Are you retired and hoping to boost your Canada Pension Plan (CPP) pension?
If so, I have some good news and some bad news. First, the good news: you can easily boost your after-tax CPP amount. All it takes is a little diligence in tracking and claiming tax-deductible expenses throughout the year.
Now, the bad news: unless you started drawing CPP benefits within the last 12 months, you can’t do anything to increase your “official” CPP amount. Although there are mild jumps in CPP payments each year from inflation indexing, they’re pretty minor, and you’re probably hoping for something more substantial than a 1.5% per year jump.
The concept of boosting your after-tax CPP amount is definitely worth exploring, though. So, let’s dive into it.
Claim more tax breaks
The basic gist of how you increase your after-tax CPP amount is you claim more tax breaks. Very few Canadians actually claim all the tax breaks they’re entitled to. Countless people neglect to claim charitable contributions, university courses and work-related transportation costs that they incur each year. If you simply commit to memorizing and documenting more of these each year, you’ll be prepared to claim them on your taxes and gain a higher after-tax CPP amount.
As for actively incurring more costs just to claim more tax breaks, that’s not usually a good idea. The tax break yielded by any claimed expense is your marginal tax rate times that expense (your tax rate is lower than 100%). The math doesn’t really work here for most expense categories, but there is one type of tax break you might viably be able to claim more of to boost your after-tax income.
RRSP contributions
Provided that you’re willing to wait a while for your investments to grow, Registered Retirement Savings Plan (RRSP) contributions are tax breaks very much worth making. The magic of them lies in the fact that you get so much more than just the tax break itself. You get years of tax-free compounding. If your tax rate is lower later in your retirement (let’s say you have a part-time job you plan to leave), then your ultimate tax rate on the RRSP withdrawals is lower, too.
Countless Canadians have funded their retirements with stocks held in RRSPs. One example that comes to mind here is Fortis (TSX:FTS) stock. When I was growing up in Newfoundland, it was pretty common for local workers to invest their retirement funds entirely in just that one stock. Parents would put their kids’ tuition funds in it, too. Amazingly, it worked out: Fortis has averaged about 11% annualized total returns over the long run.
Now, of course, you shouldn’t actually go out and invest all of your RRSP into a stock like Fortis. The fact that it worked out so well for so many people I knew growing up may have just been luck. You need to diversify.
But does Fortis merit a place in a well-diversified portfolio?
I’d argue that it does. It’s relatively cheap, trading at 18 times earnings. It has achieved positive (if mild) compounded annual growth rates over the last five years. It has achieved 50 consecutive years of dividend increases, making it a Dividend King. Finally, it’s quite profitable, with a 14.65% net income margin. It’s definitely an RRSP stock worth looking into. And if you contribute fresh funds in order to hold FTS in an RRSP, you may increase your after-tax CPP amount.
