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CPP 2021 Increase: If You Earn More Than $61,600, You’ll Pay the Max

Christopher Liew, CFA
·3-min read
grow dividends

The Canada Revenue Agency (CRA) made several important announcements in November. A prominent one is the Canada Pension Plan (CPP) contribution limits for 2021. The maximum pensionable earnings under the CPP will increase from $58,700 to $61,600.

Likewise, next year’s employee and employer contribution rates will rise from 5.25% to 5.45%. For self-employed individuals contributing to the plan, the contribution rate is double, or 10.9%.

YMPE

The government sets the maximum pensionable earnings (YMPE) figure every year, and it determines the maximum amount on which to base contributions to the CPP or the Quebec Pension Plan (QPP). The YMPE specifies the earnings amount that is generally used to calculate pension contributions for each year.

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The size of pension payments depends on the following:

  1. An individual’s earnings during the working years.

  2. The age an individual starts receiving their pension.

  3. How much and for how long an individual contributes to the CPP.

With the YMPE increasing to $61,600, plan users or contributors who will earn more than the limit can’t make additional contributions to the CPP. Note that the 4.9% increase in YMPE is higher than usual. The result is higher CPP contributions for users with high incomes that reach the limit.

Smaller paychecks

The CPP premium hike in 2021 is part of the seven-year (2019-2025) implementation of the enhancements. Users hardly noticed the contribution rate increases until the coronavirus outbreak. The higher deductions (employed) or contributions (self-employed) will sting, because it means smaller paychecks in the years to come.

In 2022 and 2023, the employee-employer contribution rates are 5.7% and 5.95% and double for self-employed individuals. The contribution rates will remain at 5.95% in 2024 and 2025. CPP users should understand the impact of higher contributions. When you retire, you’ll get them back in the form of a higher retirement pension.

Investment income to compensate

CPP users can consider higher CPP contributions as forced savings. The rewards will come in the future. However, there’s a way to make up for the temporary income loss. Investment income from a dividend stock can compensate. Renewable energy company Polaris Infrastructure (TSX:PIF) pays a decent 4.33% dividend.

In 2021, a CPP user’s annual contribution amounts to $3,166.45. If you own $73,100 worth of Polaris shares, the annual dividend income is $3,165.23. You would have recouped the total CPP contribution for the year. Over the last five years, Polaris has rewarded shareholders with an 88% total return on investment. The $295.28 million company is also performing commendably in the stock market.

Investors are winning by 60.14% year to date, which is better than the broader market’s 3.19% gain. Analysts are bullish on Polaris Infrastructure and recommend a buy rating. The price target in the next 12 months is $23.22, or a 23.5% increase from its current stock price of $18.80.

Nicaragua’s geothermal plant is Polaris’s centerpiece, although Polaris’s green projects in Peru and Panama contribute to stable cash flows. This utility stock is flying under the radar. You can ride on the momentum before the utility stock gains prominence in the coming months.

Look forward to retirement

The YMPE will not decrease in future years. However, CPP users can look forward to higher retirement income because of the enhancements today.

The post CPP 2021 Increase: If You Earn More Than $61,600, You’ll Pay the Max appeared first on The Motley Fool Canada.

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Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Polaris Infrastructure Inc.

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