Those in the top tax bracket in Ontario pay 53.5 per cent of every employment or taxable interest investment dollar to income taxes , but there are some Canadians who are paying an even higher rate yet have a lower taxable income.
If you’re in the dreaded Old Age Security (OAS) clawback zone of income, you might be paying a 60 per cent tax rate on some of your income. Here’s how to tell.
The OAS formula for those 65 and older is based on a few factors, but you likely qualify for full OAS if you have lived in Canada for most of your adult life.
In 2026, if you didn’t defer your OAS past age 65 and you received the full amount, you would receive more than $8,900 if you’re 65 to 74 and over $9,800 if you’re aged 75 or over.
Then comes the clawback. If you’re 65 to 74 and your income was between $95,323 and $154,753, every extra dollar of income would result in 15 cents of OAS being clawed back. Effectively this is a 15 per cent tax. If you’re 75-plus, the high end of this range moves up to $160,696.
Of course, this 15 per cent is just the OAS tax.
In addition, if you’re making $125,000, you are in the 43.4 per cent marginal tax rate. For every extra dollar of taxable income, you are being taxed 43 per cent of normal tax and then another 15 per cent of OAS tax for a total tax rate of 58 per cent on your income between $117,000 and $150,000.
If your income is $154,000, you would actually be taxed at 60 per cent on the final $4,000 as you are now in the 45 per cent marginal tax rate plus the 15 per cent clawback rate. Keep in mind there are people making $1 million a year who are not yet 65 and are paying a lower tax rate than this.
How do you avoid this very high tax rate?
Keep in mind that if your income at age 65 plus is going to be more than $180,000 or so and most of the income is from pensions and minimum registered retirement income fund ( RRIF ) withdrawals, there really isn’t anything you can do other than appreciate that you have high income — and high taxes.
But if you’re in the clawback range or a little above it and have any flexibility on income, there are a few things you might be able to do to reduce this high tax rate .
One of the more interesting things to do is to be more careful around Canadian dividend income , which is generally a more tax-efficient source of income than interest, but it’s close in this case.
In the $117,000-to-$154,000 range, the tax rate on the dividends starts at 25.4 per cent and goes up to 27.5 per cent. On top of this, eligible dividends — from Canadian companies such as Royal Bank of Canada , Enbridge Inc. and others — are grossed up 38 per cent to determine your net income.
This means your highest tax rate on the dividends would be 25.4 per cent, which is 18 per cent lower than if it was interest income, but every dollar of eligible income in this range that is created by the gross-up costs an additional 15 per cent in OAS clawback.
The result is that you are taxed slightly better on Canadian dividends than on interest income in this income range, but not by much.
If you’re in the OAS clawback zone, having no income investments, capital gains and return of capital is very important. If you say you need income and that is one of the reasons for large Canadian dividend investments, there is nothing to suggest that you can’t sell investments that have little interest or dividend income and do it monthly or quarterly to cover cash-flow needs.
Doing this can easily lower your 60 per cent marginal tax rate down to, at most, 37.5 per cent — 22.5 per cent on the capital gain plus 15 per cent on OAS clawback— or even lower if you can also eliminate some of the 15 per cent clawback on the 38 per cent gross-up. Examples of stocks that pay no or very low dividends might include Apple Inc. , Nvidia Corp. , Berkshire Hathaway Inc. and others.
Other investment options are exchange-traded funds (ETFs) that are structured to not pay income or certain investments, often real estate income trusts (REITs), that have preferred tax treatment. For example, Canadian Apartment Properties REIT had 84 per cent of its distribution as a return of capital in 2025.
Another thought would apply if your income is too high based on money you don’t really need. I know this is not the situation with many people, but it can certainly apply in cases where in retirement one or two people have $100,000-plus net incomes.
For example, let’s say you’re a 75-year-old couple and have investment assets of $1 million in RRIFs and tax-free savings accounts ( TFSAs ) and $1 million in taxable non-registered accounts, and the growth in these investments along with any pension income cover more than you spend in a year. You may find your investment portfolio is growing most years.
Maybe you take $250,000 of the non-registered funds and gift it to family or charity now instead of through your estate. At five per cent, this $250,000 would generate an extra $12,500 of income you don’t need.
Instead of being taxed at 58 per cent or 60 per cent in your hands, it can be used by other family members to pay down debt or to fund their TFSAs. This will lower your taxable income every year, and if you were in the OAS clawback zone, you will be getting more OAS every year going forward.
Nobody wants to be paying 60 per cent marginal tax rates, but if you’re in this situation and your income is less than $180,000, you can probably make some changes to meaningfully lower that rate.
Ted Rechtshaffen, MBA, CFP, CIM, is president, portfolio manager and financial planner at TriDelta Private Wealth, a boutique wealth management firm focusing on investment counselling and high-net-worth financial planning. You can check out their Estate and Donation calculator at www.tridelta.ca.
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