OAS Clawback and XEQT: How to Keep More of Your Government Benefits in Retirement

My aunt Linda worked as a school administrator for 32 years. She retired at 64, feeling great about her finances – a healthy RRSP, a modest pension, and a lifetime of responsible saving. When she turned 65, her OAS payments started arriving. She was thrilled. “Free money from the government,” she called it.

Then she filed her taxes the following spring. Her accountant told her she owed back a big chunk of that “free money.” Her RRIF withdrawals, combined with her pension and CPP, had pushed her net income above the OAS clawback threshold. She was losing about $2,400 per year in OAS benefits – money she had budgeted for groceries and her grandkids’ birthday gifts.

“Nobody told me this was a thing,” she said, genuinely confused. She had done everything right her whole life, and the tax system was clawing back her retirement benefits because she earned “too much.”

This is the OAS clawback, and it catches thousands of Canadian retirees off guard every year. The good news? With the right strategy – especially if you hold XEQT across your registered accounts – you can minimize or completely avoid it.

Let me walk you through everything you need to know.

1. What Is the OAS Clawback (Recovery Tax)?

Old Age Security is a monthly payment available to most Canadians aged 65 and older. Unlike CPP, you do not need to have contributed to it – it is funded through general tax revenue and paid out based on how long you have lived in Canada.

In 2026, the maximum OAS benefit is approximately $8,560 per year (around $713 per month) for someone aged 65-74. For those 75 and older, the maximum is about $9,416 per year thanks to the 10% enhancement introduced in 2022.

Here is the catch: OAS is income-tested through something officially called the OAS Recovery Tax, but everyone calls it the clawback. If your individual net income exceeds a certain threshold, you start repaying your OAS – 15 cents for every dollar over the threshold.

2026 OAS Clawback Thresholds

These thresholds are indexed to inflation and adjusted each year. The key number to remember is that first one: $90,997. If your net income stays below it, your OAS is safe. Go above it, and every extra dollar costs you 15 cents in OAS on top of your regular income tax.

The True Marginal Tax Rate Problem

This is what makes the clawback so painful. That 15% OAS recovery tax stacks on top of your normal marginal tax rate. If you are in a combined federal-provincial bracket of 30% and your income is above the clawback threshold, your effective marginal rate on that next dollar is actually 45% – 30% income tax plus 15% OAS clawback.

In some provinces and income ranges, the combined effective rate (income tax + OAS clawback + provincial surtaxes) can exceed 50%. For a retiree who thought they were in a “low tax” phase of life, that is a brutal surprise.

How the Clawback Is Calculated

The clawback applies to your individual net income (line 23600 on your tax return), not household income. It is calculated in the year you receive OAS, but the repayment is based on the previous year’s income. So your 2026 income determines how much OAS you keep in the July 2027 to June 2028 payment period.

Here is a quick example:

• Net income: $110,000
• Amount over threshold: $110,000 - $90,997 = $19,003
• Clawback: $19,003 x 15% = $2,850
• OAS retained: $8,560 - $2,850 = $5,710

That is $2,850 per year gone. Over a 20-year retirement, assuming the same income level, that adds up to $57,000 in lost benefits. And the real kicker? Most of the time, the income causing the clawback is coming from RRSP/RRIF withdrawals that could have been managed differently.

2. What Income Triggers the OAS Clawback?

Not all income is created equal when it comes to the OAS clawback. Understanding which types of income count – and how much they count – is the foundation of every strategy in this article.

Income Types and Their OAS Impact

A few things jump out from this table:

RRSP/RRIF withdrawals are the number one clawback trigger. They count at 100%, and for retirees with large RRSPs, mandatory RRIF minimums can easily push income above $90,997 when combined with CPP, OAS, and a pension.

Canadian dividends are actually worse than they appear. Because of the dividend gross-up mechanism, $10,000 in eligible dividends adds $13,800 to your net income. The dividend tax credit partially offsets this for income tax purposes, but it does not offset the OAS clawback. Dividend-heavy non-registered portfolios can be a clawback trap.

