Old Age Security with Aaron Hector | E095
OAS: Everything you need to know.
On today's episode Jason Pereira is going to talk to Aaron Hector, a private wealth advisor for CWB wealth. He is here to talk about old age security. Basically, what it is, how it works, how you can plan around it and what are the planning opportunities for this exist. Aaron also talks about how dividend junkies who love being different impact only security, different than other forms of income.
Episode Highlights:
1.09: Aaron is a financial planner. He works with CWB wealth, and the majority of his time is spent serving private clients and helping them out with their retirement planning and taxes.
1.55: Aaron has been one of the few who spent time writing about old age security topic that is an overlooked benefit compared to the Canada Pension Plan.
2.12: Old age security pension is a government pension. You need to be at least 65 years old to begin to receive it and it's for those who have residency within Canada, either current residency or former residency, you need to have lived in Canada for at least ten years after you are 18 years old, says Aaron.
3.46: Aaron explains what happens if you don't have the full maximum of 40 years? How is the benefit calculated in that case?
5.04: You get an extra .6 of a percent by choosing to postpone your starting point. If you start at age 66 instead of 65, you get an extra 7.2%, says Aaron.
6.00: When it comes to all the security, Aaron explains what happens when you are a low-income earner and what happens when you are a high income?
7.37: For every dollar above your net income exceeds, government will take away 15 cents of your old age security. Technically it is a recovery tax and people refer to this as a clawback, says Aaron.
10.27: Aaron explains what are some of the ways that a family or couple or an individual can minimize their exposure to all these security paybacks?
12.13: For people who have their own corporations, especially for small businesses who don't have revenue over 500K, they are going to be paying dividends to themselves as a non-eligible dividend, says Aaron.
17.06: If you have got a lot of health issues prior to making the decisions, then it's kind of hard to make decision for OAS, says Jason.
18.13: For every year that you live, your life expectancy increases because you are part of the survivor pool.
19.42: Aaron talks about some of his better or favorite tricks or unique planning opportunities that are uncovered when it comes to deferring past 70.
20.26: The whole amount to the lump sum plus the ongoing monthly payments that you begin to receive after OAS is taxed in the year you get the money, says Aaron.
22.36: If you are at 71 and you forgot your OAS all the way through 70 and now you are going to apply retroactively, your one-year reach back is going to be at the age 70, says Aaron.
28.23: The government did increase the amount payable to people of age 75 and older by roughly $80 roughly per month from October 2022 and this was the first meaningful change to OAS payments amount in very long time.
3 Key Points:
Once your net income exceeds a certain threshold government begins to take away your old age security benefit and that threshold for the year 2022 has been set at $81,761 per person, says Aaron.
Clawback is something that grinds people because there is a disproportional amount of time relative to the amount of dollars that can be saved spent on planning around all day security.
If you think you are going to live to 75, don't postpone OAS, take it at 65 when it's on offer. If you think you're going to live to 90 you are probably wise to postpone it to 70.
Tweetable Quotes:
"You need to have at least 10 years in Canada to qualify, but 40 to get the regular payment." – Aaron
"Effective rates of tax are more important than marginal rates." - Aaron
"The tax efficiency dividend is actually a myth. All that's happening is that you were paying less tax because the corporation paid part of the bill, but the total dollars paid in taxes are identical." – Jason
"The value of a guaranteed inflation adjusted pension which is for a lifetime and comes back by a government is enormous." – Jason
"You also have a one-off strategy around how to structure your estate in some cases, speak about that." - Jason
Resources Mentioned:
Facebook – Jason Pereira's Facebook
LinkedIn – Jason Pereira's LinkedIn
https://www.linkedin.com/in/aaronhector/?originalSubdomain=ca
https://www.cwbwealth.com/en
Full Transcript;
Producer: Welcome to the financial planning for Canadian business owners podcast. You will hear about industry insights with award winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life. And now, your host, Jason Pereira.
Jason Pereira: Hello, and welcome. Today on our show I have a friend and colleague, Aaron Hector, who is a private wealth advisor for CWB Wealth. I brought him on the show to talk about Old Age Security. Basically, what is it, how it works, how you can plan around it, and what are some of the unique planning opportunities that exist. And this is kind of the, let's call it less paid attention to benefit compared to Canada **** plan 'cause there's a lot more optionality there, but it's still one that is a cornerstone to Canadian retirement. And with that, here's my interview with Aaron. Aaron, thanks for taking the time.
