How Does Indexing Work?

Recently CPP and OAS rate changes were announced for January 2015. 

CPP recipients received a 2.5% increase while OAS recipients saw no change.

Why is that?

Indexation is based on the consumer price index, but different formulas apply to different amounts.  Below are the details for several of these.

Indexing of Personal Amounts and Tax Brackets

Personal amounts and tax brackets are indexed annually based on the average monthly Consumer Price Index (CPI) for the twelve months ending September 30 of the previous tax year, divided by the average monthly consumer price index for the twelve months ending September 30 of the second preceding year.  The result is rounded up to the nearest 0.1%.  For 2015, the computation is 124.57/122.53 = 1.01659 which is rounded to a 1.7% increase.

TFSA contribution limits are indexed by the same rate but the maximum is not adjusted until it exceeds the current maximum by $250 and then it’s rounded to the nearest $500.

Indexing of Canada Pension Plan Income

CPP pensions are indexed by a factor calculated as the average CPI for the twelve-month period ending October 31 in the preceding year to the Consumer Price Index in the prior twelve-month period.  Where the indexation factor for the current year is less than the indexation factor for the prior year, the prior year factor is used.  For 2015, the computation is 124.81/122.60 = 1.01803 which is rounded to a 1.8% increase.  Because the factor for 2014 was 2.5%, the 2.5% factor is used for 2015 instead.

Indexing of Old Age Security

OId Age Security (OAS) is indexed quarterly rather than annually.  The increase is based on the ratio of CPI for the three month period prior to the last increase to the three months before that.  The January 2015 increase is the ratio of the CPI for the three months ending October 2014 to the CPI for the three months ending July 2014).  The numbers are (125.7 + 125.8 + 125.9) / (125.8 + 125.9 + 125.7) = 1.00 so no increase in the OAS rates for the first quarter of 2014.