For many Ontario retirees, Old Age Security (OAS) is viewed as a benefit they have earned through decades of paying taxes and contributing to Canadian society. What often surprises successful retirees, however, is that OAS can quietly disappear when taxable income rises above a certain threshold.

In 2026, the OAS recovery tax—commonly known as the OAS clawback—begins when an individual's net income exceeds $95,323. For every dollar above that threshold, 15 cents of OAS is lost. While this may seem straightforward, the real challenge is that many retirees trigger the clawback unintentionally.

A large RRIF withdrawal, the sale of a cottage, a rebalancing of an investment portfolio, or a significant capital gain can push income above the threshold. The result is not merely higher taxes—it is often a much higher effective marginal tax rate than many investors expect.

For affluent Ontario households with substantial investment portfolios, understanding the interaction between taxes, RRIF withdrawals, and the OAS clawback can save thousands of dollars annually and potentially tens of thousands over retirement.

Understanding the 2026 OAS Clawback

For the 2026 income year, OAS recovery begins when net income exceeds $95,323. The recovery tax equals 15% of income above this threshold. The clawback continues until OAS benefits are fully eliminated at approximately $154,753 for individuals aged 65 to 74 and approximately $160,696 for those aged 75 and older.

The key phrase is "net income."

Many retirees assume only employment income matters. In reality, numerous forms of taxable income count toward the calculation, including:

As a result, retirees who consider themselves "comfortably retired" rather than "wealthy" often find themselves caught by the clawback.

Why the Effective Marginal Tax Rate Matters

Most people focus on their tax bracket.

However, tax brackets tell only part of the story.

The more important figure is the effective marginal tax rate (EMTR), which measures how much of each additional dollar of income is lost to taxes and benefit reductions.

For retirees receiving OAS, every additional dollar above the threshold faces:

The combination can create surprisingly high marginal tax rates.

Consider a retiree whose taxable income is already near the clawback threshold. An additional $10,000 RRIF withdrawal may not simply generate ordinary tax. It may also trigger a reduction in OAS benefits.

In practical terms, part of that withdrawal is effectively taxed twice:

This is why retirement income planning requires more than simply minimizing taxes in the current year. It requires managing future tax brackets and government benefit thresholds.

The RRIF Problem: A Tax Time Bomb

One of the most common causes of OAS clawback is mandatory RRIF withdrawals.

Many Canadians spend decades accumulating wealth inside RRSPs. During their working years, the strategy works beautifully. Contributions create tax deductions, and investments compound tax-deferred.

The problem emerges later.

By the end of the year in which an individual turns 71, the RRSP must be converted into a RRIF. Once converted, mandatory withdrawals begin.

Initially, the minimum withdrawals may seem manageable. However, successful investors often reach retirement with RRSPs valued at $750,000, $1 million, or even several million dollars.

As the account grows, mandatory withdrawals grow as well.

A retiree may not need the income. Yet CRA requires the withdrawal regardless.

The result is often:

Many retirees discover that they spent years minimizing taxes while working only to face higher effective tax rates during retirement.

How Capital Gains Create Unexpected Clawbacks

Capital gains create another common trap.

Many investors understand that only 50% of a capital gain is taxable. Because of this preferential treatment, capital gains are often viewed as tax-efficient.

However, taxable capital gains still increase net income for OAS purposes.

Imagine a retiree with:

Their income may sit comfortably below the clawback threshold.

Then they decide to:

Suddenly a large capital gain appears on their tax return.

Even though only half of the gain is taxable, the taxable portion increases net income and may trigger an OAS recovery tax.

Many retirees do not realize this until the following year when their OAS payments are reduced.

A Realistic Example

Consider David, age 72, an Ontario retiree.

His annual income consists of:

Total income is approximately $89,900.

David is below the clawback threshold.

Now suppose he sells investments and realizes a capital gain of $40,000.

Because only 50% is taxable, the taxable capital gain is $20,000.

His new net income becomes approximately $109,900.

This places him roughly $14,577 above the 2026 clawback threshold.