Aaron Hector: Thanks for having me on, Jason. Appreciate it.
Jason Pereira: My pleasure. Always good to chat. So, tell us a little bit about who you are and what it is you do.
Aaron Hector: Yeah. Okay. So, um, I'm a financial planner. I work with CWB Wealth and, um, the mo, majority of my time is spent, uh, serving private clients who I've worked with for, I most cases, many, many years helping them out with their retirement planning, with their taxes. Our, our firm does tax preparation, personal tax preparation in house. We have investment professionals as well. Uh, I'm not one of the investment guys, but, uh, we work as a team to help serve our clients. So, my hatch is really just around the, the financial planning and tax and estate planning and, and all of those different things.
Jason Pereira: Nice. And you did a bunch of writing for various periodicals, which has always been stellar. So, anyone looking up, uh, Aaron should look up some of the things he published in the past. So, I brought you on the show today to talk about Old Age Security and you've been one of the few who's actually spent time writing about this topic. Like I said, it's, it's an overlooked benefit compared to Canada Pension Plan and, and too often it's just a one commentary about **** which we'll get to. Uh, but let's talk about Old Age Security. Tell us about what it is. Who qualifies for it. How it works and, uh, what you can get.
Aaron Hector: Yeah. First of all, it's a government pension. You need to be at least 65 years old to begin to receive it. It's for those who have residency in within Canada. Either current residency or former residency. You need to have lived in Canada for at least 10 years after you're 18 years old. So, the, the time really starts when you're 18 as far as tracking your years of residency. For those who live in Canada their entire life, you, you pretty much are guaranteed to max out your entitlements. So, to, to get the full amount you need 40 years of Canadian residency. You need to have at least 10 to qualify, but 40 to, to get the regular payment that most people would get. That amount currently is $685.50 as of this quarter and the payment is adjusted on a quarterly basis, uh, along with CPI. So, so, it's inflation adjusted.
Jason Pereira: Very important this year.
Aaron Hector: Which, yeah. Very important this year. And, and I was curious heading into the, the interview today. So, the most recent adjustment was, I believe, 2.8 percent for, for one quarter.
Jason Pereira: Mm hmm.
Aaron Hector: Um, so that's–
Jason Pereira: Which used to be the entire year back in the day. So, two things I wanna hit upon there. First off, I wanna make sure everybody realizes this. This is a residency qualification. You are not paying into this like you are with Canada Pension Plan. This is often this misnomer I see when people talk about it in various political spheres. It is paid for through general government revenues not, uh, there's no slush fund. There's no credit, uh, sitting there that you contributed to. It's just you lived in this country. Doesn't matter if you worked or not, but you're basically entitled to the benefit as long as you have 10 years. So, what happens if you don't have the full maximum of 40 years. How is the benefit calculated.
Aaron Hector: Yeah. So, you basically, ev, every year after your 18 birthday you earn 140th so the speak. So, if you had less than 40 years. Say you had 30, you'd get 30 over 40, three quarters of that regular payment. If it was 35 years of residency you had after 18, you'd get 35/40 of that payment. So, it, it's just kinda a simple mathematical equation.
Jason Pereira: So, it's actually one of the major pillars of what I think it was **** identified as what, what constitutes a secure retirement income system is a guaranteed minimum income which effectively is, is in this case, um, is in this case a little, a little security because again, you don't have to work. You can be disabled and you're still gonna qualify for it as long as you live here. So, okay. So, that's the basics of it. It's gonna get, it's, it's indexed. It's a set amount. It **** every quarter. Uh, you qualify for it as early as 60.
Aaron Hector: Yeah, 65.
Jason Pereira: Or 5, 65. You qualify for it as early as 65. But let's talk about a couple of other unique things about this. What happens if I get to 65 and I don't wanna take it right then. How long can I defer this?
Aaron Hector: Yep. So, you can defer it as long as you want basically. Every month between age 65 and 70 you get an extra .6 or a percent by choosing to, to postpone your starting point. So, if, if you start at age 66 instead of 65, you get an extra 7.2 percent. Just 12 months times .6. That math continues to be true up until age 70. So, at age 70 you would be getting up to 36 percent higher amount than if you had decided to start at the kind of the normal age, 65. And then, if you postpone beyond 70, I think at that, the circumstances around wanting or that making sense are very limited. We'll get into that I think in a bit.
Jason Pereira: mm hmm.
