A relative was recently trying to evaluate the impact on her OAS payments if she sold a cottage. She may need the money soon to pay for accommodations in a long term care facility, though touch wood maybe not. Either way, she wasn’t sure how much impact the sale would have on her OAS and for how many years. She purchased the land and built the cottage in the 1970s. She used the opportunity when the government phased out the lifetime $100 000 personal capital gains exemption in 1994 to bring the adjusted cost base of the cottage up to the highest possible; The cottage is still worth more though. I decided to help her find out what will happen to her OAS if she sells the cottage for a large capital gain.
The whole exercise may be a bit academic, however.
There are many cottages on that lake that have been listed for sale for several years with no offers!
What Is the OAS Pension Recovery Tax?
Canadian Old Age Security payments are subject to a “pension recovery tax” (according to the CRA) or a “clawback” (according to everyone else.)
If a person receiving OAS in 2013 had income of $70 954 or higher then they will have to pay back some of their OAS payments when they file their 2013 taxes. (If their income was $114 815 or higher they will have to pay back all of their OAS.)
How Do Capital Gains Trigger the OAS Clawback?
Many types of capital gains are added to your total and taxable income.
For example, if you sell stocks for $10 000 more than you purchased them for (after costs and fees) you will have a capital gain of $10 000 of which $5 000 is taxable. You report your total capital gains using Schedule 3 and report the taxable capital gains on line 127 of the second page of your T1.
Selling a property like a cottage which is not your primary residence also could result in a capital gain. In my relative’s case, if she sold her cottage she would probably make a total capital gain of about $50 000. That would add 50% x (50 000) or $25 000 to her total income for the year of the sale.
If that $25 000 of additional income moves her above the $70 954 threshold, then she will have to pay back some of her OAS for that year.
How Much OAS Will I Forfeit Because of my Capital Gain?
If your capital gain moves your income above the threshold you will have to pay back some of your OAS.
If you want to calculate how much, Service Canada suggests you can estimate it using the following method.
Subtract the threshold income from your actual income.
Multiply the answer by 15%.
That is an estimate of the amount that must be repaid.
For example, if my relative had an income of $75 000 in 2013 due to the capital gain, she would calculate:
$75 000 – $70 954 = $4 046
(15/100) x ($4 046) = $606.90
The estimated OAS social benefits repayment is $606.90.
To calculate the actual repayment amount, you must complete the T1 General Federal Worksheet for the tax year in question. [When I did this for my test case I got exactly the same answer for the OAS clawback.]
The repayment amount should be reported on your income tax return on Line 235 and on Line 422. Line 235 is used to remove the amount that is clawed back from your income before you calculate how much income tax you need to pay. (Otherwise you’d be paying income tax on the money that you didn’t get to keep.) Line 422 adds the amount of OAS you need to repay to the amount of taxes you need to pay.
How Many Years of OAS Will Be Lost Following a Large Taxable Capital Gain?
My relative had heard that having to pay back some OAS one year would result in lower OAS payments the next year. She was fuzzy about how that drop in OAS payments worked.
I checked on the Canada Revenue Agency website for the details.
If a person has a one-time large capital gain, they may have to pay back some of the OAS they received during that same tax year.
The next year, their income will drop back to normal and they should not forfeit any of their OAS pension.
So only one year of OAS is permanently affected by a large capital gain. You would forfeit some or all of your OAS if the capital gain is large enough to push you above the threshold income. In 2013 that income was $70 954.
What Happens to Your OAS in the Year after the Large Capital Gain?
However there’s a catch. The government bases its OAS monthly payments on a person’s income the previous year. If the income that previous year was high enough to require OAS repayments, then they will start withholding some of the OAS payment each month of the following year.
It’s similar to the way the government withholds some of your income from your pay cheque for your income tax payment if you have a reasonably well paying job.