Capital gains are the most tax-efficient income source. Only 50% of capital gains are included in net income (for the first $250,000 annually). A $20,000 capital gain only adds $10,000 to your net income. This is one area where XEQT’s distribution structure works in your favour.

TFSA withdrawals are invisible. This is the golden rule of OAS planning. TFSA withdrawals do not appear on your tax return, do not count toward net income, and have zero impact on the OAS clawback. This is why the TFSA + XEQT combination is the ultimate retirement tool.

3. Why TFSA + XEQT Is the Ultimate OAS Shield

If there is one takeaway from this entire article, it is this: every dollar you have in a TFSA holding XEQT is a dollar that will never trigger the OAS clawback.

The TFSA Advantage for OAS

When you withdraw from your TFSA – whether it is $5,000 or $500,000 – the CRA does not care. It does not show up on your tax return. It does not get added to your net income. It does not affect your OAS, your GIS, your age credit, or any other income-tested benefit.

This makes the TFSA the single most powerful account for retirement income that does not trip the clawback.

How XEQT Maximizes This Advantage

XEQT in a TFSA gives you:

• Tax-free growth: All capital gains and distributions compound without tax drag
• Tax-free withdrawals: Sell XEQT in your TFSA and the proceeds are completely invisible to the clawback
• Global diversification: 12,000+ stocks across 49 countries mean you are not dependent on any single market
• Low cost: The 0.20% MER means more of your money stays invested and growing
• Easy partial sales: Need $10,000 for a trip? Sell a few shares, transfer the cash, done. No tax consequences whatsoever

A Practical Example

Consider two retirees, both age 68, both with $800,000 in total savings and identical spending needs of $55,000 per year beyond CPP and OAS:

Retiree A: Everything in RRSP/RRIF

Looks fine at first. But what happens at age 75, when the RRIF minimum withdrawal rate has pushed the mandatory minimum above $55,000, and the portfolio has continued growing?

Getting close. By 80, with a higher minimum rate (6.82%), they are almost certainly over $90,997. OAS starts disappearing.

Retiree B: $400K in RRIF, $400K in TFSA (XEQT)

Retiree B has the same lifestyle – the same $55,000 in extra spending. But by splitting the source between the RRIF and TFSA, their net income stays well below the threshold. The TFSA withdrawal is invisible. At age 75, 80, 85 – the TFSA continues providing clawback-free income.

Over a 25-year retirement, Retiree B could keep an additional $100,000 to $150,000 in OAS benefits compared to Retiree A, simply because of how the accounts were structured.

4. The RRSP Meltdown: Your Best Defence Against the Clawback

If you already have a large RRSP, do not panic. The RRSP meltdown strategy is specifically designed to deal with this situation.

The Core Idea

Between the time you retire (or reduce your employment income) and age 71, you systematically withdraw from your RRSP in controlled amounts, pay tax at lower rates, and move the after-tax proceeds into your TFSA. This shrinks the RRSP before it becomes a RRIF and before mandatory withdrawals push you into clawback territory.

How This Protects Your OAS

Here is a simplified 10-year meltdown scenario for someone retiring at 60 with a $600K RRSP in XEQT and no pension:

Over 10 years, this person has withdrawn roughly $455,000 from the RRSP, all at relatively low tax rates, and kept every penny of OAS. The remaining RRSP balance (perhaps $200-250K including growth) converts to a RRIF at 71 with much smaller mandatory minimums.

Without the meltdown, the full $600K+ (likely $800K+ after a decade of XEQT growth) would convert to a RRIF, and the mandatory minimums would virtually guarantee clawback territory.

The Sweet Spot: Stay Below $90,997

During the meltdown years after age 65, your goal is simple: keep total net income under the clawback threshold. Back out CPP and OAS, and the remaining room is your RRSP withdrawal budget.

You have roughly $66,000 of RRSP withdrawal room per year before touching the clawback. If you have a workplace pension, subtract that too. The key is doing this math every year and adjusting.

5. How XEQT’s Distribution Structure Helps

Not all ETFs are created equal when it comes to the OAS clawback. XEQT has some structural advantages over other investments you might hold in a non-registered account.