Aaron Hector: But you no longer accrue a, you know, higher pension amounts after age 70.
Jason Pereira: Okay. So, bottom line is I'm paid to wait until 70. And we'll get into the why you would wanna do that in a moment, but I'm not paid to wait beyond that. Fair enough. So, let's, uh, let's also talk about– We're gonna talk about two different things. We’re gonna talk about both ends of the spectrum first. What happens when you are a low-income earner and what happens when you are a high-income earner when it comes to with Old Age Security. So, we'll start on the low end of the spectrum. If, let's say I have, uh, you know, someone's a, if someone qualifies for Old Age Security but it's not the full amount. Or maybe it is the full amount, but has no other sources of income. Is very low income. What else do they qualify for as part of this program?
Aaron Hector: So, if they're very low income, you would likely have, or potentially, depending on how low we're talking about 'cause the thresholds are low, low.
Jason Pereira: Very low.
Aaron Hector: I, I say like 22, 23,000-ish. I, I'm not an expert on GIS, but the guaranteed income supplement is really what we're talking bout here. Now, that's clawed back starting at very low thresholds and, and you do lose it when you're kinda around the, in the 20-ish, 20,000 thresholds. And that's even quite complicated because it depends on whether both spouses are receiving OAS. The claw back thresholds change on GIS if, if only one of you is over 65 and receiving OAS or not. So, GIS is kinda that low-income supplement to go along with Old Age Security.
Jason Pereira: Yeah. So, guaren– So, bottom line is there's, there's a top **** up to a certain threshold at most if you qualify for the full threshold. And, uh, let's go, now you touched upon an important term there which is claw back. So, let's go over this in lay person's terms. What is a claw back and how does it work?
Aaron Hector: Yeah. So, so essentially, once your income, and, and it's important to note that this is referring to your net income. So, after your tax deductions reduce your total income down. Once, your net income exceeds a certain threshold they begin to take away your Old Age Security benefit. So, that threshold for the year 2022 has been set at $81,761.00. And the way that that works is for every dollar above that that your net income exceeds they'll take away 15 cents of your Old Age Security. So, that's technically called a recovery tax, but in day to day speak, people refer to it as a claw back. So, if you are the, the typical person who started your Old Age Security at age 65 for the year 2022 you would basically lose all of your OAS once you're up to about 136,000.
Jason Pereira: So–
Aaron Hector: And I say, I say about because we honestly, at this point in the year, we don't know. Because of the quarterly adjustments, we don't know what, you know, Q4 is gonna bring as far as, uh, an amount. So, any reference to a claw back at the top end right now, it's, it's a bit of a educated guess until we know what the Q4 amount is.
Jason Pereira: Yeah. I mean, so on the low end, of a GIS we know the threshold. Uh, and unfortunately the claw backs there are pretty brutal. It's like 50 cents on a dollar. So, basically for every dollar you are over the threshold they take back 50 cents. Now, the one saving grace is you don't pay tax twice. You pay that recovery tax, but you don't pay tax on the, the piece in the first place. So, that's one thing.
Aaron Hector: Yep. They ****–
Jason Pereira: And that applies at the high end of the spectrum. Whereas you said the thresh, once you cross that threshold, 15 cents on the dollar goes back to the government, but you're not paying the marginal tax rate on that income all together. I, personally, cannot stand claw backs. They are massive distortions to the tax code because, you know, when you think about it, and I'm sure you'll agree with me on this. At the end of the day, you know, when somebody's receiving Old Age Security, technically they now have a second set of tax brackets, right. They have this–
Aaron Hector: Oh, yeah.
Jason Pereira: –this second threshold different than everybody else in the country on there. And these are only, you know, this, this claw back system is not unique. It is in a lot of things. Everything down to the, you know, the Canada child benefit, Old Age Security, and I think, uh, someone gave me a list of I think 20 different benefits that are subject to claw back.
Aaron Hector: Yeah.
Jason Pereira: So, when you think about how just weird and distorted the tax system can become. It's not one set of tax tables. It's multiple. And the same thing, like everyone listening in the U.S., the same thing exists in the U.S. with the concept called, uh, phase outs, right. So, they call 'em phase outs. We call 'em claw backs. It's the same thing. It's you go beyond a certain threshold. They start taking back something that we say you weren't really entitled to in the first place. No, no. It's a tax. Let's just call it a tax.
