How to deal with RRSP's (Canada)

[David T.]

David—

I see where you are coming from on this. 

For reference, I accept your 5 assumptions; I believe they are accurate for many US retirement accounts as well.

The Income/Equity splits in Cam’s example are a mechanism that allow distributions to appear as income on reports, without affecting the transfer between asset accounts. This makes it easier to prepare reports for taxing agencies when needed. I see, however, how that might be finessed using reports instead of extra offsetting splits.

I guess, from a philosophical perspective, the question really is: when do these funds become income? Is it when you get paid, or is it when the money actually gets disbursed? It seems to me that most of us are looking at it from the first perspective, but that the taxing agencies are looking at it from the second. So, for example, I have paycheck transactions that document my retirement contributions, transferring to the retirement asset accounts from a special (retirement) income account.

Perhaps there is a sound accounting method for documenting that deferred amount as something other than income at the time it is diverted into retirement accounts? Then it could become income at the time of disbursement…

David

> On Jan 5, 2018, at 10:27 AM, DaveC49 <davidcousens at bigpond.com> wrote:
> 
> 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
> 
> 
> 
> 
> -----
> David Cousens
> --
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