Here’s What You Need to Know About Canada’s Changes to TFSA and CPP Pension in 2021

Financial management and investment acumen is a new hobby for millions of Canadians after the COVID-19 pandemic and subsequent lockdown. Many households are weighing financial decisions they never had before because of economic strains caused by the crisis. With that in mind, knowing about changes to Tax-Free Savings Accounts (TFSAs) and the Canada Pension Plan (CPP) this year is crucial.  

Several amendments have been made by the Canada Revenue Agency (CRA) that are pivotal to taxpayers. For those investing in a high interest savings account, the updates made by the agency are significant.  

It’s worth knowing these changes and how they affect your income, retirement investment, and financial health. That’s where we come in, with the following article setting out the CRA’s changes in detail: 

What are TFSAs and CPP? 

Firstly, its essential to have a proper grasp of what a TFSA and CPP are: 

  • TFSA. First launched in 2009, the Tax-Free Savings Account is available to Canadians 18 or over and helps them save money during their lives. As the name implies, the main benefit of this account is money that is accumulated is tax free. Withdrawals from TFSAs are tax exempt.
  • CPP. Another savings investment, the Canada Pension Plan is specifically for retirees who receive a monthly income once they retire. It’s worth noting CPP is only for Canadians aged 60 and older, while it is a taxable benefit.  

TFSA Changes for 2021 

CRA has set the TFSA contribution limit for 2021, underscoring the maximum amount people can invest in their account. Interestingly, the agency has kept the limit the same as 2019 and 2020. For investors, that means additional contribution space of $6,000 to add to the TFSA. The cumulative contribution rose from $69,500 last year to $75,500 during 2021.  

In terms of taxes, TFSA contributors still get the benefit of an account that is tax-exempt. This means it works as a tax-saving tool, allowing investors to move cash and assets to the TFSA and avoid paying tax on contributions held within the account. According to the Government of Canada TFSAs provide a tax-free savings platform:

“Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.”

However, it is worth remembering there is a 1% tax penalty for savers who over-contribute above the limits noted above.  

CPP Changes for 2021 

While it’s mostly business as usual for TFSA aside from some minor changes, CPP is undergoing a more drastic change. The Canada Revenue Agency is continuing its overhaul of the pension plan that began in 2019. Under the new system, investors can expect to get less back each year until 2023 thanks to higher contribution rates.  

CRA says weathering this setback now will have a huge impact down the road. Specifically, the changes will boost the maximum contributions in CPP pensions by as much as 50% for enhanced investments over 40 years.  

Looking at the enhanced CPP, contribution rates will increase by 1% over the 2019-2023 time period. That will see the rate jump from 4.95% at the beginning of 2019 to 5.95% by 2023. During 2021, maximum pensionable income increases from $58,700 to $61,600. Employee and employer contribution is now at 5.45%. 

Looking to the Future 

While the COVID-19 pandemic remains and Canadians are still worried about their financial well-being, TFSAs and the CPP are offering some light at the end of the tunnel. TFSAs remain a solid financial tool for people looking to save because of their tax-free nature, while CPP improvements may be hard to take now, but mean Canadians will be better off during retirement.  

RRSP contribution limit for 2021  

Let’s end by mentioning the third change the Canada Revenue Agency made for savings investors in 2021, a new RRSP contribution. The Registered Retirement Savings Plans (RRSP) is a tax-free investment that can help Canadians and their spouse or common law partners plan financially for retirement.  

CRA says the contribution limit rose to $27,830 from $27,230 last year. Canadians will be able to choose to invest up to 18% of their income toward the maximum contribution limit. 


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