Aaron Hector: Yeah. Effective rates. More important than marginal rates. What's your effective rate of tax.
Jason Pereira: Yeah. And that's the thing a lot of people miss is that they will be like, you know, you can look up a tax table and say, oh, okay. That's where my next dollar of income is. But if you're subject to a claw back at that level, your effective rate is potentially higher than that which is just never something anyone likes. It's uh, it's gonna basically, gonna be annoying to them. So, now I said to you before we started recording, there is a, I would say almost a disproportional amount of time relative to the amount of dollars that can be saved spent on pl, on, on planning around Old Age Security claw back. It is something that tends to grind people. They really don't like the idea of it. So, a lot of diversionary tactics, hopefully legally, are done. What are some of the ways that a family or an individual, couple or individual, can minimize their exposure to Old Age Security claw back.
Aaron Hector: So, you could make RSP contributions. So, that's a simple one. Um, if you're, uh, receiving OAS. So, I guess this is, this is only for a few years probably, 65 to 71. So, if you make an RSP contribution you get a tax deduction. That's gonna lower your net income. Potentially lower your exposure to claw back. You could just be strategic in draw down schedules. So, if, if you are taking money out of your RSP or you riff, just be mindful of how much you take out. Some people will skew their investment portfolio design, you know, to be less yield focus or income focused. More, more growth focus just, and this is in nonregistered accounts 'cause that's the only one that really matters here.
Jason Pereira: Yeah. So, so, aiming more for stocks that pay capital gains versus the bonds.
Aaron Hector: yeah.
Jason Pereira: And actually, you bring up an interesting point here 'cause I, uh, you, you jumped in on this online too. The people who are, what are, what we refer to as, professionally as dividend junkies who love to make **** because of the special tax treatment.
Aaron Hector: Yep.
Jason Pereira: Talk to me about how they impact Old Age Security different than other forms of income.
Aaron Hector: Yeah. So, so, a dollar of interest is taxed as a dollar on your tax return. If you receive a dollar of Canadian eligible, so most, well, all public companies that you're investing in are gonna pay eligible dividends. And, um, for a dollar of dividend that you receive on your tax return it's grossed up at 38 percent. So, you actually have to include a $1.38. So, you can see how that, over time, adds up quite quickly actually and your income is actually higher than you might expect it's gonna be for tax purposes. So, because of the way that the, the claw back is calculated based off your net income, you just gotta be mindful of that. And for people who have their own corporations, um, if, especially for small businesses who don't have revenue over 500k, they're gonna be paying dividends to themselves as a noneligible dividend. So, the, the gross up there isn't quite as, quite as painful from a OAS claw back perspective. Still lower personal tax overall, but the, on that side you got a 15 percent gross up. So, a dollar coming out of your personal corps as a dividend is gonna be 115 on your tax return. So, you just have to be mindful of that.
Jason Pereira: So, I mean, it's interesting because the, um, like I said a lot of people have been turning to "income generating" sources of retirement. Dividends being chiefly one of them. Uh, again, and I've, you know, I've said it on this podcast before and otherwise that the, uh, the tax efficiency of dividends is actually a myth. All that's happening is that you are paying less tax because the corporation paid part of the bill, but the next, but the total dollars paid in taxes are identical.
Aaron Hector: Yes.
Jason Pereira: So, it is what it is.
Aaron Hector: It's integration.
Jason Pereira: It's integration, right. So, if anyone wants to go back and listen to that. Now, some people will say well, why do I care what the corporation pays. I only care what I pay. Well, the corporation could pay you more if they weren't paying personal out a corp, um, corporate tax. So, it's, it's a moot point. The, but the bigger point being that unfortunately because of the way this integration works, uh, and the way Old Age Security is cl, is, is, is basically calculated off of gross income which includes the gross up on dividends. Just as you said, 38 percent on Canadian dividends. So, in a quick calculation there, for every dollar, for every dollar of Canadian dividends you're receiving is an additional 5 cents of Old Age Security going back on, in addition to the normal taxes you're paying. So, that deal is not as good as you think it is. And frankly, this is where potentially– I'm not a big fan of asset location. Now, we've talked about this strategy before on this show. Where you try to put certain yielding assets in different places. Uh, I think this is one, it doesn't really work that well 'cause you need to know what the growth rate's gonna be in each of these different locations, but the reality is that in this case that extra tax bit does really favor trying to minimize that in a non **** account once you're over 60 and you're on that threshold.
