Investment Income and OAS Clawback: Advanced Reverse Mortgage Planning Strategy

Is your RRIF or RRSP investment income pushing you into OAS clawback? For many Ontario retirees, the paradox is painful: a well-managed investment portfolio creates investment income that triggers Old Age Security (OAS) clawback, effectively reducing or eliminating your government benefit. A reverse mortgage can solve this through strategic asset repositioning.

This article is for educational purposes only and does not constitute financial advice.

The OAS Clawback Trap

Here's how the trap works:

2026 OAS Clawback Thresholds:

• Threshold income: $90,997 (approximately)
• Clawback rate: 15% of income above threshold
• Phase-out complete: $117,622+ (no OAS)

For every $1 of net income above $90,997, you lose $0.15 in OAS.

Example:

• Joan, age 68, has net income of $105,000/year
• This $14,003 excess triggers $2,100 in OAS clawback
• Instead of receiving $7,464/year OAS, she receives only $5,364
• Cost: $2,100/year lost benefit

Why RRIF Income Is the Problem

Many retirees experience unexpected clawback because:

Mandatory RRIF minimum withdrawals increase with age:

Age	Minimum Withdrawal %
65	4.00%
70	5.40%
75	7.38%
80	8.75%
85+	10%+

At age 80 with a $500,000 RRIF, you must withdraw $43,750/year minimum. Add CPP and other income, and you exceed the OAS clawback threshold.

Investment income compounds: If your RRIF earns 5% annually, you have:

• Required minimum withdrawal (income): $21,875/year
• PLUS investment gains (taxable): ~$24,000/year
• Total income: $45,875/year (from the RRIF alone)

Combined with CPP ($20,000+) and any other income, OAS clawback becomes inevitable.

The Reverse Mortgage Solution

A strategic reverse mortgage can minimize or eliminate clawback:

Step 1: Borrow against home equity (tax-free)

• No income tax
• No OAS clawback trigger
• Provides immediate liquidity

Step 2: Use RM funds for living expenses

• Reduces pressure to withdraw from RRIF
• Allows RRIF to grow undisturbed (or minimal withdrawal)
• Reduces investment income generated annually

Step 3: Lower net income triggers lower clawback

• Less RRIF withdrawal = less income reported
• Less investment income = stays below clawback threshold
• Preserve more of your OAS benefit

Real-World Scenario: Joan's Clawback Reduction

Joan's starting situation (age 68):

• RRIF balance: $400,000
• RRIF mandatory withdrawal: $16,000/year (4%)
• RRIF investment income: ~$19,000/year (4.75% return)
• CPP: $18,000/year
• OAS (current): $7,464/year
• Living expenses: $55,000/year
• Problem: $16,000 RRIF + $19,000 investment income + $18,000 CPP = $53,000 income reported
• This triggers $3,300 OAS clawback
• Actual OAS received: $4,164/year (vs $7,464 without clawback)

Joan's reverse mortgage strategy:

• Borrow $40,000 from home equity (at 7% fixed rate)
• Use $40,000 RM proceeds for 1-2 years of living expenses
• Reduce RRIF withdrawal to minimum ($16,000)
• Let RRIF investment income stay in the account (compounds)
• CPP remains: $18,000
• New reported income: $16,000 + $18,000 = $34,000
• OAS clawback: ZERO
• Actual OAS received: $7,464/year (no clawback)

Financial benefit over 5 years:

• OAS recovered: $3,300 x 5 years = $16,500
• Reverse mortgage interest cost: $40,000 x 7% x 2 years = $5,600
• Net benefit: $10,900

Plus, the RRIF continues growing (investment income stays in the account), and Joan's wealth actually increases.

Three Clawback Reduction Strategies

Strategy 1: Income Splitting (if married)

Requirement: Only works if your spouse is younger or has lower income.

• Transfer RRIF assets to lower-income spouse's RRSP (using RRSP spousal contributions)
• Lower-income spouse draws lower RRIF withdrawal
• Combined household income stays below clawback threshold
• Consult a tax advisor for spousal attribution rules

Strategy 2: Reverse Mortgage Bridge (works for everyone)

• Borrow against home equity (non-taxable)
• Use borrowed funds for current living expenses
• Defer RRIF withdrawals
• Minimize reported income; preserve or recover OAS

Strategy 3: Strategic RRIF Withdrawal Timing

• Accelerate RRIF withdrawals in early retirement (ages 65-70) when income is lower
• Pay tax on withdrawals at lower tax bracket
• Later (ages 75+) when mandatory withdrawals are high, use reverse mortgage
• Net effect: spread tax burden; minimize clawback in high-withdrawal years

Consult Rick Sekhon Reverse Mortgages and a tax advisor to determine which strategy fits your situation.

Tax Implications: The Key Advantage

Why this strategy works:

Funding Source	Counts as Income?	Triggers OAS Clawback?	Tax Implications
RRIF Withdrawal	YES	YES	Fully taxable
CPP	YES	YES	Partially taxable
OAS	YES	YES	Partially taxable
RRSP Withdrawal	YES	YES	Fully taxable
Reverse Mortgage Proceeds	NO	NO	Zero tax
Home Equity Loan	NO	NO	Zero tax

The reverse mortgage is the only major funding source that doesn't trigger income tax AND doesn't trigger OAS clawback.

The Math: Is It Worth It?

Decision matrix:

Use a reverse mortgage to prevent OAS clawback if:

✓ Your reported income exceeds $90,997 (2026 threshold)
✓ The excess is primarily from RRIF/RRSP withdrawals or investment income
✓ You have home equity ($200,000+)
✓ You plan to stay in your home 5+ years
✓ Your clawback loss exceeds the cost of RM interest

Quick calculation:

• OAS loss per $1,000 excess income = $150/year
• If excess income is $20,000: OAS loss = $3,000/year
• RM to cover $20,000 in bridged expenses = interest cost ~$1,400/year
• Net benefit: $1,600/year

Frequently Asked Questions

Will the CRA audit me if I use a reverse mortgage to reduce RRIF withdrawals?

No. RRIF minimum withdrawals are just that—minimums. You don't have to withdraw more than required, and the CRA has no issue with strategic financial planning that minimizes clawback. However, be prepared to document your strategy if audited.

Can I use a reverse mortgage for this strategy if I'm still working?

Yes, but your employment income may push you over the clawback threshold regardless. However, once you retire and your employment income stops, this strategy becomes powerful.

What if I change my mind and want to repay the reverse mortgage early?

You can. Most Ontario reverse mortgages allow prepayment with minimal penalty (typically 3 months interest). Repaying early just means you're accelerating the RRIF to pay back the borrowed amount.

Does this strategy affect my CPP clawback (Net Income Reduction)?

No. CPP has different clawback rules (Earnings Exemption), and borrowing doesn't affect those. But if you're still working, your employment income counts toward CPP earnings limits.

Can my spouse use the same strategy on their RRIF?

Yes, if both spouses have RRIFs in clawback range. Each can use a reverse mortgage independently, or you can coordinate strategies with a tax advisor.

What happens to the RM if I move to long-term care?

Your reverse mortgage must be repaid within 12 months of moving to long-term care. At that point, your RRIF withdrawals will have reset, and you'll need a new plan. Consult your lender about this trigger.

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Consult a qualified tax advisor for guidance specific to your situation.

Speak to a licensed mortgage professional. Independent legal advice is required before closing a reverse mortgage in Ontario.

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This content is for illustrative purposes only. Rates may vary. Call Rick Sekhon for the best rates and more information.