If you had a one time capital gain, however, you won’t have a higher income the following year. You should not have to have any OAS withheld because you won’t need to repay any of the OAS when you file your taxes. What can you do to prevent them from withholding some of your cheque?
How Can I Prevent Service Canada from Withholding Some of My OAS Monthly Cheque?
There’s a form for that!
The form is available on the Canada Revenue Agency website at http://www.cra-arc.gc.ca/E/pbg/tf/t1213_oas/README.html .
You can use this form only if you have filed all of your tax returns and paid any taxes due.
The completed form should be sent to the Taxpayer Services Division for your area. There are instructions on the form (including a toll-free phone number) to find out that address.
What Do I Need to Fill Out the T1213 (OAS) Request to Reduce Old Age Security Recovery Tax Form?
This is a simple one page form but there are quite a few numbers to fill out. You can get most of them from your previous year’s tax return provided you expect your income from various sources to stay about the same.
The information you need to complete the form is:
Estimated Income (for the upcoming year)
- employment income
- CPP or QPP
- other pensions and superannuation
- interest and other investment income
- rental income
- RRSP or RIF income
- other income
- carrying charges and interest expenses
- other deductions
Non-refundable Tax Credits
- disability amount
- medical expenses
- charitable donations
Refundable Tax Credits
- income tax deducted for this upcoming year
- tax installments already paid for this year
- telephone number
- Social Insurance Number
You also have to sign the form.
How Long Will It Take to Know If the CRA Has Agreed to Not Withhold Tax from my OAS Cheque?
According to the information on the T1213 (OAS) form, it takes 4-6 weeks for the government to make a decision about whether or not to stop withholding tax from your OAS monthly payments. They say you will be advised in writing by mail.
If I Forget to File the Form Will I Ever Get My OAS Back?
Yes and yes.
If the government withholds some of your OAS monthly payment even though you are not making enough income to have to repay any OAS, you will eventually get the money back. When you file your tax return in April, you will report how much OAS they withheld. You report this withholding on Line 437 of your tax return. (Your T4-OAS will tell you how much was withheld.) Since this will be more than you owe in taxes, you will get a tax refund for the withheld amount.
Also, in the second year after you received the large capital gain, your OAS payments should return to their original level. The government will look at your income for the year after the capital gain, see that it is lower, and stop withholding any portion of your OAS monthly payment.
According to the Tax Planning Guide http://www.taxplanningguide.ca/tax-planning-guide/section-2-individuals/old-age-security-oas-clawback/ if they withheld too much OAS, you will either receive a refund or the amount will be used to reduce the tax you owe on other income.
So eventually the waters will calm.
OAS Withholding Is Not Based on Calendar Years
In the above article, I’ve simplified everything as if Service Canada does its math based on calendar years. In fact it does not, unfortunately.
Say your income in 2013 was $75 000 which is above the threshold for 2013 of $70 954. Service Canada will use this $606.90 repayment requirement to reduce your future OAS payments so that you will not have to pay a large chunk of money all at once when you file your taxes in April.
Because the CRA will not know your 2013 income until you file your taxes by April 30 of 2014 there is a delay in when Service Canada can start withholding some of your OAS payment.
So Service Canada reduces how much OAS you receive monthly from July 2014 – June 2015 based on your 2013 taxes filed by April 30, 2014.
For a situation where your income has spiked up for only one year, it’s a good idea to file the T1213(OAS) form and not have them withhold any of your OAS cheque.
What Happens If I Don’t Live In Canada and I Have to Repay My OAS?
There are details about the OAS recovery tax for people living outside of Canada on the Service Canada website at http://www.servicecanada.gc.ca/eng/services/pensions/oas/pension/recovery-tax.shtml.
- What is the Old Age Security Pension, OAS, and Will I Get It?
- The Blunt Bean Counter Wrote: Cottages – Are Cost Base Additions a New CRA Audit Target?
Have you experienced a temporary “clawback” of your OAS? Do you have any further advice to offer others? If so, please share your experience with a comment.