TFSA, RRSP, and CPP Changes to Expect in 2021

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March, 25, 2021 | By Laura Edwards

The Canada Revenue Agency (CRA) implements significant tax law changes every year. For instance, in 2020, the CRA announced at least eight revisions, including some changes to the Home Buyers’ Plan (HBP) and taxes on journalists. While there are several revisions this year as well, it’s three of the personal plans that got the biggest updates. Here are the changes in the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), and Canada Pension Plan (CPP) you need to take note of this year.

TFSA

Increases in TFSA contribution room are highly dependent on the state of Canada’s economy. Usually, increases are indexed to the annual inflation rate rounded off to the nearest $500. Due to the pandemic, 2020’s inflation rate fell to 0.7% — a decrease from 2019’s 1.9%.

In fact, a report from Statistics Canada reveals that 2020 was the weakest year for inflation since the global financial crisis of 2009, when the average inflation rate was at 0.3%. Still, the CRA added $6,000 to the contribution room, bringing the total amount to $75,500. While TFSA contributions aren’t tax-deductible, they are themselves tax-exempt. This is also true for gains and withdrawals in and from the account.

RRSP

Much like the TFSA, the RRSP contribution limit increases every year, and 2021 is no different. As of January, Canadian residents can contribute a maximum of $27,830 to their RRSP plan. This is $600 more than 2020’s limit. However, the maximum percentage of income that may be put in a person’s RRSP hasn’t changed: it’s still at 18%. In other words, the maximum contribution limit of $27,830 does not apply to the extent that it exceeds 18% of your income.

If residents end up going over the contribution limit, they have two options: withdraw the excess or transfer it to another plan. However, unlike TFSA withdrawals, RRSP withdrawals are considered income, making them taxable. On the other hand, withdrawals from other plans, like the HBP, aren’t considered income. As such, many account holders prefer to transfer their excess contributions to other plans.

CPP

The CPP has a couple of notable changes. First, both employee and employer contribution rates have risen to 5.45%, up from 5.25% last year. The contribution rates for self-employed professionals have also increased to 10.9%. While that sounds like bad news, what it does mean is that maximum pensionable earnings for 2021 have grown too. The threshold is now $61,600, a leap from 2020’s $58,700. These changes will help Canadians live more comfortably post-retirement.

Additionally, pension regulators adjusted their protocols to accommodate challenges created by the pandemic, such as market volatility. For example, they made available extensions for filings, valuation reports, and other financial statements. “They deserve full credit for [moving] with the kind of speed we’ve never seen them move before,” mentioned Mitch Frazer, an employment law partner at Torys LLP, in an interview with Benefits Canada.
If your clients have investments in any of these accounts, informing them about tax law changes will help them make better decisions. You can even advise contribution adjustments if appropriate.

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