If you are carefully planning your income for retirement to avoid missing out on government benefits, you will want to know what clawbacks exist.
Canada Pension Plan (CPP) payments do not have the potential to be clawed back by the government, despite being taxed as income and counted as part of your total income in a given year.
People sometimes mistake a CPP clawback for an OAS clawback, which is another taxable benefit offered by the government that can be reduced based on your level of income in a given year.
I will explain potential confusion around a CPP clawback below and outline why it doesn’t exist here in Canada.
Is There a CPP Clawback?
CPP payments do not have a clawback if your income within a specific year exceeds a specific amount. In some cases, individuals will confuse a potential CPP clawback with the OAS clawback, which is a real thing.
The OAS Clawback
You must closely watch your income levels once your OAS payments have been started. The government will tax you for part or all of your OAS payments if you hit specific income thresholds.
The income threshold for 2023 at which OAS begins to be clawed back is $86,912. At this point, you will be paying 15 cents of tax, or OAS clawback for every dollar of income beyond $86,912, if you are receiving OAS payments.
If your income reaches the maximum threshold of $141,917, your entire OAS payments will be lost to the clawback, and you will essentially receive an OAS payment of zero.
This is why it is extremely important to keep an eye on your income levels and make sure that you are taking advantage of the free government benefit.
A major difference between OAS and CPP payments is that Canadians contribute to their CPP over the course of their working lives, while you do not directly contribute to OAS.
In order to qualify for OAS, you will need to be at or above the age of 65 and to have lived in Canada for at least 10 years beyond the age of 18.
What are CPP Payments?
CPP payments from the Canada Pension Plan can be started at any time if you are between the ages of 60 and 70. If you choose to defer your CPP payments or start them at a later point in life, you will receive a higher payment.
Canadians contribute to the CPP throughout their working years, which is typically the period between the ages of 18 and 65 (or once CPP is started, if earlier than 65).
CPP payments, like OAS payments, are taxed as income at year-end when your file your taxes. Unlike OAS payments, CPP payments are not clawed back by the government at specific income thresholds.
If you live in parts of Canada with a high cost of living (like Toronto or Vancouver), CPP payments will likely not be enough to sustain you throughout retirement on their own.
A solid retirement financial plan will account for CPP payments, OAS payments, GIS payments (in some cases), and other sources of income from private savings.
How Income is Taxed in Canada
Income in Canada is taxed at both the federal and provincial government levels. The total income tax that you will be paying in a given year is a sum of both of these levels. Canadian income tax is a progressive system, meaning that higher-income earners must pay a higher income tax percentage.
In any given year, your total taxable income is the sum of your different income sources. In retirement, in particular, these typically include:
- Income from investment properties or investment portfolios
- CPP payments
- OAS payments
Remember that drawing down on a saved, lump-sum amount of money does not count as income for tax purposes, allowing retirees with money saved up to have greater flexibility when it comes to controlling their income levels in retirement.
Each Canadian is responsible for filing their income taxes annually by April 30th. If you are a self-employed individual, there is an additional time extension to the 15th of June.
Retirement Income Strategies
Under a progressive tax system, having too high of an income level is never a good idea, especially within a given year. In retirement, having too high of an income (beyond the maximum OAS threshold) actually eliminates all OAS government benefits, which may seem pretty unfair.
Some basic strategies that you can take advantage of in retirement to control your income levels include:
- Drawing down from a saved lump sum of money
- Opting for investments that offer a fixed income rate (easier to control) than a variable one
- Reduce expenses in order to require a lower income
You may also want to be wary of irreversible income sources (such as life annuities), which may not be flexible if you are trying to reduce your income in a given year.
More complex strategies also exist when it comes to controlling income in retirement, including pension income splitting. To learn more about retirement, make sure to read my retirement planning guide in Canada.
Unlike OAS payments, CPP payments do not face a clawback at specific income levels. In some cases, people confuse a CPP clawback with an OAS clawback.
CPP payments are contributed to by working Canadians between the ages of 18 and 65, while OAS is entirely a government benefit. OAS payments are, however, clawed back at specific income thresholds, so be sure to keep a close eye on your income in retirement to avoid forfeiting an important government benefit.
You will typically want to supplement your income in retirement beyond CPP and OAS payments to live more comfortably. This supplement will usually come from private investment sources such as investment properties or investment portfolios.
If you are just getting started thinking about or planning for retirement, make sure to read my guide outlining the best age to retire in Canada.