Back-end load fund

This type of mutual fund charges a redemption fee when the shares in the fund are eventually sold by the investor.  This fee is also often called a deferred sales charge (DSC).  It may be calculated based on the original investment cost, or on the market value of the investment at the time of redemption.  The percentage amount of this fee is usually reduced each year that the fund is held, and can be zero if the fund is held long enough.  Many back-end load funds will allow a portion of the investment to be redeemed each year without charge.  Also, as with all mutual funds, trailer fees are paid annually by the fund to the advisor, broker or dealer where you hold your funds.  See also front-end load fund, and no-load fund.

Balance sheet

A balance sheet is part of the financial statements.  The balance sheet reports the amounts of assets, liabilities, and owners' equity at a specific date.  The total of all assets is always equal to the total of liabilities plus owners' equity.  This is a function of the double-entry accounting system.

Bank of Canada rate

The Bank of Canada rate that is quoted in the press is actually the target overnight rate.  The Bank of Canada takes deposits from and lends money to financial institutions on a one-day basis.  The rate that the Bank of Canada pays to financial institutions for funds on deposit is 1/4% lower than the target overnight rate, and the rate it charges to financial institutions is 1/4% higher than the target overnight rate.  When the financial institutions borrow and lend funds on a one-day basis among themselves, this is done at the overnight rate.  The overnight rate can vary from the target overnight rate, but will stay within the rates paid and charged by the Bank of Canada, which is a range of 1/2%.  See also prime rate.

See the recent target overnight rates on the Bank of Canada website.

Bankers' acceptance

A bankers' acceptance is a short term debt instrument guaranteed by a bank, and sold through a brokerage company to investors.

Basis point

A basis point is 1/100th of 1%, or .01% (.0001), and is used to refer to changes in interest rates, such as the Bank of Canada prime rate, or the yield rate on bonds.

Bear market

A bear market is a declining market (prices are falling).  A person who expects that the market will decline is called a bear.

Bearer security

A financial instrument, such as a bond, stock or other security that is not registered in any name.  This means it is cashable by the person physically holding it.

Bid/ask

The bid price on a security is the price that a prospective buyer is willing to pay, and the ask price is the price that a prospective seller is willing to accept.

Blue chip

A blue chip stock is a stock which has a long record of being high quality, in terms of stability, dividends, earnings, etc.

Board lot

A board lot is usually 100 shares.  Trades on stock markets are usually made in multiples of a board lot.  See also odd lot. 

Bond

A bond is interest-bearing debt issued by corporations, governments and institutions, with the principal (face value) to be repaid at a specified date (or dates) in the future.  Interest is to be paid on the principal at a specified rate per period.  Bonds may be secured (backed by a claim on specific assets) or unsecured (backed by the issuer but not by any specific collateral).  Bonds may be sold for more (at a premium) or less (at a discount) than their face value.  See also bond discount, bond premium, and strip bond.

Bond discount

When a bond sells for less than its face value, it is sold at a discount.  The discount is the difference between the face value and the purchase price.  Bonds sell at a discount when their coupon rate (rate of interest paid based on the face value of the bond) is less than the current market rate for that type of bond.  When long term interest rates rise, bond prices generally decrease.

Bond premium

When a bond sells for more than its face value, it is sold at a premium.  The premium is the difference between the purchase price and the face value.  Bonds sell at a premium when their coupon rate (rate of interest paid based on the face value of the bond) is greater than the current market rate for that type of bond.  When long term interest rates drop, bond prices generally increase.

Book value (of an asset)

The book value of fixed assets is original cost less accumulated depreciation.

Book value per share

This is the total shareholders' equity (as stated on the balance sheet), divided by the total number of common shares outstanding

Bull market

A bull market is a rising market (prices rising).  A person who expects that the market will rise is called a bull.

Business investment loss

A business investment loss is a capital loss arising from an arm's length disposition of:

50% of a business investment loss is an allowable business investment loss, which can be written off against any income.

For further information see Business investment loss on the Small Business page.

Call option

See option.

Callable

A callable security is one which can be redeemed by the issuer before the expiry date.

Canada Revenue Agency (CRA)

Canada Revenue Agency, formerly Canada Customs and Revenue Agency, and formerly Revenue Canada Taxation.  The CRA administers tax laws for the Government of Canada, and for most provinces and territories.  The CCRA became the CRA on December 12, 2003.  However, until the name is officially changed by an Act of Parliament, the old name will still be used on documents of a legal or contractual nature.

Canadian controlled private corporation (CCPC)

A CCPC is a private corporation which is controlled by Canadian residents. A corporation will not qualify as a CCPC if it is controlled directly or indirectly by a public corporation or non-residents, or a combination of the two.

A CCPC is eligible for the small business deduction, which is a reduction in corporate income tax on active business income. 

Capital cost allowance (CCA)

This is the depreciation that is allowed to be expensed for tax purposes for fixed assets, except land.  Different types of assets are allocated to different CCA classes, and each class has its own rate for capital cost allowance.  For instance, most automobiles would be class 10, which is allowed to be expensed at 30% per year on a declining balance basis.  In most cases, the CCA allowed in the year an asset is purchased is only 50% of the normal amount.  Thus, the class 10 CCA would be 15% in the first year.

Tax Tip:  If you are planning to buy an asset and yearend is approaching, buy it before yearend so that you will get the full CCA write-off sooner.

See also recapture and terminal loss.  They also have tax tips about the timing of purchase and disposal of assets.

For links to various Canada Revenue Agency guides which list capital cost allowance rates see Capital Cost Allowance Rates on our Small Business page.

