The Canada Revenue Agency (CRA)

*The Canada Revenue Agency (CRA) has announced a few updates for 2021 that are extremely important for investors and taxpayers. The government agency just disclosed three updates with respect to the Tax-Free Savings Account (TFSA), Canada Pension Plan (CPP), and the Registered Retirement Savings Plan (RRSP).*

CPP enhancement for 2021

The CPP enhancement will impact millions of employed and self-employed Canadians that contribute towards the pension fund. This will also impact businesses that need to cover 50% of employee contributions.

The CRA states the maximum pensionable earnings for 2021 will rise from $58,700 to $61,600 due to a rise in CPP contribution rates. In January 2021, the employee and employer contribution rate will increase to 5.45%, up from the current 2020 figure of 5.25%. This means the contribution rate for self-employed Canadians will increase to 10.9% from 10.5%.

The CPP enhancement might result in a smaller paycheck for Canadians, but it will also lead to higher income in retirement. The basic exemption amount for Canadians will remain at $3,500 for 2021.

The RRSP contribution limit for 2021

The CRA announced the RRSP contribution limit for 2021 last month. According to the CRA, you can contribute up to $27,830 towards your RRSP compared to the maximum contribution limit of $27,230 in 2020.

Canadians can contribute up to 18% of their income or the maximum contribution limit towards the RRSP. This means Canadians with an annual income of $154,611 will have a maximum contribution room ($154,611 *18%) of $27,830 towards the RRSP.

The RRSP is a tax-sheltered account and any contribution towards the registered account is tax-deductible.

The TFSA contribution limit is $6,000 for 2021

Another major change announced by the CRA is the $6,000 increase in the TFSA for 2021. This means the maximum cumulative contribution room will increase to $75,500, up from $69,500 in 2020.

Every year, the TFSA contribution room is indexed to inflation, and the CRA rounds it to the closest $500. While any contributions towards the TFSA are not tax deductible, any withdrawals in the form of dividends, capital gains, and interests are exempt from CRA taxes.

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