Pension Income Splitting and the OAS Clawback

A retiree can lose part of their OAS even when their spouse reports far less income.

That happens because the OAS recovery tax is calculated individually.

When one spouse receives most of the household’s employer pension or RRIF income, that person may cross the recovery-tax threshold while the other spouse remains well below it. Pension income splitting can sometimes redistribute qualifying income, reduce the higher-income spouse’s net income and preserve more of the household’s OAS.

The strategy can also backfire when too much income is shifted to a spouse who receives OAS.

The objective is to manage the couple’s combined result, not simply eliminate one person’s clawback.

What Is the OAS Clawback?

The term “OAS clawback” commonly refers to the Old Age Security pension recovery tax.

When an OAS recipient’s net world income exceeds the applicable annual threshold, they may have to repay part or all of the OAS received.

The repayment is generally calculated as 15% of the income above the threshold, up to the amount required to repay the OAS benefit.

The recovery tax is based on the individual recipient’s income.

A spouse’s lower income does not directly offset the higher-income spouse’s calculation.

Current OAS Recovery Thresholds

The threshold changes annually.

The federal government currently reports:

• 2025 income year: $93,454
• 2026 income year: estimated at $95,323

The 2026 amount applies to the July 2027 through June 2028 recovery period and remains estimated until finalized later in 2026.

Articles discussing OAS planning should be updated annually because the thresholds and maximum OAS benefits change.

How the Recovery Tax Is Calculated

Suppose an OAS recipient has 2025 net income of $110,000.

Using the 2025 threshold of $93,454:

$110,000 − $93,454 = $16,546

$16,546 × 15% = $2,481.90

The estimated recovery tax would be $2,481.90, subject to the official tax-return calculation and the amount of OAS received.

The repayment generally affects monthly OAS payments during a later July-to-June period.

Why Couples With the Same Household Income Can Have Different OAS Results

Consider two couples with household income of $160,000.

Couple One

• Spouse A: $80,000
• Spouse B: $80,000

Both may remain below the applicable OAS threshold.

Couple Two

• Spouse A: $130,000
• Spouse B: $30,000

Spouse A may face a significant recovery tax even though total household income is identical to Couple One.

Pension income splitting may help Couple Two when part of Spouse A’s income qualifies.

How Pension Income Splitting Can Reduce OAS Recovery Tax

Eligible spouses may jointly elect to allocate up to 50% of qualifying pension income from the transferring spouse to the receiving spouse.

The allocation:

• Reduces the transferring spouse’s net income
• Increases the receiving spouse’s net income
• Does not change total household income

The CRA specifically identifies OAS repayment as an individual-income-based item that can be affected by pension splitting.

If the higher-income spouse is above the threshold and the lower-income spouse is below it, shifting eligible pension income may reduce the household’s total OAS repayment.

Example: Reducing One Spouse Below the Threshold

Suppose:

• Spouse A receives $105,000 of total income, including eligible pension income.
• Spouse B receives $45,000.
• Both receive OAS.
• Assume an illustrative OAS threshold of $95,000.

Without splitting, Spouse A is $10,000 over the threshold.

The approximate recovery tax would be:

$10,000 × 15% = $1,500

If $10,000 of eligible pension income is allocated to Spouse B:

• Spouse A falls to $95,000.
• Spouse B rises to $55,000.

The recovery tax may be eliminated for Spouse A, while Spouse B remains below the threshold.

The household may preserve approximately $1,500 of OAS before considering the income-tax effect and other credits.

Example: A Full Split Creates a Clawback for the Other Spouse

Suppose:

• Spouse A: $125,000
• Spouse B: $80,000
• Both receive OAS
• Applicable threshold: approximately $95,000

If $30,000 is shifted:

• Spouse A falls to $95,000.
• Spouse B rises to $110,000.

Spouse A may eliminate recovery tax, but Spouse B is now $15,000 over the threshold.

Spouse B’s approximate recovery tax would be:

$15,000 × 15% = $2,250

A smaller split might reduce the combined household recovery tax more effectively.

OAS Itself Cannot Be Split

OAS payments do not qualify as eligible pension income under Form T1032.

Each spouse must report their own OAS.

Pension income splitting can affect OAS indirectly by changing net income, but the OAS benefit itself is never moved between the returns.

CPP and QPP also do not qualify for the Form T1032 election.

Which Income Can Help With the Strategy?

Potentially eligible income can include:

• Lifetime employer pension payments
• Certain annuity income
• RRIF income for a qualifying recipient age 65 or older
• LIF payments for a qualifying recipient age 65 or older
• Certain RRSP annuity income
• Some retirement compensation arrangement payments

Ordinary investment income, employment income, capital gains and regular RRSP withdrawals cannot simply be relabelled as split-pension income.

The source must meet the CRA’s eligibility rules.

Employer Pension Income Before Age 65

Lifetime pension payments from a registered employer pension may qualify for pension income splitting even when the pension recipient is younger than 65.

However, OAS does not begin before 65.

The split may still reduce income tax before 65, and the strategy can be revisited once OAS begins.

The couple does not have to use the same pension-splitting percentage every year.

RRIF Income After Age 65

RRIF income commonly becomes eligible for pension splitting when the owner is at least 65 at year-end.

This creates an important planning opportunity.

A spouse with a large RRSP may consider converting part of it to a RRIF and withdrawing eligible income after 65.

That decision can affect:

• Pension splitting
• Pension income amount
• OAS recovery tax
• Future RRIF minimums
• Estate taxation
• Current income tax

The account should not be converted solely to manage OAS without reviewing the longer-term result.

Large RRIF Minimums Can Create OAS Recovery Tax

At older ages, required RRIF withdrawals can increase.

