All About Canada’s Retirement System: The Old Age Security

When I first arrived in Canada as an international PhD student, I knew nothing about the country’s retirement system. Retirement pensions weren’t even on the “Essential Financial Checklist for Newcomers to Canada” that Mrs. Finance Faded and I carefully crafted. It wasn’t until I began my professional career that I received numerous documents from Human Resources about Canada’s pension system. That’s when I realized I had overlooked a crucial part of financial planning—retirement.

I immediately revised our checklist to include pensions, and the deeper I dug, the more I understood the importance of planning for retirement from day one of my first job, regardless of my age. Whether you’re in your twenties, fifties, or somewhere in between, retirement should be on your radar.

This article marks the beginning of a series where I’ll guide you through the ins and outs of Canada’s retirement system over the coming weeks. Together, we’ll explore the key components of the system, providing you with the knowledge you need to make informed decisions for your financial future.

Canada’s retirement benefits system is built around three main pillars:

1. The Old Age Security (OAS) – a universal benefit funded by general tax revenues.
2. The Canada Pension Plan (CPP) – a contributory, earnings-related pension available to employees and the self-employed.
3. Private pensions and personal savings, such as Registered Retirement Savings Plans (RRSPs) and employer-sponsored pension plans.

Understanding how these pillars interact and how to make the most of them is key to securing your financial independence in retirement. In this series, we’ll take a closer look at each pillar, breaking down complex information into actionable steps that you can apply to your own financial planning. So, stay tuned—there’s a lot to uncover!

Disclaimer

The information shared in this article reflects the current laws, regulations, and rules applicable to Canadian residents as of the date of publication. While we strive for accuracy, please note that these rules may evolve, which could impact the relevance of the details provided. The content is intended for general informational purposes and should not be taken as personalized advice. For guidance tailored to your specific financial, legal, tax, or accounting situation, it’s essential to consult with qualified professionals in the relevant field.

I. Old Age Security: Definition

The OAS program, introduced in 1952, forms the foundation of Canada’s retirement system. It provides a basic income to seniors during retirement, regardless of whether or not they worked during their working years. Unlike contributory pension plans, there are no contributions required to receive OAS benefits; eligibility is based on age and residency, not employment history.

II. Eligibility

To qualify for OAS:

• If you live in Canada: You must be at least 65 years old, a Canadian citizen or legal resident, and have lived in Canada for at least 10 years since the age of 18.

• If you live outside Canada: You must be at least 65 years old, have been a Canadian citizen or legal resident before leaving the country, and have lived in Canada for at least 20 years after turning 18.

III. How to Apply for the Old Age Security Pension

If you want to begin receiving your OAS pension at age 65, you can submit your application starting the month after you turn 64. In some cases, Service Canada will automatically enroll eligible seniors and send a notification letter. If you don’t receive automatic enrollment, you’ll need to fill out and mail the Application for the Old Age Security Pension form (ISP 3350).

IV. Old Age Security Pension Benefits

Canada’s Old Age Security (OAS) benefits are determined by how long you have lived in the country. To receive the maximum OAS pension, you must have resided in Canada for at least 40 years after the age of 18. The amount of your OAS payments is adjusted quarterly—in January, April, July, and October—to reflect changes in the cost of living, as measured by the Consumer Price Index (CPI).

Since July 2022, OAS benefits are increased by 10% when you reach age 75, regardless of when you started receiving payments. This enhanced pension is designed to help seniors maintain their standard of living as they age, offering additional financial support in later retirement. For example, the 2024 maximum monthly amount paid by OAS is $727.67 for people between the age of 65 and 74, which comes out to $8,732.04 a year. If you are age 75 or over, the maximum payment is $800.44 in 2024. 

Unless you meet the 20-year residency requirement, your OAS payments stop after you have been outside Canada for longer than 6 months. Payments are restarted after you return to Canada.

V. Is Old Age Security Taxable?

The OAS pension is taxable income and stops upon the pensioner’s death. Since 1989, OAS is no longer fully universal, as higher-income recipients may be required to repay part of their OAS through a “clawback” mechanism, formally known as the OAS recovery tax. In 2023, this clawback kicks in when your individual net annual income (including OAS payments) exceeds $86,912. For every dollar above this threshold, your OAS pension is reduced by 15 cents. If your net income reaches $142,609 and you have between 65 and 74 years old, your OAS pension is completely phased out.

OAS Clawback and Your Income Tax Returns

The amount of OAS clawed back depends on your income from a previous tax year, due to the way the OAS payment cycle is structured. For example, if you start receiving OAS in February 2024, your 2022 income tax return will be used to calculate how much, if any, OAS is clawed back. If your payments begin in July 2024, however, your 2023 tax return will determine your clawback. This is because the OAS payment cycle runs from July to June of the following year.

Tax Forms and Withholding Options

At the end of each tax year, you will receive a T4A (OAS) tax slip from Service Canada, which will show the total OAS payments you received and any taxes deducted. You can usually expect this statement by the end of February. To avoid paying large tax sums at the end of the year, you can request to have federal income taxes withheld from your OAS payments monthly by completing Form ISP 3520.

Taxation for OAS Pensioners Living Abroad

If you live outside of Canada and are considered a non-resident, a 25% withholding tax is applied to your monthly OAS benefits. However, if your country of residence has a social security agreement with Canada, you may be able to reduce this withholding tax rate. Be sure to check whether your country is part of such a tax treaty with Canada here.