Read Our Finance Blog
Retirement Planning

Do You Know How Is CPP Calculated?

Are you planning on retiring shortly? Or planning for your future retirement life? Confused about where to start and how to start? Retirement planning is like hundreds of fish in the ponds and not knowing which fish to choose from! I get you, it’s a common phenomenon. In Canada, you get plenty of options from the government to choose a retirement plan such as: Canada Pension Plan (CPP), Old Age Security (OAS) pension, Guaranteed Income Supplement, and more! This article focuses on how is CPP calculated and all the information you need to understand your pension plan.

The Canada Pension Plan was initiated in 1995 by the Canadian government in order to help citizens live a good and honourable lifestyle after they retire. There are certain benefits that you can get by opting for the CPP like benefits for the disabled, children’s plan, and survivor’s benefit. All you have to do is be at least 60 years old and you need to have contributed to the CPP at least once when you are between the age of 18 to 65. 

Read: How Much Money Do You Need to Save for Retirement in Canada?

The below steps will help you to measure your CPP.

How is CPP Calculated?

1. Calculating the Number of Months You Contributed 

This is the first step to understand how is CPP calculated. As mentioned above you need to contribute at least once between the age of 18 to 65. For example, let us assume that you start your CPP at the age of 18 and would end when you turn 65 or a month before your chosen CPP retirement pension date. 

If you have taken any CPP disability benefits you will have to deduct that amount from the number of months that you have paid to your CPP account. Let me simplify further. Suppose you turn 18 in the year 1970 and paid for CPP till the age of 65 in 2017. 

To total, your contribution would be 47 years which would translate to 564 months.

Read: How To Buy A Home In Canada: Understanding Closing Costs

2. Total Adjusted Pensionable Earnings aka TAPE 

The second step is to calculate total adjusted pensionable earnings. You can access the My Service Canada account to know this for each year. There, you will find Unadjusted Pensionable Earnings (UPE). You can divide this amount by that particular Year’s Maximum Pensionable Earnings (YMPE). The formula would be to divide UPE by YMPE. 

Read: How to Open A CRA Account? (Updated 2021)

The next step is to divide this amount by the average YMPE for a period of five years ending in the year you are planning to start your CPP. The formula is listed below.

Average YMPE for a 5-year time frame X (UPE / YMPE) 

For the last 5 years, the YMPE is listed below. 

YearYMPE
2021$61,600
2020$58,700
2019$57,400
2018$55,900
2017$55,300

3. The Dropout Period

There are two types of dropouts permissible under CPP. The first one is a general dropout and the second is Child Rearing Provision (CRP). Under the CRP, you have the provision to dropout at any period if your kids are under the age of seven and your average pensionable earnings are less than the average. In the general dropout case, everyone is eligible.

Read: Maxing Out Your Credit Card? Here Is What You Can Do!

4. Average Monthly Pensionable Earnings 

You are supposed to deduct all the average pensionable earnings that you identified in step 3 here from the TAPE. For instance, if you have dropped out for a period of 50 month then you can subtract that from the TAPE, which would reduce your years of lowest earnings. 

The next step that you are supposed to take is to deduct all the dropout periods from the number periods you have contributed to CPP as calculated in step 1. So in this case it would be 564 -50 = 514. This would be your number of contributory months (NCM).

This would help you in finding your Average Monthly Pensionable Earnings (AMPE). 

AMPE = TAPE (after dropout) / NCM (after dropout)

Read: GST Payment Dates 2021: GST/HST Credit Explained

5. Retirement Benefits

This is not tough because all you have to do here is take aside 25 percent of the AMPE we calculated in step 4. Whatever amount comes in this step is the amount of money you will get in CPP every month after retirement. Easy isn’t it?

Also, if you feel that you don’t need your retirement earnings before the age of 65, and start it after that, you can get more monthly income. The income inflow would be 0.7 percent more every month.

CPP Payment Dates and Average CPP for 2021

 If you are expecting your CPP pension during this year the below dates will help you know when you are likely to get it. 

January 27, 2021

February 24, 2021

March 29, 2021

April 28, 2021

May 27, 2021

June 28, 2021

July 28, 2021

August 27, 2021

September 28, 2021

October 27, 2021

November 26, 2021

December 22, 2021

The below table will also help you to know how much CPP amount you can expect to get during this year annually. You can also see a gradual increase in the annual amount.

YearYearly Maximum CPP Monthly Maximum CPP
2021$14,445.00$1203.75
2020$14,109.96$1175.83
2019$13,854.96$1154.58
2018$13,610.04$1134.17
2017$13,370.04$1114.17

How is CPP Affected? 

There are three parameters that affect the CPP the most. 

  1. The age you start getting CPP
  2. Your contribution and time period to CPP
  3. Average income when you were working 

CPP works like compounding interest, the earlier you start, the more benefit you will get. At present, the maximum CPP you can get if you start receiving retirement earnings at the age of 65 is $1203.75 monthly. If you are earning more than $3500 and if you are 18 or above the age of 18 then you need to contribute to your CPP account. 

Though if you are working under a company then your CPP would be divided between you and your employer. You need to know that you also have to pay taxes on your retirement income. The below information will help you out with that.

IncomeTax Percentage
$49,020 or below15 percent
Between $49,020 to $98,04020.5 percent
Between $98,040 to $151,97829 percent
Between $151,978 to $216,51129 percent
$216,511 and above33 percent

Read: Tax For Self-Employed In Canada: How Much To Set Aside For CPP & EI?

If you want to apply for CPP, you can do so by going to My Service Canada Account. You can also apply for CPP by sending an application form to Service Canada Center. For the online application, it would take around 7 to 14 days while for the offline application, it may take around 120 days. 

The Bottom Line

Retirement is like the afterlife, you can fulfil all the pending goals, dreams, and can travel the world. There is no office 9 to 5 or work deadline to budge you. The only hurdle you would have is a lack of finance. But this can be solved with systematic planning and savings.

You can start investing in other financial assets as well according to your needs and preferences. Even if it’s a small amount, it would be a considerable one at the time you retire. So, make it your priority and enjoy your old days being stress free! I hope this article has helped you understand CPP and clear your doubts on how is CPP calculated. All the best! 

Read: 10 Easy & Realistic Ways to Make 1000 Dollars Fast


Devanshee Dave

Devanshee is a staff writer at YourFirst.ca. She is a finance enthusiast and has completed her Master’s degree in Mass Communication & Journalism. She is currently pursuing CFA (Chartered Financial Analyst) and has worked as a journalist in a local business newspaper, multiple start-ups as well as finance and economy-related online media houses.

Leave a Reply

Your email address will not be published. Required fields are marked *

About YourFirst.ca

YourFirst.ca is your trusted resource to find simple Canadian financial advice for Your First everything! Buying your first home, applying for your first mortgage, or making your first investment should not be that difficult. Learn more about us:

Learn More About Us
Blog Categories
Read Our Blog
Cart Overview