How to deal with RRSP's (Canada)

[DaveC49]

Hi David

The main reason for my suggested approach is that the relevant income is
still earned at the time the contributions are initially made and at the
time the fund earnings are credited to the account. It is only that the tax
on these earnings is deferred until the RRSP is converted to an RRIF and
funds are withdrawn from the RRIF and it is taxed at a current marginal rate
not the original rate. 

We have similar but not exactly the same tax  deferred retirement savings
schemes in Australia, hence my interest. I am fortunately past the
accumulation phase and in the retirement phase. I track the fund separately
from my daily accounts and simply treat the payments from the fund as income
in my personal accounts and an expense in my accounting of the fund which is
in reality done by my bank which administers it for me.  We have schemes in
Australia which have different tax statuses depending on whether tax was
fully deferred on input so I have income streams which are taxed on
withdrawal and others which are not, to complicate the accounting. This
approach has always been vaguely dissatisfying for me though as the fund is
an asset and will form part of my estate when i drop off the perch and I
feel it should be able to be incorporated in my personal accounts if only to
simplify things for my executor (the likely executor is fortunately an
accountant).

Mike Novak makes a lot of valid points about the vesting of and accounting
for employer contributions which may apply to retirement fund accounting
generally, but not specifically to the RRSP-RRIF system in Canada which is
largely designed for self employed people to set up retirement funding and
to similar self managed and commercial funds in Australia. The accounting
also has to reflect the legislative framework which supports and establishes
a particular type of fund and its terms and conditions.  That said as long
as you have captured the essentail data at any point in time, you can always
adjust the approach in the future if necessary.

Nevertheless it should be possible to extract some broad general principle
accounting methodology from which to develop specific adaptions to
individual circumstances. That was my purpose in trying to identify the 5
essential assumptions/features behind the RRSP-RRIF system in Canada in
looking at this.

I had considered setting up of a long term Liability account for the
deferred tax. The only problem with this is while in the contribution phase
any tax liability calculations will be estimates only as you will likely not
know precisely the marginal tax rate which may apply when you are in the
retirement phase. This would then introduce  the complication of having to
make adjustments to these estimates once in the retirement phase and
withdrawing funds and paying tax on the withdrawals. 

My financial advisor and I did some estimates of the future tax liabilities
under various scenarios for example when setting up my finances for
retirement mainly for comparison of the advantages of using different fund
structures but these were only ever estimates. However incorporating this
into your accounts may serve some purpose if you specifically want to
monitor the ultimate actual performance of your retirement strategy vs your
expectation of that performance. 

I personally did not see any particular advantage in this level (deferred
tax liability) of recording of my finances as individual calculations for
possible strategies at the planning phase are much more useful to me and
once I have committed to a strategy I will follow it unless circumstances
change sufficiently that there is a benefit in adopting an alternative
strategy and the possibility of changing strategy exists in any case. I
prefer a looser form of monitoring with occasional spot checks. I also have
performance reports from my financial institution which partly serve this
function.

I understand Cam's objective of trying to get the fund withdrawals to appear
in a standard income report and if his approach works for him and provides
the necessary information he needs, then that is fine provided he is aware
of the possibility of he may introduce a distortion elsewhere in his 
accounts, which he may purposefully ignore. The only concern is someone else
adopting a procedure without being aware of the possible distortion it may
produce. An accountant may have a fit but as long as the taxman and the user
are happy - no problem. This is however more likely to be true, if the
accountant is also happy.

I am going to continue to see if I can find an approach which is more
intellectually satisfying  and rigorous in accounting terms. The problem is
really how to account for the conversion of an asset to an income stream in
the same set of books. Concepts associated with the recording and sale of
long term assets are one possibility to have a close look at.

Cheers

David Cousens





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David Cousens
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