Canada Revenue Agency: Your Taxes Will Increase in 2021

Your employment taxes will probably increase in 2021, but dividend income from the iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) can be sheltered.

| More on:
edit CRA taxes

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

So far, the federal government has announced no new taxes for 2020. But if you think that means the Canada Revenue Agency won’t take more of your money, you’re mistaken. A tax hike is just one of many ways your taxes can increase. There’s another, subtler way that your tax bill can rise over time. And it’s set to come in effect in a big way in 2021. In this article, I’ll explore this subtle “tax hike” and how you can offset it.

Bracket creep

Bracket creep is where inflation pushes you into a higher tax bracket, but your purchasing power doesn’t actually increase. This can happen when tax bracket thresholds don’t adjust for inflation. In Canada, the thresholds are supposed to adjust for inflation, but your own budget may not match the basket of CPI goods.

If your employer specifically indexes your salary to inflation, then you’ll get a little bump every year. But that doesn’t mean your purchasing power increases. Most of the time, the effect of a salary bump commensurate with inflation is no real change in purchasing power. It’s a different story if your salary hike pushes you into a higher tax bracket. In that situation, your purchasing power declines because of your increased marginal tax rate.

In 2020, many Canadians’ income increased because of pandemic pay and other benefits. If you’re one of them, then bracket creep may hit you when you file in 2021.

Two different CPP premium hikes

Another factor related to bracket creep is CPP premiums. CPP premiums are a part of your tax bill that will increase every single year until 2023 at least. One reason they will increase is because of CPP enhancement. To help Canadians in the future, the Canada Revenue Agency is taking out increasing CPP premiums from 2019 to 2023. Each annual increase is small, but it adds up to a 16.7% hike over the five years of enhancement.

Then there’s the increase in CPP pensionable earnings. If you earn over $58,700, this will increase your CPP premiums too. Each year, there’s a cap on the percentage of your earnings CPP premiums are assessed on. In 2021, it will be increasing from $58,700 to $61,600. That will result in higher CPP premiums for many Canadians.

The one tax you can counter

Most of the taxes mentioned in this article can’t be countered. You can lower your tax bill by claiming more tax breaks, but you don’t want to trigger a Canada Revenue Agency audit by claiming spurious deductions.

Instead, what you want to do is reduce your overall taxes by holding your investments in a TFSA.

If you hold ETFs like iShares S&P/TSX Capped Composite Index Fund (TSX:XIC), you can shelter all the dividends and capital gains from taxation. This reduces your overall tax rate — assuming you’re going to be holding investments one way or the other.

In 2021, you’ll have $75,500 worth of TFSA contribution space if you’re 29 or older. The annual dividends on a $75,500 XIC position would be about $2,265. In a TFSA, all that’s spared from taxation. Ditto with any capital gains you realize on the ETF. So, holding investments in a TFSA can save you big come tax time — especially if you’re going to be holding investments one way or the other.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned.

More on Dividend Stocks

edit Person using calculator next to charts and graphs
Dividend Stocks

The 3 Best Dividend Stocks for Monthly Passive Income

These three dividend stocks are the best options for those seeking high passive income in the next few years in…

Read more »

clock time
Dividend Stocks

Got $10,000 to Invest? 1 Cheap TSX Stock to Buy Right Now

This top TSX dividend stock is finally on sale and has made some savvy buy-and-hold investors quite rich.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Want Monthly Passive Income? These TSX Dividend Stocks Are for You

If you want monthly passive income from TSX stocks, you have to do a little digging. I've given you a…

Read more »

ETF chart stocks
Dividend Stocks

3 International ETFs to Buy for a Diversified Portfolio

Some international markets may prove more resilient against economic downturns, and exposure to them may strengthen your portfolio during crashes…

Read more »

Payday ringed on a calendar
Dividend Stocks

TFSA Pension: 3 Canadian Dividend Stocks to Buy for Monthly Passive Income

These high-yield Canadian stocks look good to buy right now for a TFSA focused on monthly passive income.

Read more »

TIMER SAYING TIME FOR ACTION
Dividend Stocks

Need $500 Right Away? These 3 Passive-Income Stocks Have Got You Covered

I could really use an extra $500 to feed my kids, who seem to be permanently hungry. Couldn't you?

Read more »

Young adult woman walking up the stairs with sun sport background
Dividend Stocks

3 Top TSX Stocks to Begin Your Investment Journey

Given their solid business models and stable cash flows, these three TSX stocks are ideal for income-seeking investors.

Read more »

Community homes
Dividend Stocks

Housing Market Crash: How to Make a Profit 

The housing market crash is here, but you can still earn dividends with Brookfield Infrastructure Partners (TSX:BIP.UN)(NYSE:BIP).

Read more »