These within the prime tax bracket in Ontario pay 53.5 per cent of each employment or taxable curiosity funding greenback to income taxes , however there are some Canadians who’re paying an excellent greater price but have a decrease taxable earnings.
If you happen to’re within the dreaded Old Age Security (OAS) clawback zone of earnings, you may be paying a 60 per cent tax price on a few of your earnings. Right here’s learn how to inform.
The OAS formulation for these 65 and older relies on just a few components, however you possible qualify for full OAS in case you have lived in Canada for many of your grownup life.
In 2026, should you didn’t defer your OAS previous age 65 and also you acquired the complete quantity, you’ll obtain greater than $8,900 should you’re 65 to 74 and over $9,800 should you’re aged 75 or over.
Then comes the clawback. If you happen to’re 65 to 74 and your earnings was between $95,323 and $154,753, each further greenback of earnings would end in 15 cents of OAS being clawed again. Successfully this can be a 15 per cent tax. If you happen to’re 75-plus, the excessive finish of this vary strikes as much as $160,696.
After all, this 15 per cent is simply the OAS tax.
As well as, should you’re making $125,000, you might be within the 43.4 per cent marginal tax price. For each further greenback of taxable earnings, you might be being taxed 43 per cent of regular tax after which one other 15 per cent of OAS tax for a complete tax price of 58 per cent in your earnings between $117,000 and $150,000.
In case your earnings is $154,000, you’ll really be taxed at 60 per cent on the ultimate $4,000 as you at the moment are within the 45 per cent marginal tax price plus the 15 per cent clawback price. Remember there are folks making $1 million a yr who will not be but 65 and are paying a decrease tax price than this.
How do you keep away from this very excessive tax price?
Remember the fact that in case your earnings at age 65 plus goes to be greater than $180,000 or so and many of the earnings is from pensions and minimal registered retirement income fund ( RRIF ) withdrawals, there actually isn’t something you are able to do apart from recognize that you’ve excessive earnings — and excessive taxes.
However should you’re within the clawback vary or somewhat above it and have any flexibility on earnings, there are some things you may be capable to do to cut back this excessive tax rate .
One of many extra fascinating issues to do is to be extra cautious round Canadian dividend income , which is mostly a extra tax-efficient supply of earnings than curiosity, nevertheless it’s shut on this case.
Within the $117,000-to-$154,000 vary, the tax price on the dividends begins at 25.4 per cent and goes as much as 27.5 per cent. On prime of this, eligible dividends — from Canadian corporations reminiscent of Royal Bank of Canada , Enbridge Inc. and others — are grossed up 38 per cent to find out your internet earnings.
This implies your highest tax price on the dividends could be 25.4 per cent, which is eighteen per cent decrease than if it was curiosity earnings, however each greenback of eligible earnings on this vary that’s created by the gross-up prices an extra 15 per cent in OAS clawback.
The result’s that you’re taxed barely higher on Canadian dividends than on curiosity earnings on this earnings vary, however not by a lot.
If you happen to’re within the OAS clawback zone, having no earnings investments, capital gains and return of capital is essential. If you happen to say you want earnings and that is without doubt one of the causes for big Canadian dividend investments, there may be nothing to recommend which you can’t promote investments which have little curiosity or dividend earnings and do it month-to-month or quarterly to cowl cash-flow wants.
Doing this could simply decrease your 60 per cent marginal tax price right down to, at most, 37.5 per cent — 22.5 per cent on the capital acquire plus 15 per cent on OAS clawback— and even decrease if you may as well eradicate a number of the 15 per cent clawback on the 38 per cent gross-up. Examples of shares that pay no or very low dividends may embrace Apple Inc. , Nvidia Corp. , Berkshire Hathaway Inc. and others.
Different funding choices are exchange-traded funds (ETFs) which are structured to not pay earnings or sure investments, typically actual property earnings trusts (REITs), which have most popular tax therapy. For instance, Canadian Condo Properties REIT had 84 per cent of its distribution as a return of capital in 2025.
One other thought would apply in case your earnings is just too excessive based mostly on cash you don’t actually need. I do know this isn’t the scenario with many individuals, however it may well definitely apply in circumstances the place in retirement one or two folks have $100,000-plus internet incomes.
For instance, let’s say you’re a 75-year-old couple and have funding property of $1 million in RRIFs and tax-free savings accounts ( TFSAs ) and $1 million in taxable non-registered accounts, and the expansion in these investments together with any pension earnings cowl greater than you spend in a yr. Chances are you’ll discover your funding portfolio is rising most years.
Perhaps you’re taking $250,000 of the non-registered funds and reward it to household or charity now as an alternative of by your property. At 5 per cent, this $250,000 would generate an additional $12,500 of earnings you don’t want.
As a substitute of being taxed at 58 per cent or 60 per cent in your arms, it may be utilized by different members of the family to pay down debt or to fund their TFSAs. It will decrease your taxable earnings yearly, and should you had been within the OAS clawback zone, you can be getting extra OAS yearly going ahead.
No person desires to be paying 60 per cent marginal tax charges, however should you’re on this scenario and your earnings is lower than $180,000, you possibly can in all probability make some modifications to meaningfully decrease that price.
Ted Rechtshaffen, MBA, CFP, CIM, is president, portfolio supervisor and monetary planner at TriDelta Non-public Wealth, a boutique wealth administration agency specializing in funding counselling and high-net-worth monetary planning. You may take a look at their Property and Donation calculator at www.tridelta.ca.
