How to deal with RRSP's (Canada)

[DaveC49]

Cam,

I have been giving a bit of thought to the way one might account properly
for Retirement funds. I am not sure how your CRA asks for information about
income from your RRIFs. In Australia, I have specific questions in the tax
return dialog at which I have to record the income from such funds and it is
distinct from any ordinary income from other sources. If this is also the
case in Canada then the following should be a reasonable treatment in
accounting terms.

Assumptions:
    1. Contributions to the RRSP are from pre-tax income;
    2. Contributions to the RRSP are not taxed on payment into the fund 
(i.e. the contributions are tax deductible against income at the time of
their payment;
    3. Fund earnings are not taxed as they are earned;
    4. Withdrawals from the fund after retirement and conversion to RRIF are
taxable at that time;
    5. Withdrawals from the RRIF are not taxed in the hands of the fund on
withdrawal (i.e. no withholding tax) but the payment of tax is through the
drawer’s personal income tax at whatever marginal rate applies.

The most obvious way of accounting for this, particularly if your income tax
return has a specific entry for a total of RRIF (or converted RRSP)
withdrawals, is simply to record the withdrawal as a transaction from an
Asset:Fixed:RRIF account to a Asset:Bank:Savings (or Cheque) account. i.e.
debit the Savings account and credit the RRIF account by the amount of the
withdrawal. This is assuming no withholding tax applies.

A custom report which then listed and totalled all withdrawals from the RRIF
account would provide the necessary information for completing such a tax
return entry.

Even if there was no separate entry for RRIF withdrawals, the results of the
above report could simply be added to your income entries at an appropriate
point. (I have no familiarity with CRA tax processes so cannot suggest how
this might appear .)

In the case where a withholding tax is applied by the institution
administering the RRIF to any withdrawal how you record it will depend upon
how you record your Tax liabilities generally. Taxes  are generally recorded 
as Liabilities e.g in an account like Liabilities:Tax. To record withholding
taxes, which are generally paid in advance of assessment of your tax
liability you would normally use what is known as a contra account in
accounting to record this. A typical account structure might look something
like:

Liability:Tax                                          parent account;
Liability:Tax Assessed                          daughter account to record
tax assessed by authority;
Liability:Tax:Withholding                     daughter account to record tax
withheld from income.

When withholding tax is paid to the tax authority by the account
administrator (your bank for example),  you would record it as a debit to
the Liability:Tax:Withholding account where as assessments of tax owing
would be recorded as a credit to Liabilities:Tax:Assessed and the balance of
Liability:Tax gives your overall tax liability position.  With this sort of
structure for tax recording, then recording a withdrawal from an RRIF of
$xxxx  with tax $yyyy  withheld, i.e. a nett payment of $zzzz =$xxxx-$yyyy
to your bank account would be recorded as:

                                                    Debit    |     Credit
Asset:Fixed:RRIF                                       |      $xxxx
Liability:Tax:Withholding                 $yyyy   |
Asset:Bank:Savings                       $zzzz    | 

Must stress that the above is a suggested approach for accounting for such
funds but is not specific accounting advice. It may or may not need some
other adjustments to account for aspects of the enabling RRIF and taxation
legislation with which I claim no real familiarity. I have looked at some
info
http://accountingtoronto.ca/2017/09/15/registered-retirement-saving-plan-rrsp/,
https://en.wikipedia.org/wiki/Registered_Retirement_Savings_Plan,
http://www.wheatlandaccounting.com/rrsp.html to compare it with what I am
familiar with in my own jurisdiction (Australia) but only in broad
conceptual terms.

Cam  I don't think there is a need to use an equity or expense account as
the offset account for a withdrawal or even an expense account (recording an
existing balance against Equity:Opening Balances is not a problem when you
open/create a set of books). Expense accounts generally record the
expenditure on goods or services which are expected to be consumed within
the accounting period so it would be somewhat artificial to use an expense
account. The most logical offset account is the Asset account into which the
funds are paid, i.e a cheque/check  or savings account as you have converted
a fixed long term asset, the RRIF, into a current asset -cash in you bank
account, when you make a withdrawal.


David




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David Cousens
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