Aaron Hector: Mm hmm.
Jason Pereira: Now, for most people though, this is like, for most couples though, this is not a pre, a big concern, is it? Right. Like where's the claw back threshold right now?
Aaron Hector: It's 8, almost 82,000, 81,761 per person.
Jason Pereira: Yeah.
Aaron Hector: I should've mentioned that before. That's per person.
Jason Pereira: Yeah. So, I mean, given the fact you can split pension income, uh, including CPP and, uh, any payments coming out of your riffs. Not your RSP. This is important to note. You can't split RSP withdraws. You can split riff withdraws.
Aaron Hector: Yep.
Jason Pereira: All those. That's $162,000 worth of income in retirement that you would have to, you would have taxed before you already had a, a dollar of claw back go back.
Aaron Hector: Yeah. It's a lot higher than I think a lot of people would recognize.
Jason Pereira: Yet they still get bent outta sh, it's funny. The number of people I've seen come in at like 50,000 **** retirement income per spouse and they're like yeah, am I gonna keep all my Old Age Security. I'm like you got so much room it's fine, but people have been, for years, we keep on hearing this, this point. So, I wanna turn now to some of the stuff you've written about in the past. Um, and some of the, let's call them more creative options for differing when you have a higher income. Right, so I'm subject to claw back. Maybe I'm subject to the entirety of claw back. I mean, you know, and I think we discussed this in the past before to where if you're continuing to work when you're in, when you're over 65 and you would get your, your Old Age Security claw back regardless, there's no point in taking it until age, until 70. Hey, actually before we get to those creative things. Let's, let's talk about why you would defer. And I just hit on one of them. You're still working. You're earning good money. You're gonna get a claw back anyway. There's no point.
Aaron Hector: Mm hmm.
Jason Pereira: What are the other reasons for deferring your Old Age Security to 70 or beyond?
Aaron Hector: If you just wanna maximize your lifelong income, uh, throughout retirement and, and say you live in a family where you think you have a reasonable chance of living until a nice old age. Maybe both your parents lived into their 90s. Then, uh, there's just a mathematical benefit to the postponement and the higher OAS amounts. So, if you're living into your 80s that prob, say, if, if you think you're only gonna live to 75, don't postpone this. Take it at 65 when it's on offer. If you think you’re gonna live to 90, you're probably wise to postpone it to 70 just 'cause the math of how much is gonna get put in your pocket. This is very similar to the planning conversations around Canada Pension Plan that get a lot of, uh, expo, uh, media exposure. The only difference here is that your benefit for waiting is not as high as with CPP. So, with CPP you get 42 percent extra. If you wait to age 70 here you only get 36, but conversation is kinda the same. So, really just putting more money in your pocket if you think that you are gonna be running out of money. If, if you're nervous about not having enough investments, postponing to 70 and maybe taking some RSP money between 65 and 70 to bridge you and guaranteed a lifelong higher inflation adjusted, which this year that's very important as you can see. Pension into your old age, it can add up.
Jason Pereira: Absolutely. So, one thing I wanna stop here though quickly on is life expectancy and this comes up quite often. It's, let's, unless you're, you've got a lot of health issues prior to making this decision, it's kinda hard to make that call.
Aaron Hector: Absolutely.
Jason Pereira: Exactly. We don't know, right. So, that, that favors being cautious in my opinion. And by that, I mean potentially favors deferral unless you know there's a medical issue, because frankly, the value of a guaranteed inflation adjusted pension, which is what this is, for life from a, backed by a government is enormous. Like, everything going on right now, frankly if you're, if you remember, if you have CPP, and, and Old Age Security at the fullest deferred extent, you're, you know what, you're feeling pain like everyone else is but at least you know that your, your primary sources of income, or two of your primary sources of income, they're immune to this to some degree.
Aaron Hector: Yep.
Jason Pereira: So, it's huge. And I will also always so that look, life expectancy's a misunderstood concept. Life expectancy is roughly the average someone your age is gonna live to be. Great. Well, the thing is is that that's an average. 50 percent of people live beyond that. So, don't just say, **** bunch of people said that well, why would I save for that. Life expectancy is 84. And it's just like, yeah. So, are you wanna, you're telling me you wanna bet you die exactly on that day versus when the 50 percent of people who die after that day.
Aaron Hector: Mm hmm.
