This 1 CPP Change in 2023 Is Going to Hurt the Worst

CPP premiums will increase next year, but making RRSP contributions and holding dividend stocks like Royal Bank of Canada (TSX:RY) could lower your tax bill.

| More on:
worry concern

Image source: Getty Images

There are several Canada Pension Plan (CPP) changes coming in 2023, and most of them are going to hurt. Some changes will help retirees who are already receiving the CPP (payouts will increase a little), but for working-age Canadians, the changes mostly involve extra “taxes.” I put taxes in scare quotes because there is some debate about whether CPP premiums really are taxes. They certainly feel like taxes prior to the age when you retire, although, theoretically, the money should be returned to you in the future.

At any rate, CPP premiums are rising, which is both a good thing and a bad thing.

In this article, I will explore the CPP change that is likely to hurt the worst in 2023 — and what you can do about it.

CPP enhancement

By far, the biggest source of increased CPP premiums in 2023 is CPP enhancement. That a program whereby the CPP premium increases incrementally from 2019 to 2023 to pay for higher benefits later. If you’re near retirement age, maybe this sounds like a good thing, but if you’re still working, then it mainly means extra CPP premiums come out of your paycheque.

There are two things that will increase CPP premiums in 2023:

Enhancement and maximum pensionable earnings. CPP enhancement increases the premiums paid on any given level of earnings, the maximum pensionable earnings increase hikes the amount of earnings that CPP premiums are paid on.

CPP enhancement is likely to hurt the worst of these two hikes, because there’s no escaping it. If you go well beyond the maximum pensionable earnings threshold, you cease paying additional CPP premiums. If you’re below it, well then, your premiums simply go up. There’s not a lot you can do about it, save for risky tax maneuvers aimed at lowering your tax bill. It’s possible to lower your CPP premiums by aggressively claiming credits and deductions to get your income level down, but if the CRA catches you doing this, you may get sued.

How it could harm your bank account

CPP enhancement could harm your bank account balance by increasing the amount of money you pay out in CPP premiums. Unless you get a big raise this year, you’re likely going to take a pay cut. Thanks to CPP enhancement and inflation, that’s just how the cookie crumbles.

A good way to offset the CPP premium hike

One legal way to offset the CPP premium hike is to make a lot of Registered Retirement Savings Plan (RRSP) contributions. This is a 100% legal way to lower your tax bill. Earlier, I’d mentioned that claiming lots of tax deductions could get you in trouble with the CRA. RRSP contributions are the exception: this is a deduction that the government wants you to claim!

You can invest money in an RRSP. If you hold a dividend stock like Royal Bank of Canada (TSX:RY) in your RRSP, you’ll pay no taxes on the dividends or capital gains. You’ll pay taxes on the withdrawals in the future, but the extra income you save by contributing can be invested. It’s worth it overall. Dividend stocks like RY are particularly good RRSP picks, because they create cash flows each and every single year.

With pure capital gains stocks, if you never sell them, you’ll never pay taxes on them. But RY’s dividends are immediately taxable unless you hold the stock in an RRSP or TFSA. So, if you’re going to be making RRSP contributions, consider spending them on dividend stocks.

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. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Investing

Doctor talking to a patient in the corridor of a hospital.
Investing

TFSA: Healthcare Dividend Stocks Are Perfect for Passive Income

Top healthcare dividend stocks like Extendicare Inc. (TSX:EXE) and others can provide huge passive income in your TFSA.

Read more »

TFSA and coins
Tech Stocks

TFSA: Invest in These 2 Stocks for a Legit Chance at $1 Million

Are you interested in building a $1 million portfolio? Invest $20,000 in these two stocks!

Read more »

edit Person using calculator next to charts and graphs
Investing

The Top TSX Stock on My Watch List Right Now

Here's why Alimentation Couche-Tard (TSX:ATD) remains a top TSX stock that long-term investors seeking growth and yield will want to…

Read more »

Hourglass projecting a dollar sign as shadow
Investing

3 Stocks to Add to Your TFSA ASAP

Given their stable cash flows and solid underlying businesses, these three stocks are excellent additions to your TFSA in this…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

Better Buy: Fortis Stock vs Enbridge

Fortis stock and Enbridge are top dividend stocks on the TSX today. Which stock is better buy for safe dividend…

Read more »

Canadian Dollars
Dividend Stocks

How to Make $1,500 in Passive Income 4 Times a Year

Blue-chip TSX stocks such as Enbridge can enable investors to create game-changing wealth over the long term.

Read more »

Woman has an idea
Investing

5 Stocks You Can Confidently Invest $500 in Right Now

Consider putting your surplus cash in these stocks for stellar capital gains.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

TFSA: How to Easily Turn $10,000 Into $500/Year of Passive Income

You don't need to be a stock market expert to turn $10,000 into a $500 of tax-free passive income. Here's…

Read more »