Pension Splitting and OAS Clawback Planning

Introduction
Understanding pension splitting and OAS clawback planning is essential for retirees and near-retirees who want to reduce taxes, preserve government benefits and increase after-tax income. Retirement income in Canada often comes from multiple sources—CPP, OAS, RRIF withdrawals, private pensions and investment income. Without proper planning, seniors can unintentionally trigger the Old Age Security (OAS) clawback, which reduces or eliminates OAS payments once income passes certain thresholds. Pension splitting, RRSP/RRIF strategies and timing of withdrawals all play major roles in reducing this risk. Many seniors do not realize how the OAS recovery tax works or how splitting retirement income Canada allows couples to balance taxes more efficiently. This guide explains pension splitting and OAS clawback planning step-by-step to help retirees protect their income and avoid surprises.

Legal and Regulatory Framework
Pension splitting and OAS clawback planning operate under several provisions of the Income Tax Act and the Old Age Security Act. Eligible pensioners may split up to 50 percent of qualifying pension income with a spouse or common-law partner. Qualifying income includes private pensions, registered pension plans and RRIF withdrawals after age 65. CPP benefits cannot be split through the tax return; they must be legally shared through a separate CPP sharing application. Pension splitting allows couples to reduce combined taxable income, lower marginal rates and minimize exposure to the OAS recovery tax.

The OAS clawback applies when net income exceeds an annual threshold indexed to inflation. For every dollar over the threshold, OAS is reduced by 15 percent. If income exceeds the upper limit, OAS may be fully eliminated for the year. Québec applies its own provincial tax rules but does not claw back OAS because OAS is a federal program. Proper pension splitting and OAS clawback planning ensures compliance with these laws while optimizing retirement taxes.

Key Court Decisions
Court decisions have shaped how pension splitting and OAS clawback planning is applied. Cases involving pension income attribution established that pension splitting through tax returns is a reporting mechanism rather than an actual transfer of funds. Courts have upheld that taxpayers must meet the legal definition of eligible pension income and cannot artificially convert non-qualifying income into pension income to access the split. Other rulings clarified that OAS is subject to recovery tax regardless of financial hardship, reinforcing strict application of the OAS clawback threshold. Cases addressing residency, foreign pensions and timing of withdrawals emphasize that retirement income must be properly classified under Canadian law. These decisions make it clear that pension splitting and OAS clawback planning must follow strict legislative definitions and accurate reporting.

Why CRA Targets This Issue
The CRA closely reviews pension splitting and OAS clawback planning because these strategies significantly impact tax revenue and government benefit payments. Many taxpayers incorrectly split non-eligible income, miscalculate RRIF withdrawals or report inaccurate net income for OAS purposes. CRA systems also cross-match pension slips, RRIF withdrawals and investment income with returns to detect misreporting. Common red flags include attempting to split CPP when not formally shared, splitting income from non-qualifying foreign pensions, or reducing income specifically to avoid the OAS clawback without supporting documentation. Because pension splitting and OAS clawback planning directly reduce taxes and government benefit repayments, the CRA ensures compliance and accuracy.

Mackisen Strategy
Mackisen CPA provides a comprehensive and tailored approach to pension splitting and OAS clawback planning. We analyze all sources of retirement income, including RRSPs, RRIFs, private pensions, CPP, OAS and investment income, to determine the optimal split each year. Mackisen calculates projected income for both spouses, identifies whether income can be rebalanced and applies the 50 percent split strategically.

We also forecast whether the OAS clawback threshold will be exceeded based on withdrawals, CPP start dates, timing of OAS application, and amounts from non-registered investments. Mackisen evaluates whether delaying CPP or OAS increases long-term benefits, whether RRSP-to-RRIF conversion should occur earlier, and whether partial withdrawals can suppress future income spikes. For clients with corporate structures, we develop dividend and salary strategies that minimize clawback exposure. Our process ensures pension splitting and OAS clawback planning is optimized with precision year after year.

Real Client Experience
Many retirees come to Mackisen after discovering unexpected OAS clawbacks. One client triggered a clawback because of a large RRIF withdrawal made late in the year. Mackisen adjusted future withdrawals, split pension income with the spouse and eliminated clawback exposure in following years. Another couple received inconsistent tax results because they did not realize they could split up to 50 percent of private pension income. After applying proper pension splitting and OAS clawback planning, their combined tax payable decreased significantly.

A client with substantial investments experienced rising income due to capital gains. Mackisen recommended spreading gains across multiple years, reducing RRIF withdrawals and applying pension splitting to avoid the OAS recovery tax. Another retiree with a foreign pension did not understand how it affected OAS eligibility. After recalculating income and applying proper offsets, we minimized the clawback. These examples show how pension splitting and OAS clawback planning protects retirement income and improves long-term financial stability.

Common Questions
Taxpayers often ask which income qualifies for splitting. Eligible income includes registered pension plan benefits and RRIF withdrawals after age 65. Non-eligible income includes OAS, CPP (unless formally shared), GIS and investment income. Many ask how the OAS clawback works. The clawback reduces OAS by 15 percent of income above the federal threshold. Others ask whether delaying CPP or OAS helps. Delay decisions depend on income projections, long-term planning and health considerations. Québec residents often ask whether provincial taxes affect clawback. OAS is federal, so clawback applies regardless of province. Understanding these questions is essential for effective pension splitting and OAS clawback planning.

Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency and protection from audit risk. When managing pension splitting and OAS clawback planning, Mackisen provides customized retirement strategies, accurate income forecasting and detailed tax optimization that protect seniors’ benefits and maximize after-tax income.