Capital Gains vs Income Distributions

XEQT’s distributions typically include a mix of:

• Canadian dividends (subject to gross-up)
• Foreign income (taxed at your full marginal rate)
• Capital gains (only 50% included in net income)
• Return of capital (not immediately taxable – reduces your adjusted cost base)

The capital gains and return of capital components are particularly friendly for OAS purposes. Capital gains have a 50% inclusion rate, meaning a $10,000 capital gain from selling XEQT only adds $5,000 to your net income. Return of capital adds $0 to your net income in the year you receive it.

Compare this to holding GICs or bond ETFs, where 100% of the interest income counts toward the clawback. Or holding Canadian dividend ETFs, where the gross-up makes $10,000 in dividends count as $13,800 of income.

Strategic Selling in a Non-Registered Account

If you hold XEQT in a non-registered account, you have control over when you trigger capital gains. You choose when to sell, which means you can time sales to stay below the clawback threshold.

Here is a comparison of $20,000 in income from different sources and their impact on net income for OAS purposes:

The difference is significant. Capital gains cost you half as much in clawback as RRIF withdrawals, and TFSA withdrawals cost nothing.

6. GIS Eligibility and Your XEQT Strategy

The Guaranteed Income Supplement (GIS) is a monthly benefit for low-income OAS pensioners. If you or your spouse might qualify, this section matters enormously – because GIS is even more aggressively income-tested than OAS.

GIS Basics

• Available to OAS recipients with low individual or combined household income
• In 2026, a single person generally qualifies with annual income (excluding OAS) below approximately $21,624
• GIS can provide up to $1,086 per month (~$13,032/year) for a single person
• GIS is clawed back at 50% to 75% of every dollar of income above the exemption amounts

The GIS Clawback Is Brutal

While the OAS clawback rate is 15%, the GIS clawback is 50-75%. Combined with income tax, the effective marginal rate for someone losing GIS can exceed 80%. This means for every extra dollar of RRSP/RRIF income, you might keep only 20 cents.

TFSA Is Even More Important for GIS

Just like with OAS, TFSA withdrawals do not count as income for GIS purposes. This makes the TFSA absolutely critical for low-income retirees:

• RRSP withdrawal of $5,000: Adds $5,000 to income, potentially triggers $2,500-$3,750 in GIS clawback plus income tax
• TFSA withdrawal of $5,000: Adds $0 to income, zero GIS impact, zero tax

If you are a lower-income Canadian in your working years, seriously consider prioritizing TFSA contributions over RRSP. A dollar in the TFSA earning growth through XEQT is worth dramatically more in retirement than a dollar in the RRSP if you are anywhere near GIS eligibility.

The GIS-Aware Strategy

For retirees who might qualify for GIS:

1. Minimize RRSP/RRIF income – keep it as low as possible (RRIF minimums cannot be avoided)
2. Maximize TFSA withdrawals – this is your invisible income
3. Be careful with non-registered capital gains – even at 50% inclusion, they can erode GIS
4. Consider delaying CPP – CPP income counts for GIS purposes, so deferring might make sense in some cases
5. Hold XEQT in the TFSA – tax-free growth on a globally diversified portfolio maximizes the value of every dollar in this account

7. CPP Deferral to 70: A Piece of the Puzzle

You can start CPP as early as 60 or defer it until 70. Each year you defer past 65, your CPP increases by 8.4%. That is a guaranteed, inflation-indexed return that is very hard to beat.

How CPP Deferral Interacts with OAS

Deferring CPP to 70 gives you:

• 42% more CPP than taking it at 65 (8.4% x 5 years)
• Lower income in your 60s, which creates more room for RRSP meltdown withdrawals below the clawback threshold
• Higher guaranteed income later, reducing reliance on portfolio withdrawals when you are older

Here is the trade-off in an OAS context:

The math gets complicated. Deferring CPP opens up more meltdown room in your 60s, which lets you shrink the RRSP faster. But at 70, the larger CPP payments eat into your clawback cushion.

