“I can travel more!” That was the first thing Anne said when we discovered that she should be receiving an extra $610 per month from Canada. It was a benefit, that her U.S. and Canada financial advisors had missed. The Canadian Old Age Supplement (OAS) is a big part of many retiree’s income plan, however there is a lot of confusion about the benefit. As a cross-border financial planner I see people make mistakes all the time regarding their OAS benefit. This article is meant to clear up that confusion. If you have worked and lived in the U.S. and Canada, don’t miss out on all your retirement benefits.
What is OAS?
If you have lived in the U.S., you are probably familiar with social security. In Canada, your “social security” benefit is split into two parts; Canadian Pension Plan (CPP) and OAS. Your CPP benefit is based on how long and how much you paid into CPP during your working career. In order to qualify for OAS however, you just had to have lived in Canada after the age of 18. OAS is a flat monthly benefit, which is based on the amount of years you have lived in Canada.
The earliest that someone can start collecting their OAS benefit is 65. However, a person can delay starting OAS until age 70. OAS grows each year that it is delayed up to age 70.
Qualifying for OAS while in the U.S.
If you retire in Canada, in order to qualify for OAS a person just needs to live in Canada for 10 years after the age of 18. Now, if you are retiring outside of Canada, a person typically must have resided in Canada for 20 years after the age of 18. This makes qualifying for OAS more difficult if you are planning on retiring outside of Canada. However, if you are retiring in the U.S., the rules for qualifying for OAS are easier.
To get OAS benefits, you must be age 65 or older and must have been a resident of Canada for at least 10 years after age 18 (or 20 years after age 18 to have benefits paid outside Canada).
Under the agreement, Canada will consider your U.S. Social Security credits earned after 1951 and after age 18, along with periods of residence in Canada after 1951 and after age 18, to meet the OAS residence requirements. However, to be eligible to have your U.S. credits counted, you must have resided in Canada for at least one year after 1951 and after age 18.
In short, you can use social security credits plus Canadian residency to qualify for OAS. I recently had a client that worked in Canada for only 17 years before moving to the U.S. As a result, she felt like she didn’t qualify for an OAS benefit as she was familiar with the 20-year residency rule. However, she worked and paid into U.S. social security for 15 years. When we add her U.S. social security credits to her Canadian residency, she does qualify for an OAS benefit. Next up, we discuss how much a person may receive from their OAS benefit.
How Much is My OAS Benefit?
The longer that you have lived in Canada after the age of 18, the higher your benefit. I mentioned before that you can use social security credits to help you qualify for an OAS benefit. However, those credits don’t also increase your benefit. Your benefit is based on the number of years you lived in Canada.
In 2019, the maximum OAS benefit is C$607. In order to receive the maximum benefit, you would have had to have lived in Canada for 40 years after the age of 18. If you had lived in Canada for less than 40 years, you will get a fraction of the maximum OAS benefits. For each year that you have lived in Canada, you will get 1/40 of the maximum OAS benefit. For example, if you had lived in Canada for 20 years, you are eligible for ½ of the maximum OAS benefit, or $304 in 2019.
The maximum OAS benefit also assumes that you start your OAS benefit at age 65. However, you can delay and grow your OAS benefit until age 70. Each month that you delay OAS, your benefit will increase by 0.6% (7.2% annually). If you delay until age 70, your OAS benefit will increase by 36%.
OAS Pension Recovery Tax
Lower federal taxes, lower state taxes, and potentially warmer weather are a few reasons people make the move to the U.S. from Canada. Let’s add one more advantage to retiring in the U.S.; no OAS pension recovery tax here in the U.S.
Typically, if your worldwide income exceeds a certain amount, your OAS benefit is reduced. In 2019, your OAS benefit starts to be reduced if over C$75,910 and is completely eliminated if over C$123,386. For each dollar in which your net income exceeds C$75,910, you will need to have a 15% repayment tax on your OAS. For example, if your income is C$86,000 in 2019, then your income repayment would be 15% on the difference between C$86,000 and $75,910. The result would be a $1,513.50 repayment would be deducted from your OAS benefit for the following year.
However, if you retire in the U.S., this repayment tax does not apply. From the OAS Return of Income Guide for Non-Residents:
Do you have to file the Old Age Security Return of Income?
To ensure that your OAS payments are not suspended in July, you have to file this return on or before April 30th each year even if your net world income is less than CAN$75,910. However, you do not have to file this return if, in 2018, you were a resident of one of the following countries and you have no plans to move to a non-listed country before July 1, 2020:
If you are a retiree with high income, not having this OAS income tax repayment could be a big benefit.
Taxation of OAS in the U.S.
Taxation of your OAS benefit in the U.S. is the same as the taxes on your U.S. social security benefit. There is no foreign tax withholding on your OAS benefit here in the U.S. Meaning that you will receive the full benefit, with nothing paid to Canada. In the U.S., there are tax advantages on social security income, compared to other types of income. For example, at least 15% of your social security/OAS benefit is completely free from federal taxation. In fact, depending on your income, all your social security/OAS may be free from federal taxation. Also, most states don’t tax social security either.
Please read, “Taxation of your RRSP, RRIF, CPP and OAS in the U.S.”, for a more detailed look of your Cross-Border taxation here in the U.S.
I can’t tell you how many times I have seen people not take full advantage of their U.S. and Canadian retirement benefits. Starting benefits at the wrong time and not collecting all of the benefit in which you qualify, can really hurt your cross-border retirement plan. OAS is one of the biggest culprits. If you have worked in Canada and the U.S., it is very possible that you will qualify for an OAS benefit. If that is the case, you will want to develop a game plan for starting your OAS, CPP and social security benefit. Cross-Border retirement planning can get confusing, and working with a financial planner that specializes in this area can ensure that you are maximizing benefits and minimizing cross-border taxation.
Need More Help?
Are you missing out by working with a financial advisor that doesn’t fully understand your cross-border financial planning needs? Are you interested in working with a financial planner that specializes in your cross-border financial planning situation? Schedule a complimentary meeting below, and let’s create your cross-border financial plan.