3.0 Concepts and definitions

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This chapter outlines the definitions of the main assets, debts and wealth concepts and their components. Table 3-1 below illustrates the components of the net worth calculation accounted for by the Survey of Financial Security. The value of all assets less all debts is net worth. A family’s net worth can be thought of as the amount of money they would have if they liquidated their assets and paid off all of their debts. The PUMF variable names appear in brackets.

3.1 Net worth

The net worth (sometimes referred to as wealth) of a family unit is defined as the difference between the value of its total asset holdings and the amount of total indebtedness .

There are two types of net worth variables:

1. WNETWPT – Net worth of the family unit. (Assets including current pensions valued on termination basis¹ (WATOTPT) – debts (WDTOTAL).
2. WNETWPG – Net worth of the family unit. (Assets including current pensions valued on going concern basis¹ (WATOTPG) – debts (WDTOTAL).

Respondents were asked to provide the value of the asset or the amount of the debt at a time as close as possible to the date of the interview. Assets and debts were reported for the family unit as a whole and not for each person in the family. The assets and debts included in the survey are identified below.

3.2 Assets

Respondents were asked to report the market value of the asset that is the amount they would receive if they had sold the asset at the time of the survey. If available, respondents were encouraged to consult financial records. When the value could not be determined through an independent source, the respondent was asked to estimate the value. This is in itself prone to error. In the case of vehicles, respondents were asked to provide the make, model and year in addition to the estimated value. This information was used to impute for non-response and also to identify potential reporting errors. Values provided by respondents were not adjusted unless they were judged to be an error, resulting, for example, from data entry. If the respondent either over or underestimated the value of an asset by a relatively small proportion, this would not be readily apparent. However, extreme values were reviewed and adjusted if necessary.

The value of all invested assets was to include accrued earnings or interest. Respondents were asked to estimate the actual value, at the time of the survey. In one case, for the value of the contents of the principal residence, the respondent was able to select one of 16 ranges.

The definitions of the assets items identified in table 3-1 are:

Assets, total (WATOTPT, WATOTPG): Total value of all financial assets, non-financial assets and equity in business.

There are two types of total asset variables:

1. WATOTPT – Total assets, including employer pension plans (current plans valued on termination¹ basis).
2. WATOTPG – Total assets, including employer pension plans (current plans valued on a going concern¹ basis)

Bonds (WASTBOND): Bonds are the total value, including earnings, of federal and provincial savings bonds and other bonds issued by governments and corporations. Includes investment in foreign bonds but excludes the amount held within registered plans.

Deposits (WASTDEPT): Deposits are the total amount, including interest, of all chequing and savings accounts with a non-zero balance and of other deposits such as term deposits and Guaranteed Investment Certificates. These amounts would generally be held in financial institutions such as chartered banks, trust companies, co-ops and caisses populaires. This item includes only the amount held outside of registered plans.

Employer pension plans (WARPPT, WARPPG): An employer pension plan (EPP) is an employers-ponsored plan registered with Canada Customs and Revenue Agency and most commonly also with one of the pension regulatory authorities. The purpose of such plans is to provide employees with a regular income at retirement.

There are two commonly used approaches to valuing EPP assets: the going concern and the termination approach. The two EPP variables included on the PUMF are:

1. WARPPT – Current pension plans valued on a termination basis.
2. WARPPG – Current pension plans valued on a going concern basis
   
   The main differences between the two valuation methods are:
   
   
   1. Although future service is not considered in either type of valuation, in a going concern valuation assumptions are made about future salary increases. As many EPPs base the amount of the pension on average earnings close to the time of retirement, assuming salary increases up to that time will obviously increase the value of the benefit. In a termination valuation, salary increases are not considered.
      
      
   2. Interest rates for a termination valuation are assumed based on current market rates. For a going concern valuation longer term interest rates are assumed.
      
      
   3. The going concern valuation method is applicable only for current members of certain types of EPPs. Those with deferred pensions (people who had previously belonged to an EPP) and those receiving benefits are no longer members of the plan so future salary increases need not be considered.

 

When analyzing SFS data the termination valuation approach is generally used. That approach is more consistent with the basis on which other assets are valued, in that future expectations are not taken into consideration and current market conditions are used to estimate the value. The termination approach, however, can underestimate the value of the benefit earned (accrued) as of the time of the survey because many employees will continue to participate in the plan, and therefore receive a pension based on their salary closer to the time of retirement. In order to allow users the option of selecting the value of the EPP that is most appropriate for their type of analysis both values have been produced and are available.

In valuing benefits for those respondents who belonged to a pension plan at the time of the survey, only plan membership up to the time of the survey has been considered. Therefore, in the case of a person who was 45 at the time of the survey and who had participated in an EPP for 10 years, the pension would be valued for the 10 years of known service.

For more information on employer pension valuation see M. Cohen, H. Frenken and K. Maser, Survey of Financial Security: Methodology for estimating the value of employer pension plan benefits, Statistics Canada, Catalogue 13F0026MIE-01003.

Equity in business (WBUSEQ): The estimated amount the respondent would receive if the business were sold, after deducting any outstanding debts to be paid.

