RRSP, CPP & TFSA Contribution Changes for 2021 Plus 6 Interesting Facts About TFSAs

Annually the Canada Revenue Agency (CRA) adjusts the contribution schedules for three of our most popular retirement and investment vehicles.

Increase in RRSP Contribution Room

The maximum allowable room has now been increased from $27,300 (in 2020) to $27,830 as of January 1st, 2021.

Canadian tax filers can contribute up to 18% of their previous year’s income up to $27,830 should they be eligible. Those that participate in a Registered Pension Plan will have less room, after the Pension Adjustment (PA) is factored in.

Higher CPP Contributions

Both employees and employers will be paying a slightly higher percentage towards our national pension plan. The percentage has increased from 5.25% to 5.45% on pensionable earnings. Self-employed individuals contribute both the employer and employee’s share for a total of 10.9%.

The ceiling for pensionable earnings has also increased for 2021 bringing the amount eligible for CPP deductions to $61,600 from $58,700. Both the actual contributions and pensionable earning’s limit will increase annually up to 2025.

The good news is – the pensions we receive from the program will also increase as more contributions are added. This is especially true for those under the age of 30 who will gain the most benefit with the higher limits.

No Change in TFSA Contribution Room

The annual limit of $6,000 remains the same, however, the maximum cumulative contribution room is now $75,500. This means that an adult who turned 18 in 2009 when TFSAs were first created, has a total contribution room of $75,500 that can be sheltered from Income Tax.

Here are the annual limits since 2009 when TFSAs were first introduced:

For the years 2009 to 2012 the annual limit was $5,000

For the years 2013 and 2014 the limit was $5,500

For the year 2015 the limit was $10,000

For the years 2016 to 2018 the limit was $5,500

For the years 2019 to 2021 the limit is $6,000

The annual TFSA room limit will be indexed to inflation and rounded to the nearest $500.

Interesting Facts & Rules on TFSAs

  • Putting your TFSA up for collateral with your banker is usually a poor idea. In the event the funds are needed for an emergency, a withdrawal is virtually impossible without their consent.
  • The idea that a RRSP is superior to a TFSA or vice versa is not accurate for everyone. The general rule of thumb is that if your income is less than $48,535 a TFSA deposit works better than a RRSP deposit. The combined tax bracket of 21% makes the RRSP deposit less valuable.
  • For spouses it is better to be named as Successor Owner than as Beneficiary. As a Successor Owner you take over the contract should your spouse die before you. This means you will have their TFSA lifetime limit of $75,500 plus your own, bringing the total to $151,000, assuming you both maxed out your annual contributions prior to death.

    As a beneficiary the amount is paid out once, and that TFSA is now closed, reducing your lifetime limit to $75,500.
  • There is no tax advantage to borrowing funds to deposit into a TFSA.  Much like RRSPs, interest on a loan to purchase either is not tax deductible.
  • There is no limit on the amount of TFSA accounts you can have. Thus, you can one account in ultra conservative investments and a second account with more aggressive investment funds or individual stocks. The key is that the lifetime contribution maximum of $75,500, cannot be exceeded. There is no restriction on the amount of growth inside a TFSA.
  • If you have reached your lifetime maximum and must withdraw funds in the same year, you must wait until the next calendar year to recontribute the amount taken out. CRA has strict rules regarding over contributions, so be aware of what you have put in and taken out in any given year.