For most people with a large RRSP and good health, deferring CPP to 70 while aggressively melting down the RRSP between 60 and 70 is the optimal strategy. You use the low-income years to extract RRSP money at low tax rates, then rely on the higher CPP plus TFSA withdrawals for income later.

But this only works if you have other income sources (TFSA, non-registered, or remaining RRIF) to live on between 60 and 70 while deferring CPP. XEQT in a TFSA fills this gap perfectly.

8. Practical Withdrawal Ordering: The OAS-Optimized Sequence

Here is the big picture – a withdrawal order designed to minimize the OAS clawback over your entire retirement.

Phase 1: Age 60-64 (Pre-OAS)

Priority: Aggressive RRSP meltdown.

• No OAS payments yet, so there is no clawback to worry about
• Employment income is gone or reduced – you are in lower tax brackets
• Withdraw as much from the RRSP as you can while staying in reasonable tax brackets (aim for combined federal-provincial rate under 30%)
• Move after-tax proceeds to TFSA (if room is available) or non-registered account
• Buy XEQT in the TFSA with those proceeds
• Live off non-registered account savings, part-time income, or RRSP withdrawals

Phase 2: Age 65-71 (OAS Begins, Pre-RRIF)

Priority: Continue meltdown, but cap income below $90,997.

• OAS and CPP are now part of your income
• Calculate remaining room: $90,997 minus CPP minus OAS minus pension = your RRSP withdrawal budget
• Continue the meltdown within this budget
• Supplement spending with TFSA withdrawals (they do not count)
• If you deferred CPP to 70, you have much more meltdown room during ages 65-69

Phase 3: Age 71+ (RRIF Begins)

Priority: Minimize the damage.

• RRSP converts to RRIF with mandatory minimums
• If the meltdown was successful, the RRIF balance is manageable and minimums stay below clawback territory
• Rely heavily on TFSA for supplemental income – every TFSA dollar is OAS-safe
• In non-registered accounts, prefer selling XEQT (capital gains at 50% inclusion) over drawing interest income or dividends
• Consider pension income splitting with a spouse to keep both individuals below the threshold

The Golden Rules

1. TFSA withdrawals last (or whenever you need clawback-invisible income). The longer XEQT compounds tax-free in the TFSA, the more it is worth. But do not hesitate to use it when RRIF minimums push you near the threshold.
2. RRSP/RRIF withdrawals first (during low-income years). Get the tax-deferred money out while rates are low.
3. Non-registered capital gains strategically. Time XEQT sales to years when your income is lower. Defer gains when you are close to $90,997.
4. Avoid lump sums. Smooth and steady beats one-time large withdrawals every time.

9. Sample Withdrawal Scenarios

Let me put this all together with two scenarios that show the difference smart planning makes.

Scenario A: No Planning (The Default Path)

Janet, 65, retired with:

• $700K RRSP (XEQT)
• $50K TFSA (XEQT)
• No pension
• Takes CPP at 65

She does no meltdown, just lets the RRSP grow until 71.

Her RRSP grew to over $1M by 72 (XEQT does not stop compounding). TFSA was exhausted early because she used it for living expenses instead of keeping the RRSP in check. By her late 70s, she is losing thousands in OAS every year.

Estimated lifetime OAS lost: $40,000-$60,000+

Scenario B: Strategic Planning (The XEQT Approach)

Robert, 65, retired with the same:

• $700K RRSP (XEQT)
• $50K TFSA (XEQT)
• No pension
• Defers CPP to 70

He starts an aggressive meltdown immediately.

Robert deferred CPP, giving him five years (65-69) with massive meltdown room. He withdrew $310,000 from the RRSP during those years, paying tax at moderate rates and funnelling after-tax proceeds into his TFSA. By 70, his CPP kicks in at the higher amount, his RRIF balance is only ~$300K (and shrinking), and his TFSA has grown significantly from both contributions and XEQT growth. His income never touches the clawback.

Estimated lifetime OAS lost: $0

The difference between Janet and Robert? Tens of thousands of dollars in preserved OAS benefits, plus lower lifetime taxes, plus a larger TFSA balance compounding tax-free.