Locked-in Retirement Account (included in WARRSPL): A Locked-In Retirement Account (LIRA) is an RRSP in which the money is locked-in until the person reaches a specified age. LIRAs are included in the RRSP category. This money would have been transferred from an employer pension plan after the individual terminated employment. For the most part, LIRAs came into use in the late 1980s, when revisions to pension regulatory legislation provided for enhanced portability of pension accruals on termination of employment.

Mutual funds and other investment funds (WASTMUIC): The total value, including investment earnings, of all holdings in mutual and investment funds. Excludes the amount held within registered plans.

Principal residence (WAPRVAL): Market value, as estimated by the respondent, of the residence where the respondent lives. If the respondent has two residences, this would be the one where they most often live. If the respondent shares ownership of the home with someone outside the family, only the family's share is included. If the property is a farm, the estimated value of the farmhouse is included; the value of the farmland would be included either with business equity or with other real estate, if no business were reported.

Real estate, other (WASTREST): Estimated market value of real estate other than the respondent's principal residence. Included would be second homes, vacation homes, timeshares, rental property (residential or non-residential) or vacant lots. Real estate includes property in Canada or outside.

Registered Retirement Savings Plans (included in WARRSPL): A Registered Retirement Savings Plan (RRSP) is a capital accumulation program designed to encourage saving for retirement. Contributions are tax-deductible within prescribed limits. Investment income earned in the RRSP is tax exempt, but benefits are taxable.

The RRSP could be held in deposits, mutual funds, stocks or bonds. As well, this includes the amount held in Locked-in retirement accounts (LIRAs); see definition above.

Registered retirement income funds (WARRIF): A Registered Retirement Income Fund (RRIF) is intended to provide a regular income in retirement. Monies in RRSPs must be transferred to a RRIF or an annuity before the end of the year in which the owner of the RRSP turns 71². Payments from an RRIF may be varied, but a minimum amount must be withdrawn annually. Also includes monies in locked-in retirement income funds (LRIFs) and life income funds (LIFs); these plans are intended to receive amounts transferred from an employer pension plan.

Stocks (WASTSTCK): Total value, including earnings, of all publicly-traded common and preferred shares. Includes foreign stock but excludes the amount held within registered plans.

Vehicles (WASTVHLE): Estimated value of cars, trucks, vans, sport utility vehicles as well as motorcycles, mobile homes, boats and snowmobiles. Excludes vehicles owned by the respondent's business and vehicles that are leased.

3.3 Debts

The amount reported for debts is not intended to include interest owing, as this would most often not be known.

The debt items listed in table 3-1 comprise the following:

Debts, total (WDTOTAL): Total of all debts for the family unit.

Credit card and instalment debt (WDSTCRED): For credit cards, the amount owing on the last bill, excluding any new purchases. Includes major credit cards (VISA, Mastercard, American Express, Diners Club/en Route) and retail store cards, gasoline station cards, etc. Instalment debt is the total amount owing on deferred payment or instalment plans where the purchased item is to be paid for over a period of time.

Line of credit (WDSTLOC): Total amount owing on both a home equity line of credit and a regular line of credit. This does not refer to the credit limit on the LOC.

Mortgages, on principal residence (WDPRMOR): Outstanding amount owing on the respondent's principal residence. If the respondent shares ownership of the home with someone outside the family, only the family's share of the mortgage is included. If the property is a farm, the mortgage owing on the farmhouse is included; the mortgage on the remainder of the farm would implicitly be included with business equity or would be included with mortgage owing on other real estate, if no business were reported.

Mortgages, on other real estate (WDSTOMOR): Respondent's share of the mortgage owing on second homes, vacation homes, timeshares, rental property (residential or non-residential) or vacant lots.

Student loans (WDSLOAN): Amount owing on loans taken out to attend a post secondary education program. These loans are most often taken through the Canada Student Loan Program or one of the provincial student loan programs. This item also includes amounts owing on loans taken directly from a financial institution to attend school.

Vehicle loans (WDSTVHLN): Amount owing on loans for those vehicles listed under assets.

3.4 Family type

Within the family type classification, the following definitions apply:

Couples: Couples include legally married, common-law and same-sex relationships.

Couples with children: Couples living with a child or children (by birth, adopted, step, or foster) under age 18. Children aged 18 or over are considered to be "other relatives". Other relatives may also be in the family.

Economic family: An economic family is defined as a group of two or more persons who live in the same dwelling and are related to each other by blood, marriage, common law or adoption.

Elderly/elderly families: Person aged 65 and over. In the case of elderly families, the major income recipient is aged 65 and over.

Family units: Includes economic families of two or more and unattached individuals. Lone-parent families: One parent living with at least one child under age 18. Families where the parent is 65 years and older are excluded.

Other non-elderly families: Couples living with a child or children (biological, adopted, step, or foster) aged 18 or over and/or with other relatives, but not living with a child or children under the age of 18. Also includes lone parent families (with children of all ages) and related persons (e.g., siblings, cousins) living together.

Unattached individual: An unattached individual is a person living either alone or with others to whom he or she is unrelated, such as roommates or a lodger.

Major income recipient or earner: For each family, the major income recipient is the person with the highest income before tax. For persons with negative total income before tax, the absolute value of their income is used, to reflect the fact that negative incomes generally arise from losses "earned" in the marketplace and are not meant to be sustained. In the rare situations where two persons have exactly the same income, the older person is the major income recipient.

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1. Employer pension plan valuation is explained further in this chapter.
2. At the time the SFS was conducted, the age was 69.