Last week we reviewed details of the proposed increase to the age eligibility for old age security (OAS) to 67 from 65, which was introduced in the 2012 federal budget.
This prompted questions about the basic eligibility for OAS, especially the residency requirements, rules regarding partial eligibility and the high-income clawback. This column will review those rules.
Rule 1 is you must apply for your OAS benefits -- they are not received automatically.
Benefits are payable once a person has reached age 65. However, the government has proposed to gradually increase the age of eligibility to 67 between 2023 and 2029, so keep that in mind as you read the age 65 references below.
Maximum OAS benefit in 2012 is $540 a month or $6,481 a year, and it goes up with inflation.
To be eligible for any OAS benefits, a person who is legally resident in Canada at 65 must have lived in Canada for at least 10 years after turning age 18. Or, if the person is living outside of Canada at the time of application, that person must have lived in Canada for at least 20 years after age 18 and been either a citizen or legal resident at the time they left Canada.
Once approved, benefits can be paid outside of Canada indefinitely if the person lived 20 years in Canada after reaching 18. If less than 20 years, then benefits are only paid for six months, but may be reinstated if the pensioner returns to Canada.
Most long-term residents qualify for maximum benefits, provided they lived in Canada for the 10 years immediately prior to their application. Even those not living in Canada continuously for the 10 years prior to application may qualify for maximum benefits if they lived in Canada for the full year prior to application and they lived in Canada for at least three years for every one year of absence in the last 10 years.
For people who do not qualify for maximum benefits, there are also partial payments available, calculated at 1å/40th of the full pension for each complete calendar year of residency after reaching age 18.
If in doubt, go to www.ServiceCanada.gc.ca for more on the rules, or visit my blog at www.davidchristianson.com for last week's article on the proposed age change.
OAS benefits are taxable, and if a person's individual net income is above $69,562, there is an additional "OAS recovery tax" -- popularly known as the clawback -- of 15 cents of OAS for every dollar that individual net income exceeds the threshold. Some benefits are received until net income reaches about $111,000.
"Net income" includes all sources of income -- before most deductions -- including OAS and the "grossed up" amount of dividends. Although the corresponding dividend tax credit significantly reduces the actual tax on dividends, it can be painful with regard to the OAS clawback.
People who are eligible for OAS and whose net income (other than OAS) is below $16,368 may qualify for the guaranteed income supplement, with a maximum benefit of $732 a month. Benefits are reduced by 15 cents for each dollar of net income above $3,500.
If married to a spouse who does not get OAS or who receives the GIS, then the maximum income level cutoff is $39,264.
Here's a fact you might not know: From the introduction of OAS in 1952 until 1965, the eligibility age was 70, not 65. The change to age 65 was phased in from 1965 to 1969.
OAS is the largest single government program, at $38 billion in 2011, and is paid out of general revenues. The government projects that cost will grow to $108 billion by 2030, a compound growth rate of about 5.5 per cent. If government revenues grow at less than this rate, then OAS will squeeze out other programs, or require overall tax increases or a special levy to pay for it.
The gradual increase in the age limit should prevent this and acknowledges the fact we are living longer than before.
Now, go out and exercise in the summer weather this weekend, and make sure you extend your own life and health.
David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).