These within the prime tax bracket in Ontario pay 53.5 per cent of each employment or taxable curiosity funding greenback to earnings taxes , however there are some Canadians who’re paying a fair larger fee but have a decrease taxable earnings.
Should you’re within the dreaded Previous Age Safety (OAS) clawback zone of earnings, you may be paying a 60 per cent tax fee on a few of your earnings. Right here’s how one can inform.
The OAS system for these 65 and older is predicated on a number of components, however you probably qualify for full OAS if in case you have lived in Canada for many of your grownup life.
In 2026, when you didn’t defer your OAS previous age 65 and also you obtained the complete quantity, you’ll obtain greater than $8,900 when you’re 65 to 74 and over $9,800 when you’re aged 75 or over.
Then comes the clawback. Should you’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. Should you’re 75-plus, the excessive finish of this vary strikes as much as $160,696.
In fact, this 15 per cent is simply the OAS tax.
As well as, when you’re making $125,000, you’re within the 43.4 per cent marginal tax fee. For each further greenback of taxable earnings, you’re being taxed 43 per cent of regular tax after which one other 15 per cent of OAS tax for a complete tax fee of 58 per cent in your earnings between $117,000 and $150,000.
In case your earnings is $154,000, you’ll truly be taxed at 60 per cent on the ultimate $4,000 as you at the moment are within the 45 per cent marginal tax fee plus the 15 per cent clawback fee. Consider there are folks making $1 million a 12 months who should not but 65 and are paying a decrease tax fee than this.
How do you keep away from this very excessive tax fee?
Understand that in case your earnings at age 65 plus goes to be greater than $180,000 or so and a lot of the earnings is from pensions and minimal registered retirement earnings fund ( RRIF ) withdrawals, there actually isn’t something you are able to do apart from respect that you’ve got excessive earnings — and excessive taxes.
However when you’re within the clawback vary or just a little above it and have any flexibility on earnings, there are some things you may have the ability to do to cut back this excessive tax fee .
One of many extra attention-grabbing issues to do is to be extra cautious round Canadian dividend earnings , which is mostly a extra tax-efficient supply of earnings than curiosity, however it’s shut on this case.
Within the $117,000-to-$154,000 vary, the tax fee 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 firms corresponding to Royal Financial institution of Canada , Enbridge Inc. and others — are grossed up 38 per cent to find out your web earnings.
This implies your highest tax fee 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 a further 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.
Should you’re within the OAS clawback zone, having no earnings investments, capital positive factors and return of capital is essential. Should you say you want earnings and that is without doubt one of the causes for giant Canadian dividend investments, there’s nothing to counsel which you could’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 fee all the way 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 it’s also possible to get rid of a few 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, usually actual property earnings trusts (REITs), which have most well-liked tax therapy. For instance, Canadian Residence 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 primarily based on cash you don’t really want. I do know this isn’t the state of affairs with many individuals, however it could actually actually apply in circumstances the place in retirement one or two folks have $100,000-plus web incomes.
For instance, let’s say you’re a 75-year-old couple and have funding belongings of $1 million in RRIFs and tax-free financial 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 12 months. Chances are you’ll discover your funding portfolio is rising most years.
Perhaps you are taking $250,000 of the non-registered funds and reward it to household or charity now as an alternative of via your property. At 5 per cent, this $250,000 would generate an additional $12,500 of earnings you don’t want.
As an alternative of being taxed at 58 per cent or 60 per cent in your fingers, it may be utilized by different relations to pay down debt or to fund their TFSAs. This can decrease your taxable earnings yearly, and when you have been within the OAS clawback zone, you may be getting extra OAS yearly going ahead.
No person needs to be paying 60 per cent marginal tax charges, however when you’re on this state of affairs and your earnings is lower than $180,000, you possibly can most likely make some adjustments to meaningfully decrease that fee.
Ted Rechtshaffen, MBA, CFP, CIM, is president, portfolio supervisor and monetary planner at TriDelta Personal Wealth, a boutique wealth administration agency specializing in funding counselling and high-net-worth monetary planning. You’ll be able to try their Property and Donation calculator at www.tridelta.ca.