The resulting OAS recovery tax is approximately:

$14,577 × 15% = $2,186

David not only pays income tax on the capital gain but also loses over $2,000 of OAS benefits.

The investment sale may have been perfectly reasonable. The tax consequences, however, are much larger than anticipated.

The Hidden Cost of "One-Time" Income Events

Many retirees assume OAS clawbacks only affect those with permanently high income.

Unfortunately, a single large transaction can create a temporary clawback.

Common examples include:

These events can create a significant spike in taxable income.

While the transaction may occur once, the resulting OAS reduction can still be substantial.

This is particularly frustrating because the clawback often appears after the fact, when there is little opportunity to change the outcome.

Why Wealthy Retirees Need Tax Diversification

Many investors focus heavily on investment diversification.

Far fewer focus on tax diversification.

Yet tax diversification can be equally important.

Ideally, retirement assets should be spread across different tax categories:

Tax-Deferred Assets

Examples include:

These accounts provide tax deferral but eventually create taxable withdrawals.

Tax-Free Assets

Examples include:

Withdrawals generally do not affect taxable income or OAS calculations.

Non-Registered Investments

These accounts offer flexibility and may generate capital gains rather than fully taxable income.

When retirement income comes from multiple tax buckets, retirees gain more control over their annual taxable income.

That flexibility can help preserve OAS benefits.

The Value of Early RRSP Drawdown Strategies

One strategy frequently overlooked is the gradual reduction of RRSP assets before mandatory RRIF withdrawals begin.

Many retirees enter retirement with relatively low income during their 60s.

These years often present an opportunity.

Rather than waiting until age 72 and beyond, retirees may intentionally withdraw modest amounts from their RRSP while remaining in lower tax brackets.

Benefits may include:

The objective is not necessarily to minimize taxes this year.

The objective is to minimize taxes and clawbacks over an entire retirement.

Pension Income Splitting Opportunities

For married couples, pension income splitting can be another valuable planning tool.

OAS clawbacks are calculated individually, not jointly. One spouse may face clawbacks while the other remains below the threshold.

Through pension income splitting, families may be able to:

The potential savings can be significant over a multi-decade retirement.

Why Investment Decisions Should Be Coordinated With Tax Planning

Many investors make investment decisions in isolation.

They ask:

The better question is:

"What are the tax consequences of this decision within my overall retirement plan?"

A transaction that appears sensible from an investment perspective may create unnecessary taxes and OAS clawbacks.

Conversely, careful planning may allow the same transaction to occur over multiple years, reducing the tax impact.

Tax planning and investment planning should never operate independently.

They are two sides of the same financial decision.

The Bigger Picture: Lifetime Tax Planning

The OAS clawback is not really about OAS.

It is about lifetime tax planning.

Many retirees focus exclusively on annual tax returns. Wealthier families often benefit more from looking decades ahead.

Questions worth considering include:

The answers can significantly affect both retirement lifestyle and legacy goals.

Final Thoughts

The 2026 OAS clawback threshold of $95,323 creates an important planning consideration for successful retirees. While the recovery tax itself is only 15%, the combination of income tax and lost OAS benefits can create effective marginal tax rates that are far higher than many investors expect.

The challenge is that clawbacks are often triggered accidentally. A large RRIF withdrawal, a portfolio rebalance, or a capital gain from selling appreciated assets can push income above the threshold with little warning.

For Ontario households with substantial investment portfolios, proactive planning is essential. Coordinating tax planning, investment management, retirement income strategies, and estate planning can help reduce unnecessary taxes, preserve government benefits, and improve after-tax wealth throughout retirement.

The goal is not simply to earn higher returns. The goal is to keep more of what you earn.

Let us help you with managing your capital gains and RRIF withdrawal strategies which is right for you

Making a decision on capital gains and RRIF withdrawals is one of few retirement decisions which will have a significant impact on your retirement. Our financial advisory team specializes in tax-smart retirement planning for Ontario residents aged 50 and older. We can work with you to understand your full tax picture, model different sale timings, and coordinate with your CPA or estate planning attorney as needed. Check if we are a fit for your personal situation.