2020 was not a year anyone expected, courtesy of the pandemic affecting the entire world. However, 2021 is another year, and it brings new hopes and new challenges with it. While nobody can say what this year has in store for the world, the Canada Revenue Agency (CRA) undoubtedly has some changes you should know.
The government agency has made several significant changes that can affect your paycheck this year. The CRA requires Canadians to deduct three things from their taxable salary: contribution towards the Canada Pension Plan (CPP), income tax, and Employment Insurance (EI) premiums.
The CPP has seen a change that you should know, because it will affect your paycheck.
Crucial change to your paycheck in 2021
The government agency does not have any direct influence on how much you earn. However, the CRA can determine how much you get to keep from your income after taxes and deductions.
With the enhanced CPP changes coming into effect, the employee and employer contribution has gone up from 5.25% in 2020 to 5.45% this year. It also increased the maximum pensionable earnings to $61,600. The amount will be reduced to $58,700 after the reduction of $3,500 for the basic exemption amount.
How it affects your paycheck
Suppose Susie earns $55,000 per year before taxes and deductions. In that case, the CPP update will affect her paycheck like this: $55,000 will lead to a $2,806.75 CPP deduction based on 2021 CPP contribution rates.
The same $55,000 in 2020 would have resulted in a $2,703.75 deduction due to the lower contribution rate. The enhanced CPP and increased CPP contribution rate means that her paycheck will be reduced by $103.
The government has increased payroll deductions like the increased CPP contribution rate. However, it has also increased the amount of tax breaks that you can use to your benefit. For instance, the CRA has increased the basic personal amount tax credit by $139 for 2021.
Offsetting your reduced paycheck
While the increased CPP contributions might cause you short-term difficulties, it has substantial long-term benefits. Your retirement income through the CPP can vary widely depending on how much and how long you contribute to the fund. Increasing your payments to the retirement plan will increase your retirement income.
However, it is possible for you to offset the out-of-pocket expenses to contribute to your CPP. Creating a portfolio of reliable dividend stocks in your Tax-Free Savings Account (TFSA) can add a passive-income stream that you can use to grow your wealth without incurring taxes. It is crucial that you select reliable dividend stocks that can continue increasing dividends to provide you with a growing income source.
Fortis generates most of its revenues through highly regulated and contracted assets. It means that the company can earn reliable cash flows that it can invest in expanding its operations. Additionally, it also allows the management to finance its growing dividend payouts comfortably.
Fortis’s essential services have allowed the company to earn predictable and increasing revenues over the years. The company is a Canadian Dividend Aristocrat with a dividend-growth streak spanning 47 years. It can be an excellent stock to consider for a dividend income portfolio.
You can use the tax-free returns from your TFSA to make contributions to your CPP without letting it affect your taxable income. If you keep reinvesting additional money and maximizing your contribution room, you can even start earning enough passive income to supplement your active income.
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Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.