The article “Should I Sell Off Some Investments To Avoid OAS Clawbacks?” was originally published on MoneySense on October 29, 2019.

Q. I’m due to receive Old Age Security (OAS) benefits next year. I’m concerned because the dividends I receive from my investments will bring my income to $90,000, putting me in a situation where my OAS will be clawed back. Should I be selling some of my dividend stocks to stay below the threshold for clawbacks? I already pay more in income tax than I receive from my Canada Pension Plan benefits.

A. Old Age Security (OAS) is a federal government pension payable to those age 65 and older. Unlike Canada Pension Plan (CPP), it is based on years of residency in Canada, and not work history or historical contributions. Those who have lived in Canada for at least 40 years since the age of 18 are entitled to the maximum of $613.53 per month at age 65 (as of the fourth quarter of 2019). That’s $7,363.36 annualized.

OAS can be lower or higher than the standard maximum. Those with fewer than 40 years of residency may receive a prorated pension. Recipients can also defer their OAS pension past age 65 and start it as late as age 70. Deferring results in a 0.6% monthly increase—or 7.2% per year. Deferring to age 70 may make sense for recipients with a long life expectancy, though low-income recipients may miss out on other benefits if they defer past age 65 (namely, the Guaranteed Income Supplement or GIS).

OAS may be subject to a recovery tax, or “clawback,” if your 2019 net income exceeds $77,580. This sounds like your primary concern, Cam, and with estimated income of $90,000, you are solidly into “clawback” territory.

I think it is important to understand how the clawback works. If you apply in the second half of 2019, Service Canada will look at your 2018 tax return. If your income was high enough, your monthly OAS pension payable through June 2020 may be reduced by a withholding tax. If you apply in the first half of 2020, depending when you file your tax return, Service Canada may have your 2019 income on hand, and your 2019 income will be used to assess your pension from July 2020 to June 2021. Likewise, high income can result in withholding tax.

The thing is, the withholding tax does not really matter. When you file your tax return, it is your income, received in that tax year, which will dictate whether your OAS is clawed back. On your tax return, your net income after certain deductions determines any social benefits repayment. Any tax withheld initially is credited and may or may not get refunded. So, you can always try to strategically reduce your income to the extent that is possible in order to maximize your OAS pension.

Some people cannot avoid OAS clawback. If you have a high income, Cam, especially an income like a salary or pension you cannot control, there may be little you can do to reduce your income. Those approaching or into retirement can make decisions about the timing of taking capital gains or making withdrawals from their Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) or even the start of their government pensions to try to maximize OAS in a given year or over the rest of their lives.

Early retirees may benefit from early RRSP/RRIF withdrawals. Retirees with large non-registered portfolios may benefit from strategic realization of capital gains in low income years to avoid higher income in later years. Deferring CPP and OAS to age 70 may allow a retiree to reduce non-registered and RRSP/RRIF balances and income during their 60s in order to avoid OAS clawback in their 70s.

In your case, Cam, selling dividend stocks to increase your OAS may be cutting off your nose to spite your face. What I mean is that your marginal tax rate on a dollar of dividend income may range from 28% to 56%, depending on your province or territory of residence and whether the dividends are from Canadian or foreign companies. Avoiding a dollar of income to save 28 to 56 cents does not make sense, especially if the dividend stocks are an appropriate part of your investment strategy.

Investment strategy (asset allocation, risk tolerance, time horizon, etc.) should be the most important consideration when investing. Taxes should be secondary.

You could shift your dividend focus more towards capital gains, Cam, given that you can determine the timing and amount of your capital gains better than dividends that may be paid quarterly whether you like it or not. Capital gains are only 50% taxable—so they are 50% tax-free. But the types of stocks that pay no or low dividends may be very different from those that pay dividends. Neither is better than the other in isolation, as a diversified portfolio should include different sectors, geographies, income stocks and growth stocks.

There are strategies to consider so you can reduce your taxable income like splitting your eligible pension income with a spouse, maximizing your Tax Free Savings Account (TFSA) contributions, or contributing to a Registered Education Savings Plan (RESP) for grandchildren. If your non-registered assets are significant, you could consider a discretionary family trust as a means of splitting income with grandchildren whose income is still low, and whom you wish to benefit financially.

I would never avoid income to avoid tax, Cam, but strategic income realization in retirement can help you maximize your after-tax income, split income among family members, and maximize your estate value for your beneficiaries.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.