10. Pension Income Splitting: A Bonus Tool

If you are married or in a common-law partnership, pension income splitting can help keep both partners below the OAS clawback threshold.

After age 65, you can split up to 50% of eligible pension income with your spouse or partner. RRIF withdrawals qualify as eligible pension income at 65+. This means if one spouse has a large RRIF and the other has little income, you can shift up to half the RRIF withdrawals to the lower-income spouse’s tax return.

This does not actually change who receives the money – it is a tax election only. But it can mean the difference between one spouse hitting the clawback threshold and neither spouse hitting it.

Example

That is $2,200 per year saved, just by ticking a box on the tax return. Over 20 years, it adds up to $44,000. And it costs nothing.

11. Putting It All Together: Your OAS-Protection Checklist

Here is the action plan, whether you are 30 or 60:

If You Are Still Working (Accumulation Phase)

• Max out your TFSA first if you are in a lower tax bracket. Every dollar in the TFSA is future OAS-proof income.
• Use your RRSP if you are in a high tax bracket – the deduction is valuable now. But know that you will need a meltdown strategy later.
• Hold XEQT in both accounts. Its low cost, global diversification, and favourable distribution structure make it ideal for both accumulation and decumulation.
• Avoid dividend-heavy portfolios in non-registered accounts if OAS protection is a long-term goal. The gross-up inflates your future net income.

If You Are Within 10 Years of Retirement

• Start planning your meltdown. Figure out your projected income in retirement and estimate whether RRIF minimums will push you above $90,997.
• Build up TFSA room. If you have been neglecting your TFSA, start contributing now. Even five years of XEQT growth in a TFSA can make a meaningful difference.
• Consider your CPP timing. Model the impact of taking CPP at 60, 65, and 70 on your overall income and OAS exposure.
• Build a glide path to transition from 100% XEQT to a balanced portfolio as retirement approaches.

If You Are Already Retired

• Calculate your clawback exposure. Add up CPP + OAS + pension + expected RRIF withdrawals. Are you over $90,997?
• Start the meltdown now if you have RRSP room and lower-income years ahead. Every year you wait is a year of missed opportunity.
• Use TFSA withdrawals for spending when RRIF minimums push you close to the threshold. The TFSA is your pressure-release valve.
• File pension income splitting if your spouse has lower income. It is free money.
• Talk to a fee-only financial planner. A one-time consultation costing $1,500-$3,000 can save you tens of thousands in clawback over your retirement.

12. Final Thoughts

The OAS clawback is one of those things that feels deeply unfair when you first learn about it. You saved responsibly, invested wisely in something like XEQT, and now the government wants some of your benefits back because you were “too successful.” I get it. My aunt Linda felt the same way.

But once you understand the rules, you can play the game. The clawback is not inevitable – it is a planning problem with real solutions:

• TFSA + XEQT for invisible retirement income
• RRSP meltdown to shrink the RRIF before mandatory withdrawals begin
• CPP deferral to open up meltdown room in your 60s
• Capital gains over dividends in non-registered accounts
• Pension income splitting with a spouse
• Strategic withdrawal ordering across all accounts

None of this requires exotic investments or complicated financial instruments. It is just XEQT in the right accounts, withdrawn in the right order, at the right time. Simple in concept, powerful in execution.

The best time to start thinking about this is 10-20 years before retirement. The second-best time is right now. Open the right accounts, start building your TFSA balance, and put together a plan. Your future self – and your OAS cheques – will thank you.

Related Reading

• XEQT TFSA vs RRSP: Where Should You Hold It?
• Tax-Efficient Withdrawal Order for XEQT Investors
• The 4% Rule with XEQT
• RRSP Meltdown Strategy with XEQT
• Coast FIRE with XEQT

XEQT (iShares Core Equity ETF Portfolio) is a long-term investment. Returns are not guaranteed, and past performance does not predict future results. This article is for educational purposes and is not financial advice. Always consider your personal financial situation before making investment decisions.