Jason Pereira: And it's like, oh. Okay. That's what it means. And in addition to that it's like the mechanical rabbit at a dog track. You never really catch it until well, until the end really. And for every year that you live your life expectancy actually increases because you're part of the survivor pool. You're not part of that 50 percent that dies before the period. So, when people are, this is just a way to tell people that hey, when you're thinking about life expectancy you have to err on the side of caution, and you have to understand that it's not a terminal date. It's an average.
Aaron Hector: Yep. And, and so, I wrote an article a few years back and I think the title was OAS deferral, the grim possibilities and how to manage them. Some, something like that. Anyways, the idea was that even if you're starting on the track to defer to 70, and between 65 and 70 something medically comes up that is gonna shorten your life expectancy, you're gonna wanna pivot and then apply and probably even replay, apply with a retroactive application to kinda as much as you can get back to that earlier starting application date.
Jason Pereira: So, how, how far back can **** application.
Aaron Hector: You can go 1 year.
Jason Pereira: Okay. So, 12 months.
Aaron Hector: But if you wait until 68 you can only basically affect and age 67 start date. You can't go back to 65 and get, you know, 3, 4 years' worth of payments.
Jason Pereira: Absolutely, and when–
Aaron Hector: You'll get that one lump sum.
Jason Pereira: Well, it is, and that is valuable. Now, that is actually does tax implications we'll talk about shortly. But one of the key points to consider here. The one thing that does complicate this beyond CPP is that there is no survivorship benefit, right. So, if I pass away my wife does not get any of my Old Age Security going forward. So, that's an important thing to remember there. Okay. So, let's talk about, uh, planning for some of the more unique planning opportunities you've uncovered. Especially when it comes to deferring past 71. So, talk to me about some of your better or favorite "tricks" in this, in this case.
Aaron Hector: Sure. So, first of all the, I think there's, just, let me just talk about the mechanics of how, how, how to set this up a little bit. So, when you do an application for OAS and you're older than 65, there is this retroactive. So, when you're making your application, you choose when you would like to start it if it was earlier than the current date. And you can go back the one year. So, let's just say you do that, they're going to actually pay you a lump sum for that one year and the important thing to note her is that it's taxed in the year that you actually receive that lump sum. So, they're not going to request that you go back and adjust your prior year tax return because you're reaching back into that prior year. No, the, the whole amount of the lump sum plus the ongoing monthly payments that you begin to receive after that, it's taxed in the year you actually get the money. So, if say you apply in November or December. Just given processing time, you're not gonna receive that lump sum for the prior year until the following calendar year and you're gonna get the whole next year's monthly payments. So, you will effectively get 2 years of payments in one. And so, this is a really, and, and then you're, you're taxed in that following year. So, this is a, an interesting planning point for someone who maybe is retiring in one year. Still has high salary, um, in the current year that maybe would put 'em into claw back, but because their retiring. Even if they wanted to start their OAS, they might wanna wait, apply later with a retroactive to push that first year of OAS income into the next taxed year when, when they're fully retired. So, that, that's one just kind of **** I think a, a lot of people would potentially find use in that.
Jason Pereira: Yeah.
Aaron Hector: Um, shifting that first year around.
Jason Pereira: Yeah. I mean, and that doesn't, that don't, like you said earlier, that doesn't have to wait until, uh, age 70 specifically–
Aaron Hector: No.
Jason Pereira: I mean 1. Right, if you're retiring at 68 then, you know, the 69th year you're gonna have zero income. So, that's, that's a wonderful way of kind of, of fixing that. So, I mean and that's not, you know, like I said it's not a huge sum. But frankly, you know, we're talking over $7,000.00 here that is, that is now– If you, let's say assume you were top bracket if, you know, over 50 percent in most provinces versus getting down to somewhere closer to 30, that's a couple thousand worth of savings there.
Aaron Hector: Yep. Definitely, and then you get into more niche scenarios. So, let's say someone's retirement income put them at 150,000. They just got corporate money. They're, they're winding down or they've got this large, very large amounts in riff accounts, or you name it. For whatever reason they've just got lots and lots of income. And let's say on average it's 150,000. So, that basically claws back all of your OAS even if you've deferred your starting until age 70. So, what you could do, and this is, this is really just designed to try and capture at least something out of the program. So, you could wait until say you're 71. Now, you've basically forgone your OAS all the way through 70. Now, you're gonna apply retroactively. Your one-year reach back is gonna be at the age 70, which is gonna get you about currently 11,200 or so. But if you time it you get two of those because you get the, the regular monthly ongoing amounts as well.
