Determining the OAS Clawback for Gary’s Net Income: A Financial Analysis

QUESTION

• Gary was born on January 1^st, He celebrated his 65^th birthday this year. He was born in Israel, but he immigrated to Canada with his family when he has 12 years old. After ten full years of residency in this country he moved back to Israel when he was 22 years of age only to return to Canada and settle here permanently at age of 37.

• Upon hi return to Canada Gary Began Cygnus Corporation as a Service Technician, where he Worked for 12 years. After leaving Cygnus Corporation, he was hired by Dreamline Enterprises where he was employed for nine years. Gary Retired at the age of 58 and has been enjoying his time at home for the past seven years.
• Nancy was also born on January 1^st; she is 60 years old. She has lived in Canada her entire life. Due to working on her PhD. Nancy entered the workplace at a relatively late age, she began working for the federal government at age of 34. She completed 26 years of service before officially retiring effective today’s date.
• Gary and Nancy have been married for 13 years. This is Gary Second Marriage following the death of his wife. He has a 32-year old daughter named Charlene from his first marriage. Charlene is a single mother her daughter Wendy will be celebrating her first birthday on May 7^th of this year.

• Registered Assets.

• In addition to contribution to his own RRSP, Gary has made annual contributions of $5000.00 to Nancy’s spousal RRSP for the past several years. Gary Intent to continue making these spousal contributions until and including the year Nancy must deregister her RRSP. Nancy will not make any further contributions to her individual RRSP.

• Gary and Nancy Intend to wait until the latest possible year before transferring their respective RRSP into RRIfs
• Assets

• The source of Gary’s LIF assets is from his membership in a registered pension plan during his employment with Cygnus Corporation. Gary lives in a province that requires conversation of his LIF to a life annuity at age of 80. His subsequent employer, Dreamline Enterprises, did not offer a pension plan.
• Being a government employee, Nancy was a member of a contributory, defined benefit pension plan, with a normal retirement age of 60. She joined the plan immediately upon being hired. The plan provides a retirement pension based on 2% per year of service of her average pensionable earnings for the last 5 years of service. Benefits are reduced by CPP offset of 0.7% of the average YMPE for the last three years of service.

• Based on this information, Nancy’s average pensionable earnings for the las 5 years of service with the federal government was $52,880.20and her basic monthly pension at age 60 is $2,291.47.
• Canada Pension Plan and Old Age Security
• Gary’s contributions to the cpp started upon his return to Canada from Israel t age 37. Nancy made her first contribution to the cpp once she was hired by the federal government at age 34. Neither Gary nor Nancy has had any interruptions during their cpp contributory period.
• Gary started receiving his CPP retirement pension when he was 63 years old and 6 months old. Gary will receive his first OAS benefit payment effective this month.
• Nancy will wait until age 65 before collecting her CPP retirement benefits. At that time, she will be eligible for the maximum pension payable. Also, when her CPP payments commence, based on an assignment ratio of $69.23 , the portion of her CPP benefits that will be assignable will be $799.32; the portion of her CPP benefits that will not be assignable will be $355,26.
• Retirement Objectives
• Gary and Nancy intend to lead a modest lifestyle during their retirement years. Withing the next 5 years, they will have one significant expense: they want to take around the world trip. They estimate they will have to withdraw 50K from their savings to fund this trip.
• Estate objectives
• Gary wants to leave a before tax amount of $25,000, in current dollars, in his RIFF as a charitable bequest to his church.
• A major assumption in Gary and Nancy’s retirement plan is that real estate values will continue to rise. They are counting on their principal residence having market a market value of $2.5 million at the time of their deaths. The property was purchased by Gary during his first marriage so, ultimately, he would like to see the house passed to Charlene and his grandchild.
• Assumptions
• Unless otherwise stated, Gary and Nancy are each assumed toto be in a 36% combined marginal tax bracket for the reminder of their lives.
• Inflation is expected to be annual rate of 2.5%
• Investments returns for all investments are assumed to be 7%
• The OAS clawback threshold for this year is $77,580.
• The max monthly OAS benefit from this year forward will remain fixed at $601.45.
• The max monthly CPP benefit from this year forward will remain fixed at $1,154,58
• The max monthly CPP benefit 18 months ago was $1,134.17.
• YMPE: 3 years ago: $54,900; 2 years ago: $55,300; last year: $55,900
• The net Income threshold for enhanced RESP CESG payments will remain fixed at $91,831 from this year forward
  Question
• If Garys net income for this year from all sources including CPP benefit but excluding OAS is $72,275 how much of Gary’s OAS benefit will be subject to clawback ? a) $819.90 b) $1631.69 C) $1834.63 d)$5466

ANSWER

To calculate the portion of Gary’s Old Age Security (OAS) benefit that will be subject to clawback, we need to consider his net income for the year, including CPP benefits but excluding OAS. Gary’s net income from all sources for this year is $72,275. Let’s break down the calculation step by step:

Determine the OAS clawback threshold for this year: The OAS clawback threshold for this year is $77,580, as mentioned in the provided information.

Calculate Gary’s income above the threshold: To find out how much Gary’s income exceeds the clawback threshold, subtract the threshold from his net income: $72,275 – $77,580 = -$5,305

Note: The negative value indicates that Gary’s income is below the threshold, which means he won’t be subject to the full clawback.

Calculate the OAS clawback rate: The OAS clawback rate is 15%. This means that for every dollar of income above the threshold, 15 cents of OAS benefits will be clawed back.

Calculate the clawback amount: To find the amount of OAS benefits subject to clawback, multiply the income above the threshold by the clawback rate: (-$5,305) * 15% = -$795.75

Note: The negative value indicates that Gary’s OAS benefits won’t be clawed back entirely, as his income is below the threshold.

Now, to answer the question, we need to determine how much of Gary’s OAS benefit will be subject to clawback. Since his income is below the threshold, none of his OAS benefit will be clawed back. Therefore, the correct answer is not listed among the options provided. Gary’s OAS benefit will not be subject to clawback in this scenario.

In summary, with a net income of $72,275, Gary’s OAS benefit will not be subject to clawback because his income is below the OAS clawback threshold of $77,580.