CRA: Big Changes for RRSP and CPP in 2021

The CRA has updated rules about the CPP ceiling and RRSP contribution limit for 2021. Investors should use these tax incentives to boost their portfolio with all-weather dividend stocks like Fortis (TSX:FTS)(NYSE:FTS).

| More on:

The Canada Revenue Agency (CRA) has made annual announcements about the nation’s retirement programs. Namely, the Canada Pension Plan (CPP) and the Registered Retirement Savings Plan (RRSP) are being updated as we enter the new year.

Here are the changes you need to know and how to use them to your advantage. 

CRA raises CPP ceiling

In 2021, the maximum pensionable earnings under the CPP will be $61,600. That’s a whopping 4.9% higher than the $58,700 ceiling in 2020. CRA has also raised the rate of employee and employer contributions to 5.45% from 5.25% last year and the self-employed rate to 10.9% from 10.5% last year. 

This means Canadians will be paying more towards their CPP in 2021. Of course, this has nothing to do with the ongoing economic issues. Instead, the rates are decided based on a CRA-mandated formula that accounts for wage and salary growth over the past year. 

CRA updates RRSP limit

Similarly, the CRA has also raised the cap on the dollar amount Canadians can contribute to their RRSP in 2021. The dollar limit is set at $27,830 for 2021 — up from $27,230 in 2020. Although that extra $500 doesn’t seem like much today, it could add a significant boost to your portfolio if invested in the right stock. 

Invest your extra RRSP

I prefer high-growth companies that are likely to survive for several decades in my RRSP. The program is particularly well suited to long-term investing. With that in mind, my top pick for your expanded RRSP in 2021 is Fortis (TSX:FTS)(NYSE:FTS).

In an increasingly uncertain year, Fortis has been rock steady as an income stock investors can rely on. The stock price is basically flat year to date, while the dividend yield at 3.75% is far higher than any “high-interest” savings account you can find right now. 

Fortis’s dividend stability is based on two key factors: the business model and the management team’s conservative approach to cash management. For one, supplying electricity is a business that is disconnected from the rest of the economy. People pay their Hydro bill, even in a pandemic and historic economic crisis. That keeps cash flowing in for Fortis. 

Fortis management keeps a tight lid on this cash flow. Over the past year, they paid out just 72% of earnings in dividends. That means more than a fourth of cash flow is reinvested into the business or held in reserve. This cash buffer makes Fortis a lot more reliable if you’re looking for a safe place to park your money. 

That’s what makes it ideal for your spare RRSP contribution in 2021.

Bottom line

The CRA has updated rules about the CPP ceiling and RRSP contribution limit for 2021. Both programs are a critical part of the financial future for every Canadian. Investors should use these generous tax incentives to boost their portfolio with all-weather dividend stocks like Fortis. Fortis’s decades-long dividend-growth trend looks likely to continue. 

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 Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.

More on Investing

investment research
Dividend Stocks

Best Stock to Buy Right Now: TD Bank vs Manulife Financial?

TD and Manulife can both be interesting stock picks for today, depending on your investment style.

Read more »

A worker gives a business presentation.
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

These stocks are out of favour but could deliver nice returns over the coming years.

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 5.5 Percent Dividend Stock Pays Cash Every Month

This defensive retail REIT could be your ticket to high monthly income.

Read more »

Confused person shrugging
Dividend Stocks

Passive Income: How Much Do You Need to Invest to Make $600 Per Month?

Do you want passive income coming in every single month? Here's how to make it and a top dividend ETF…

Read more »

Canadian Dollars bills
Dividend Stocks

3 Monthly-Paying Dividend Stocks to Boost Your Passive Income

Given their healthy cash flows and high yields, these three monthly-paying dividend stocks could boost your passive income.

Read more »

ways to boost income
Investing

Are Telus and BCE Stocks a Smart Buy for Canadian Investors?

Telus (TSX:T) and BCE (TSX:BCE) have massive dividend yields, but their shares have been quite sluggish!

Read more »

investment research
Tech Stocks

Is OpenText Stock a Buy, Sell, or Hold for 2025?

Is OpenText stock poised for a 2025 comeback? AI ambitions, a 3.8% yield, and cash flow power make it a…

Read more »

Make a choice, path to success, sign
Dividend Stocks

The TFSA Blueprint to Generate $3,695.48 in Yearly Passive Income

The blueprint to generate yearly passive income in a TFSA is to maximize the contribution limits.

Read more »