CRA: Big TFSA, RRSP, and CPP Changes in 2021

Invest in Hydro One, as you take advantage of the three major changes that the CRA introduced for 2021 in the TFSA, RRSP, and CPP.

| More on:
Knowledge concept with quote written on wooden blocks

Image source: Getty Images

The Canada Revenue Agency (CRA) announced several important updates in November 2020 for this year that investors and taxpayers were keenly looking forward to. The government agency disclosed three crucial updates with respect to the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), and Canada Pension Plan (CPP) that I will discuss today.

TFSA contribution room increase

The CRA announced a $6,000 increase in the TFSA for this year. This means that the maximum cumulative contribution room in the account since its inception in 2009 is $75,500, up from $69,500 after the 2020 update.

Each year, the CRA adds more contribution room to the TFSA indexed to inflation. The CRA rounds off the number to the nearest $500. Any contributions you make to the TFSA are not tax deductible. However, any withdrawals and revenue in the form of capital gains, interest, and dividends are exempt from the CRA.

RRSP contribution limit increase

According to the latest update, you can contribute up to $27,830 to your RRSP this year compared to the maximum limit of $27,230 in 2020. Canadians can contribute up to 18% of their income or the maximum contribution limit towards the RRSP, depending on which is lower.

The RRSP is a tax-sheltered account, and any contributions you make to it are tax deductible. However, the CRA can charge penalties for early withdrawals from your RRSP.

CPP enhancements

The CPP enhancements that came into effect this year will impact millions of employed and self-employed Canadians that contribute to the pension fund. The enhancement will also affect businesses that have to cover 50% of employee contributions to the CPP fund.

The CRA has announced that the maximum pensionable earnings for 2021 are $61,600, up from $58,700 in 2020 due to a rise in CPP contribution rates. The employee and employer contribution rates to the CPP have increased to 5.45%, up from 5.25% last year. It also means that the contribution rate for self-employed Canadians has increased to 10.9%, because they cover both employer and employee contributions to the CPP.

The CPP enhancement means that Canadians may take a smaller amount from their paychecks home. But it also means that they can earn higher retirement income through the pension plan’s monthly payments by the time they retire. The basic exemption amount for Canadians has remained at $3,500 for 2021.

Generate tax-free income

Considering the possible tax-free gains after these updates, it would be best to consider adding a Canadian dividend stock like Hydro One (TSX:H) to your TFSA. Utilities are inherently safe investments due to their relatively safe business models. Unlike typical utilities, Hydro One provides its investors with an additional layer of safety with increased growth.

Hydro One is a utility company that is not involved in generating power. The company only takes care of transmission and distribution, allowing it to save substantial upfront costs and minimize its exposure to volatile commodity prices.

Like several other utilities, Hydro One generates stable and predictable earnings that allow the company to finance its dividend payouts comfortably. Hydro One is trading for almost $27 at writing, and it sports a juicy 3.76% dividend yield.

Foolish takeaway

Being aware of the significant changes announced by the CRA can help you make more well-informed investment decisions. Make sure that you re-evaluate your investment portfolio and make any adjustments necessary to maximize your long-term benefits.

Allocating the additional TFSA contribution room to reliable dividend stocks like Hydro One could be one good way to begin.

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 Adam Othman has no position in any of the stocks mentioned.

More on Dividend Stocks

Retirement
Dividend Stocks

Passive Income: Buy Dividends to Rule Your Retirement

You can establish a passive-income stream by investing in high-dividend ETFs like BMO Equal Weight Banks ETF (TSX:ZEB).

Read more »

consider the options
Dividend Stocks

Magna Stock: Is a 3% Dividend Yield Enough to Make Investors Stay?

Magna (TSX:MG)(NYSE:MGA) stock has grown 8% in the last week but is down over the last year. So is a…

Read more »

Close up shot of senior couple holding hand. Loving couple sitting together and holding hands. Focus on hands.
Dividend Stocks

Retirees: How to Stay Calm in Market Downturns

Are you losing sleep because of market volatility? Here are three tips that should give you peace of mind.

Read more »

Index funds
Dividend Stocks

Buy the Pullback: 2 Top TSX Dividend Stocks for RRSP Investors

The drop in the TSX Index is giving RRSP investors a chance to buy top dividend stocks at cheap prices.

Read more »

Dividend Stocks

2 Stable REITs for $177 in Monthly Income

These two REITs offer stable income you can bring in each month but also have valuable numbers for investors wanting…

Read more »

funds, money, nest egg
Dividend Stocks

3 of the Best Dividend Stocks to Combat Inflation and Rising Interest Rates

Suncor, TD Bank, and Tourmaline are dividend stocks benefitting from rising inflation and rising interest rates.

Read more »

Community homes
Dividend Stocks

Housing Correction of 20% Could Come in 2022: How to Prepare

A housing correction of up to 20% could be coming thanks to inflation and interest rates, but there are other…

Read more »

grow dividends
Dividend Stocks

WOW! This Canadian Dividend Stock Is Incredibly Cheap

While there are lots of opportunities for investors in the market today, one of the best to buy now is…

Read more »