The OAS Clawback Problem—and How Home Equity Can Help

Most Canadians spend decades assuming that Old Age Security (OAS) is a benefit they'll automatically receive throughout retirement. What many don't realize until it's too late is that the government can gradually take back those benefits if your income exceeds certain thresholds.

This is known as the OAS clawback, officially called the Old Age Security Recovery Tax.

It's one of the most overlooked retirement planning challenges in Canada, yet it can quietly cost retirees thousands of dollars over the years.

Fortunately, with careful planning, there are strategies that may help reduce the impact. In some situations, a reverse mortgage in Canada can play an important role in preserving retirement income while protecting valuable OAS benefits.

Understanding the OAS Clawback

The OAS clawback begins when your annual net income exceeds a government-established threshold. In 2024, that threshold was approximately $90,000.

For every dollar earned above this limit, you repay 15 cents of your OAS benefit. Once your income reaches roughly $148,000, your OAS benefit can disappear entirely.

At first glance, these figures may seem comfortably out of reach. However, many retirees unintentionally cross the threshold—not because they are exceptionally wealthy, but because of how they withdraw money from their retirement accounts.

This is one of the most significant planning challenges I see, and it's one reason why a reverse mortgage in Canada is increasingly becoming part of comprehensive retirement income planning.

How Retirees Accidentally Trigger the OAS Clawback

The OAS clawback is based on income, not overall wealth.

You could own a mortgage-free home worth $1.2 million while living on a modest monthly income, yet still lose part of your OAS because of taxable withdrawals from your retirement savings.

A typical retirement income might include:

• Canada Pension Plan (CPP)

• Old Age Security (OAS)

• A workplace pension

• RRSP or RRIF withdrawals

When retirees need additional cash for home renovations, travel, healthcare, helping family members, or rising living costs, they often turn to their RRIF because the funds are readily available.

The problem?

RRIF withdrawals are fully taxable.

An additional withdrawal of $30,000 or $40,000 may push your taxable income above the OAS threshold, resulting in:

• Higher income taxes

• Partial or full OAS clawback

• Reduced long-term retirement income

Over time, these unnecessary withdrawals can become surprisingly expensive.

A Real-Life Example

One client from Hamilton—let's call him David—retired at age 68 with what appeared to be a strong financial position.

His retirement income included:

• Approximately $900 per month from CPP

• A modest teacher's pension

• An RRIF valued at just over $600,000

His advisor established annual RRIF withdrawals of approximately $45,000 to supplement his retirement lifestyle.

Unfortunately, when combined with CPP and pension income, those withdrawals consistently pushed David above the OAS clawback threshold.

Each year, he lost nearly $4,000 in OAS benefits, while simultaneously paying higher marginal income taxes on his RRIF withdrawals.

Over ten years, that represented roughly $40,000 in lost government benefits, not including the additional taxes paid.

Why the RRIF Problem Gets Worse With Age

Many retirees assume they can simply withdraw less from their RRIF.

Unfortunately, it isn't always that simple.

Once your RRSP converts to a RRIF—which must occur by the end of the year you turn 71—the government requires minimum annual withdrawals.

Those mandatory withdrawal percentages increase as you age.

Even if you don't need the income, you're required to withdraw it.

Combined with CPP, OAS, and pension income, these mandatory withdrawals may create taxable income well above your actual spending needs.

This is where a reverse mortgage in Canada becomes worth considering.

Unlike RRIF withdrawals, funds received from a reverse mortgage are loan proceeds, not taxable income.

That means the money:

• Does not appear on your tax return

• Does not affect your OAS calculation

• Does not increase your taxable income

• Does not trigger additional OAS clawback

Using Home Equity to Reduce Taxable Income

For some retirees, home equity can provide a smarter source of retirement cash flow.

Rather than making large taxable RRIF withdrawals, they access a portion of their home equity through a CHIP Reverse Mortgage while keeping RRIF withdrawals closer to the required minimum.

This strategy can:

• Preserve OAS benefits

• Lower taxable income

• Reduce unnecessary taxes

• Allow retirement investments to continue growing longer

In David's case, restructuring his retirement income made a significant difference.

Instead of withdrawing approximately $45,000 annually from his RRIF, he accessed about $25,000 per year through a reverse mortgage in Canada.

His RRIF withdrawals dropped close to the mandatory minimum.

As a result:

• His taxable income fell below the OAS clawback threshold.

• He recovered his full OAS benefit.

• His RRIF continued to compound for future years.

The interest accumulating on the reverse mortgage was substantially less than the combined cost of the taxes and OAS benefits he had previously been losing.

Is This Strategy Right for Everyone?

Not necessarily.

A reverse mortgage in Canada isn't a universal solution, and it does involve costs—most notably, compounding interest over time.

If your RRIF is relatively small or your retirement income is already below the clawback threshold, you may never face this issue.

However, if you're repeatedly withdrawing taxable income you don't truly need simply to cover living expenses, while simultaneously paying higher taxes and losing OAS benefits, using home equity may deserve serious consideration.

Every retirement situation is unique.

That's why these decisions should always involve coordinated planning between:

• A reverse mortgage advisor

• A fee-only financial planner

• A qualified tax professional

While I can help clients understand how home equity fits into their retirement strategy, broader tax optimization should always consider your:

• Marginal tax rate

• RRIF withdrawal schedule

• Pension income

• Spousal income

• Estate planning objectives

The best outcomes come from looking at the complete financial picture.

Why Tax-Free Cash Flow Matters in Retirement

There is a broader lesson here that many Canadians overlook.

Most retirement assets are tax-deferred, not tax-free.

RRSPs, RRIFs, pensions, and investment withdrawals eventually generate taxable income.

Home equity is different.

It represents one of the few significant sources of wealth that many Canadians can access without creating a taxable event.

That's why a reverse mortgage in Canada can be a valuable retirement planning tool—not because it's always the right answer, but because tax-free access to home equity offers flexibility that traditional retirement accounts cannot.

Final Thoughts

If you're in your late 60s or 70s, own a valuable home, have a substantial RRIF, and find yourself paying increasing taxes while losing part of your OAS benefits, it may be time to evaluate your retirement income strategy.

A reverse mortgage in Canada may help reduce taxable withdrawals, preserve government benefits, and provide greater flexibility throughout retirement.

This isn't about selling a financial product.

It's about making informed planning decisions based on your unique financial situation.

If you'd like to better understand how your home equity fits into your retirement income strategy—and whether a reverse mortgage in Canada could help protect your OAS benefits—I'd be happy to walk through the numbers with you.

Together, we can have an honest, personalized conversation focused on finding the strategy that best supports your retirement goals.