Jason Pereira: Mm hmm.
Aaron Hector: So, now you're up to over $22,000.00 total OAS received in that one year and now your claw back ceiling, which I refer to as a super ceiling in this one year, is up to about 230, 231,000. So, if, for that retiree who has 150,000 of regular retirement income, they're gonna have 80,000 of room there still in that year. So, it's just, it's just a way for someone to put, kinda it's a onetime opportunity almost to put some money in their pocket out of this program and if they didn't do the retroactive application and, you know, waiting to age 70, they're likely to not ever have been able to receive anything from it.
Jason Pereira: And let's just be clear here. This is the ceiling, right? So, this is the uppermost, like this is a p, this is at which point it stops, the claw back stops, right. And, and the reason for this is because it's a percentage. It's 15 cents on the dollar, but if you have more dollars then it pushes the ceiling higher, right?
Aaron Hector: That's right.
Jason Pereira: Now, this doesn't change the floor.
Aaron Hector: No.
Jason Pereira: So, they're still subject to it and again, you know, simple example. Someone's making $100,000.00. They're already subject to some claw back and left with X amount of dollars. But now, the increase of the O, the increase in OAS that they're receiving from this extra one year bump up is not going to bump them up, you know, it's money they would otherwise never been able to keep. They would've gone, been gone all together.
Aaron Hector: Yep.
Jason Pereira: Yep. It's a, it's a great little one-off strategy. You also have a one-off strategy around how to structure your estate in some cases.
Aaron Hector: Yep.
Jason Pereira: Care to speak about that?
Aaron Hector: Yeah. So, this one's even, even more niche. Um, so, this is for someone who– let's just, man. Let's say, uh, what was my, what was my ceiling I, I mentioned there for the, for the age 71 strategy? It was like 200 and
Jason Pereira: 200 and something.
Aaron Hector: 230,00 was the, the new ceiling for that person. So, let's say someone had $250,000.00 of regular income each year. That strategy that I just walked through would not even give them anything because they're income is so excessively high. So, the only real way that someone in that situation would ever be able to get anything would be to never apply during their life and then their executor or there , you know, personal representative, whoever's looking after managing their estate, applies on behalf of the deceased individual has that same one-year reach back ability. Gets one year of OAS income which is again about $11,000.00 if you’re beyond 70. But because it's received after death, they'd be the option to put that income onto what's called a rights or things returned which essentially is income that's due to you on death but received after death and because most of the other assets that they have would have been allocated onto the final tax return. Usually there's very, very limited sources of income that can be on a right or things. So, you would very likely keep that full amount or, you know, it, it would be taxed on the rights or things filing but at least not subject to, to claw back. So, that one is really out there but it, it's an option, uh–
Jason Pereira: It should still be on every estate planning check list as far as I'm concerned. You know, if you're, you got an executor, that little box should be there. Because, and I've seen this before. People were earning so much money it's like I'm not gonna apply, I'm not gonna get it.
Aaron Hector: Right, or, or this is a more practical approach would be if, if you're one of those people who has just simply had it in their financial plan that they were gonna wait until 70 and they, they got in a car accident between 65 and 70, but they hadn't yet applied yet. So, this, this is where I actually picked up on a lot of this stuff because that happened to one of my clients who was postponing and, um, passed away. I had to figure out is there anything we can do to help the window in this situation. Get some extra money in her pocket and then I did the research on it. Figured out that the executor could apply one year after and, you know, that's kinda where a lot of these concepts started was just out of ****–
Jason Pereira: Real life cases, of course.
Aaron Hector: –very real-life unfortunate situation.
Jason Pereira: Yeah, and I mean it's, you know, there is that risk always that you're deferring, and you'll never benefit, but I mean, that strategy absolutely reduces the overall, if it goes sideways, it reduces it from a, you know, the benefit times 5 years to the benefit times 4 years. So, again, it's, it is niche in that you're , if you're not super high income then basically it's the 5-year period that, that applies. If you are super high income then it's the, you know, when, when, whenever you die. At some point any, anywhere in that, in that entire length that where it does matter. So, overall, it's–
Aaron Hector: And, and I, I kicked this around with an estate lawyer as well and, um, her advice was rather than actually putting that as a paragraph within the will about, you know, a postmortem application for OAs. You know, she, her suggestion was take it out of the will, out it on a personal memorandum or you know a, a letter of wishes. Something like that just to provide a bit of guidance for the executor. Because this is something that would, I, I probably 99–
Jason Pereira: I'm sure people scratch their heads at it quite honestly.
