Higher CPP contribution
Phase one of the CPP enhancements enters its third year, and would-be pensioners will again contribute more in 2021. The employee and employer contribution rate will increase from 5.25% in 2020 to 5.45% this year. It also means that self-employed contribution rates will rise from 10.5% to 10.90%.
The third increase in contribution rates in as many years will likewise bump up the yearly maximum pensionable earnings (YMPE) from $58,700 to $61,600. The CRA uses a legislated formula to come up with the new YMPE. You can’t make additional contributions if your income in 2021 exceeds the YMPE ceiling.
In absolute amounts, an individual employee will contribute $268.45 more in 2021. Income will reduce by $3,166.45 each instead of $2,898. Self-employed individuals must contribute $6,332.90, not $5,796. The basic exemption amount is unchanged at $3,500.
More contribution room
The TFSA contribution limit announcement every November is welcome news to CPP users and investors. In 2021, the additional contribution is $6,000 — the same as in 2019 and 2020. The cumulative contribution room from 2009 will likewise increase to $75,500 from $69,500 last year.
As customary, the CRA indexes the annual TFSA contribution to inflation and rounds it off to the nearest $500. A TFSA user’s unused contribution room in 2020 carries over to 2021. For tax-conscious Canadians, a new TFSA contribution limit is a pivotal tax change.
Every January is an opportunity to grow wealth the tax-free way. All earnings, gains, or dividends are tax exempt. Besides the tax savings you can derive to offset tax payables, your TFSA is a hedge against rising living expenses. CPP pensioners can also avoid the Old Age Security (OAS) clawback by maximizing the TFSA.
If you haven’t used a TFSA since its inception in 2009, consider opening an account this year. You can build a small fortune from the ground up using your $75,500 available contribution room.