net income and push you over the OAS clawback threshold.

Claudia’s Revised OAS Clawback

Because Claudia received $20,000 in eligible dividends, her income was grossed up to $27,600, which in turn increased her total net income to $122,600.

Here’s how that changed her clawback:

• Net income: $122,600
• OAS threshold: $93,454
• Excess: $29,146
• Clawback: 15% × $29,146 = $4,372

While dividends may reduce your tax payable, they do not reduce the income used to calculate your OAS clawback, which is where many retirees often get caught off guard.

Why It Matters

The dividend gross-up exists to align the personal and corporate tax systems. While the dividend tax credit reduces the actual tax payable, it does not reduce your net income for OAS purposes.

That means retirees who rely heavily on dividends may unintentionally trigger larger clawbacks, which can reduce their monthly OAS benefits.

Strategies to Minimize Your OAS Clawback

New investment strategies and financial products are making it easier to preserve OAS benefits. Here are a few proven ways to reduce your risk of clawback:

1. Use a Tax-Free Savings Account (TFSA)

TFSA income is completely tax-free and does not appear on your tax return, meaning it won’t affect your OAS. For retirees, the TFSA is often the best first line of defense against clawbacks.

2. Prioritize Capital Gains Over Dividends

Capital gains are only 50% taxable and aren’t grossed up. This makes them more OAS-friendly than dividends.

You can use:

• Corporate class mutual funds: Built for growth, with fewer taxable distributions
• Systematic withdrawal plans (SWPs): These trigger capital gains only when you sell, allowing for control and flexibility

3. Consider Class T Mutual Funds

Class T funds offer regular cash flow with tax-deferral advantages. Distributions often include a return of capital (ROC), which is not considered taxable income.

Key benefits:

• Up to 8% annual payout as ROC
• ROC lowers your adjusted cost base (ACB), delaying tax until you sell
• More control over when you trigger gains and pay taxes

4. Make RRSP or Spousal RRSP Contributions

If you’re under 72, RRSP contributions can reduce your taxable income and limit clawback exposure.

Things to consider:

• You may still have unused RRSP deduction room
• You may be earning “earned income” that qualifies
• If you’re over 71, consider spousal RRSPs for income-splitting and tax deferral

Final Thoughts

These aren’t the only options, but they’re smart starting points for reducing your OAS clawback and improving your retirement tax strategy.

With the right plan in place, you can protect your OAS benefits, increase your after-tax retirement income, and gain better control over your long-term finances.

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¹ 2025 calendar year. Thresholds are adjusted annually for inflation.
² Eligible dividends are typically from publicly traded companies; non-eligible dividends are usually paid by private corporations.
³ RRSP deduction room is based on earned income, which includes employment and self-employment income, not pension or investment income.