Aaron Hector: – ****. Yeah. It would fall through the cracks for sure.
Jason Pereira: Yeah. It's funny, 'cause unlike Canada Pension Plan which has a death benefit, uh, that you receive at the time of payment. Old Age Security does not, but in, in effect if we can, you know, if you're deferring and you can do this one year, if you're not receiving it already, you can do this one year. For those people let's say it's a death benefit.
Aaron Hector: Yep. Absolutely.
Jason Pereira: Great. Any other weird–
Aaron Hector: Um.
Jason Pereira: –tricks or quirks?
Aaron Hector: Not really a trick or anything like that, but just we, we haven't commented on it yet so, we probably should. Um, just recently the amount for those who are age 75 or over got in–
Jason Pereira: Oh, yes. yep
Aaron Hector: So, I think the first payments were in July. Although don't quote me on that, but I'm pretty sure it was July of this–
Jason Pereira: Well, they’re up now. No, October for the, the October ones are up for sure. And that's 754 versus 685. Of course, note this is 2022 we're seeing this, so it's gonna change. But yes, that's right. The Trudeau government did increase the amount payable to 75, people 75 and older by, what is that , roughly $80.00 roughly per month. Eh, what can I say. Old people vote.
Aaron Hector: Yeah.
Jason Pereira: But, uh, yes.
Aaron Hector: But I think that was the, the, the first meaningful change to OAS payment amounts in a very, very long time.
Jason Pereira: Yeah, and, and there is some basis for it in that, ugh, the need for, for care will proportionally increase over time. 75 is kind of a, I would say, is a reasonable time to assume that that sort of thing is gonna start potentially. So, I, I do see the basis for it all together even though I joke about the politics of it.
Aaron Hector: And those extra 10 percent amounts they also are impacted by the deferral. So, they're not excluded from that deferral opportunity. They're included within the calculations.
Jason Pereira: Yep. So, even in the super ceiling this is after 75.
Aaron Hector: That's correct. Yep.
Jason Pereira: Okay. Super square. Excellent. So, uh, so yeah. This ****–
Aaron Hector: Yeah. I mean we were talking about age 71 to max out the super ceiling. I mean technically, now it'd be age 76.
Jason Pereira: That's true. Absolutely. Yeah, 'cause then you can qualify for one year in arrears of 75 so therefore, you get a bigger one. I mean, it's, eh, 80, it's, it's about $1,000.00 difference. Not bad.
Aaron Hector: Yeah, I mean you gotta, you gotta get through that. Get through those years to make that count.
Jason Pereira: Yes, and then, yeah and then, well, and then die.
Aaron Hector: Yeah.
Jason Pereira: Not the best deal. Okay, and unfortunately too many things in planning. It will revolve around what happens when you die. Anyways. So, Aaron, this has been great. Thank you so much for your time. Um, this is a, like I said, kind of the overlooked stepchild, like a stepsibling of, of Canada Pension Plan. Everybody thinks this is a lot simpler and easier to understand, but, you know, I think you've done a good job of explaining there are some nuances to planning around this.
Aaron Hector: Yeah. Well, thanks for having me on again, Jason. Appreciate it.
Jason Pereira: My pleasure. Hey, where can people find you?
Aaron Hector: Well, they can find me on LinkedIn. I'm pretty prevalent there. My profile's up to date, so that or email aaron.hector@cwbwealth.com.
Jason Pereira: Thank you so much. That was today's episode of financial planning for Canadian business owners. Hope you enjoyed that and, uh, unlike other issues such as Canada Pension Plan, Old Age Security effects all of us the same way. Not really business owners except for maybe the dividend issue. So, uh, as always if you enjoyed this podcast, please leave a review on Apple Podcast, Soundcloud, Stitcher, or Spotify. Wherever it is that you're podcasting. Until next time, take care.
Producer: This podcast was brought to you by Woodgate Financial, an award-winning financial planning firm catering to high-net-worth individuals, business owners and their families. To learn more, go to woodgate.com. You can subscribe to this podcast on Apple Podcast, Stitcher, Google Play, and Spotify or follow find more episodes at Jasonpereira.ca. You can even ask Siri, Alexa, or Google Home to subscribe for you.