A retiree may have:

• Employer pension
• CPP
• OAS
• Investment income
• Mandatory RRIF income

The combined income can cross the recovery-tax threshold even when spending needs are lower than the taxable income reported.

Pension splitting may reduce the owner’s income, but it is limited to 50% of eligible pension income and requires room on the spouse’s return before that spouse also faces recovery tax.

Pension Splitting Does Not Reduce Household Income

Pension splitting changes which spouse reports the income.

It does not:

• Reduce the total amount received
• Reduce total household net income
• Move money between bank accounts
• Change ownership of the pension
• Change the pension provider’s payments

This matters because benefits calculated using combined family income may not improve.

The CRA notes that family-income-based benefits such as the GST/HST credit generally do not change solely because of the split, while individual-income-based items such as OAS repayment can change.

Should You Split Only Enough to Reach the Threshold?

Often, this is a useful calculation to test.

Suppose the higher-income spouse is $8,000 over the threshold.

A split of approximately $8,000 may eliminate that spouse’s recovery tax when:

• The pension income qualifies
• The receiving spouse remains below the threshold
• Other income and deductions remain as projected
• The split does not create larger tax costs elsewhere

Transferring more than the amount needed may still reduce income tax, but the additional benefit should be calculated.

Other Deductions Can Reduce OAS Exposure

Pension splitting is only one possible planning tool.

Other factors that may reduce net income include:

• RRSP deductions when contribution room and age permit
• Deductible investment expenses
• Business losses or expenses
• Carrying charges
• Certain employment expenses
• Other permitted deductions

The deductions must be legitimate and supported.

A retiree should not make an RRSP contribution or investment decision solely to avoid a 15% recovery tax without comparing the cost and future taxation.

TFSA Withdrawals Do Not Increase Taxable Income

TFSA withdrawals are generally not included in taxable income.

Using TFSA money for additional retirement spending may therefore avoid increasing net income used for OAS recovery-tax purposes.

By comparison, withdrawals from:

• RRSPs
• RRIFs
• LIFs
• Taxable investment accounts

may create taxable income or gains.

A retirement-income plan can coordinate taxable and non-taxable sources to manage the threshold.

Capital Gains Can Cause a One-Year OAS Problem

A large capital gain may push income above the OAS threshold in a single year.

Examples include:

• Sale of investments
• Sale of a cottage
• Fund distributions
• Business disposition
• Portfolio rebalancing

Pension splitting cannot transfer the capital gain itself.

It may still reduce the higher-income spouse’s net income by shifting eligible pension income away from that return.

The ideal pension split could therefore be much larger in a capital-gain year.

Severance or a Pension Lump Sum Can Affect OAS

A taxable severance payment, retiring allowance or taxable pension excess can increase annual income substantially.

When the recipient is already receiving OAS, this can create recovery tax.

The payment itself may not qualify for pension splitting.

However, eligible recurring pension income received in the same year may still be allocated through Form T1032, partially offsetting the income concentration.

Payment timing and registered-transfer opportunities should be reviewed before the money is received.

Delaying OAS Does Not Always Solve the Problem

OAS can be delayed from age 65 to 70 in exchange for a higher monthly amount.

Someone expecting very high income between 65 and 69 may consider delaying OAS.

However:

• The delayed payments are permanently missed.
• The later OAS amount is larger.
• Higher future income can still create recovery tax.
• Life expectancy and cash-flow needs matter.
• Pension splitting may change the result.

OAS timing and pension splitting should be modelled together.

Income Splitting After One Spouse Dies

Pension income splitting generally ends after the death of a spouse, except for the tax-year treatment and survivor-related rules that may apply.

The surviving spouse may then report:

• Their own pension
• Survivor pension
• CPP retirement and survivor benefits
• OAS
• RRIF or LIF income
• Investment income

The survivor loses the ability to split pension income with the deceased spouse in future years.

This can create a significant increase in individual taxable income and OAS recovery-tax exposure.

Retirement planning should test the survivor’s tax position, not only the couple’s current return.

Coordinate OAS With Survivor Pension Choices

A 100% survivor pension may provide excellent income protection.

It can also leave the surviving spouse with high taxable income after the first death.

That does not mean the survivor pension should be reduced.

It means the household should plan for:

• Future OAS recovery tax
• RRIF withdrawals
• Life insurance
• TFSA assets
• Beneficiary designations
• Tax-efficient investment income

Survivor security is usually more important than avoiding every dollar of recovery tax, but both should be modelled.

Questions to Ask During Annual OAS Planning

1. What is the OAS threshold for this tax year?
2. Is the threshold final or estimated?
3. What is each spouse’s projected net income?
4. Which pension income qualifies for splitting?
5. How much income is each spouse above or below the threshold?
6. What split eliminates or reduces the recovery tax?
7. Does the receiving spouse then face recovery tax?
8. What is the combined household repayment?
9. How does the split affect ordinary income tax?
10. Are age or spouse credits affected?
11. Are large RRIF withdrawals planned?
12. Are capital gains expected?
13. Could TFSA withdrawals fund additional spending?
14. Is either spouse receiving a taxable lump sum?
15. What happens after the first spouse dies?

Review the Split Before Year-End

The Form T1032 election is made when tax returns are prepared, but better planning often begins before the end of the year.

Before December 31, consider:

• Expected pension income
• RRIF withdrawals already taken
• Additional withdrawals needed
• Capital gains
• Charitable donations
• Medical expenses
• OAS threshold exposure
• Tax instalments
• Spouse’s income

Disclaimer: This article provides general Canadian tax information. OAS thresholds, pension-splitting rules and recovery-tax results change over time and depend on each spouse’s complete income, deductions and benefits.