The Canada Revenue Agency (CRA) has increased the maximum pensionable earnings for 2021 by 4.9% to $61,600 from $58,700 in 2020. As part of its Canada Pension Plan (CPP) enhancement, the CRA has also increased the 2021 employer and employee contribution to 5.45% from 5.25% in 2020. These changes will come into effect from January 2021. What does this mean to you?
The CRA pays you a monthly pension under the CPP once you turn 65. You have to apply for the CPP and decide the age you want to start receiving the pension. You can start receiving CPP payments as early as 60 years of age or as late as 70 years of age.
The revised CPP contributions and earnings for 2021
The CRA started CPP enhancement in 2019 to help Canadians get a higher payout of 33% of their average work earnings as compared to 25% under the previous CPP. The CRA calculates your CPP payout on three parametres:
- Your average earnings in your working life;
- Your contributions to the CPP; and
- The age you decide to start your CPP payments.
To increase CPP payout, you need to increase the CPP contribution. You can increase your contributions by contributing to a longer period. The CRA can increase your CPP contributions by increasing your contribution percentage and your pensionable earnings.
From January 2021, you and your employer will contribute 5.45% each on your annual employment income between $3,500 and $61,600. Both you and your employer can contribute up to $3,166.45 each in 2021. This way, the CRA increased your annual CPP contribution by $537.
You can also increase your CPP contribution by delaying your payout until you turn 70. This can increase your annual payout by 42%. You can choose to stop contributing to the CPP at the age of 65. But you can also choose to continue contributing beyond 65 until and until 70. This way, you can increase your payout even more.
How much CPP payment can you get?
If you turned 65 this year and started collecting CPP, you can get an average of $710.41 and a maximum of $1,175.83 per month. This amount is higher than your 2019 average of $679.16 and a maximum of $1,154.58. This increase in payout is the result of the CPP enhancement.
In addition to CPP, you can also claim up to $614 per month in Old Age Security (OAS) pensions if you earned less than $77,580 in 2019. The maximum you can get from OAS and CPP is $1,790, and this amount is taxable. If you are above 65 and are claiming your pension now, the CRA will give you 11 months of retrospective CPP and OAS payments.
Passive income can enhance your pension payments
At old age, $1,800 per month is not sufficient to meet your living expenses as well as pay medical bills. You need another source of passive income. If you have never contributed to Tax-Free Savings Account (TFSA), you can contribute a comprehensive amount of $69,500. You will pay tax on your contribution, but your withdrawals will be free from tax.
The COVID-19 pandemic has created some good opportunities to lock in dividend yields above 8%. You can divide the $69,500 amount between Enbridge (TSX:ENB)(NYSE:ENB), RioCan REIT, and SmartCentres REIT. The three stocks fell 35-45% in March, as the pandemic brought their business to a standstill. Retail stores closed temporarily, which impacted the rent collection of RioCan and SmartCentres. Travel restrictions reduced oil demand, which impacted Enbridge’s cash flow.
Many of their competitors cut dividends to preserve cash. But the three companies maintained their dividend rates, which increased their dividend yields. Now, the reopening of the economy is bringing back the lost cash. Although the cash flows are lower than last year, they are sufficient to avert any dividend cuts. Enbridge has also ensured that it will try to increase dividends next year, if possible.
A $23,000 investment in each of the three stocks will fetch you $474 per month in tax-free dividend income for a lifetime. In fact, your dividend income from Enbridge will increase every year between mid- to high single digits. The addition of this passive income to the $1,800 pension income can relieve you of financial stress.
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Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends Smart REIT.