Capital dividend

Canadian controlled private corporations (CCPCs) keep track of certain non-taxable income amounts, and are able to pay these amounts to shareholders as a capital dividend.  The capital dividend is not taxable to the shareholders.  The non-taxable income amounts are tracked in the company's capital dividend account, and include the non-taxable portion of capital gains, less the non-allowable portion of capital losses, plus the non-taxable portion of gains on eligible capital property (such as goodwill), plus non-taxable life insurance proceeds.

Capital gain or loss

Capital personal property

There are special rules for GST registrants for claiming input tax credits on the purchase of capital personal property.

Capital personal property includes movable capital property, such as office furniture, computers, photocopiers, movable machinery and equipment, and free-standing appliances.  Built-in appliances are fixtures, and are usually considered part of capital real property. 

Capital property

Capital property includes fixed assets, and items which are purchased for investment purposes, such as stocks and bonds.  Any gain or loss on the sale of capital property is considered a capital gain or loss for tax purposes.

Capital real property

Capital real property includes land and buildings, and any items which are installed in and attached to the buildings or land.   Capital cost allowance can be claimed on buildings and attachments, but not on land.  

There are special rules for charging GST/HST and for claiming GST/HST input tax credits on capital real property.

Capital stock

Capital stock is the total amount of money (equity) invested in a corporation by its shareholders (owners).  The capital stock is made up of individual shares, which are registered in the names of the shareholders (also called stockholders).

A corporation may have more than one class of share, with different rights attached to them.  At least one class of shares will have voting rights, but there may be classes of shares which do not have voting rights.  There are many corporations with 2 classes of shares, let's say Class A and Class B shares, where the Class A shares have voting rights, and Class B shares do not.  In many of these cases, the Class B shareholders will have a much greater investment in the corporation than the Class A shareholders.  The Class B shares are issued in order to raise funds without losing voting control.

See also common shares and preferred shares.

Cash basis accounting

Under the cash basis for preparing accounting records, the revenues and expenses are recorded when the revenues are received and the expenses are paid.  Using the accrual basis, revenues and costs are recorded in the accounting period in which they occur, even if the revenue has not been received or the costs have not been paid.  

Most businesses are required to use the accrual basis for preparing their tax returns.  Those people who are in a farming or fishing business, or who are self-employed commission sales agents, are allowed by the Income Tax Act to use the cash basis.

Cashflow / cashflow per share

The "cashflow" used in reporting cashflow per share usually means net income with depreciation and amortization added back.  See also operating cashflow and free cashflow.

Cashflow per share is cashflow divided by the total number of common shares outstanding.

Cashflow statement

The cashflow statement is a financial statement which reports the reasons for changes in cash balances for a period of time. It provides details of changes in cash balances resulting from operating activities, financing activities, and investing activities.

Central bank

A central bank, such as the Bank of Canada, tries to prevent the country's currency from rising or falling too much or too quickly.

Children's special allowances (CSA)

Children's special allowances are non-taxable amounts paid monthly, by the federal government, to agencies, institutions and foster parents who are responsible for the care and education of children under 18.

CICA

CICA is the Canadian Institute of Chartered Accountants.  The CICA publishes the CICA handbook, which provides the primary source of generally accepted accounting principles.

Closed-end fund

This is an investment company which has a fixed number of shares.  The shares trade on a stock exchange (such as TSX, NYSE, AMEX, etc) at market value.

See also mutual fund, open-end fund, exchange traded fund, and management expense ratio.

Collateral

Collateral is property which is pledged as security for the repayment of a loan.

Commercial paper

Commercial paper is a short term debt instrument issued by a corporation and sold through brokerages to investors.

Commodity

In financial markets, usually refers to agricultural or resource products, which are traded on commodities exchanges.  Examples:  wheat, coffee, lumber, oil, copper, pork bellies, etc.

Common-law partner

For purposes of the Income Tax Act, a common-law partner is a person (of the same or opposite sex) who lives with the taxpayer in a conjugal (marriage-like) relationship, and 
(a) has lived with the taxpayer for a continuous period of at least one year, or
(b) is a parent of a child of whom the taxpayer is a parent, by birth or adoption,  or
(c) has custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on that person for support.

Where two people have been living in a marriage-like relationship, it is considered to be continuous unless it has ceased for a period of at least 90 days due to a breakdown in the relationship.

Where two people previously lived together in a conjugal relationship for at least 12 continuous months, and then resume living together again in such a relationship, they are immediately considered common-law partners.

You must report the net income of your spouse or common-law partner on your tax return.

Common shares

When a corporation is formed, common shares are purchased by investors who then become shareholders in the corporation, and hold voting privileges.  Common shareholders elect the board of directors, and vote on other matters which require the approval of the owners of the company.  If a corporation is liquidated, the common shareholders have the right to a share of the assets of the corporation, after any prior claims on the corporation have been settled.

A corporation may authorize an unlimited number of common shares to be issued, so that they may raise funds in the future by issuing more shares.

See also capital stock and preferred shares.

Company

Compound interest

Conglomerate

Connected corporation

1. one of the corporations controls the other corporation (owns more than 50% of the voting shares), or
2. one corporation owns more than 10% of the voting shares and more than 10% of the fair market value of all the shares of the other corporation.

Consolidated financial statements

Consolidated financial statements group together the financial results of a parent company and its subsidiaries.

Consumer price index (CPI)

The consumer price index (CPI) is a measurement produced by Statistics Canada which is meant to reflect the increase in the cost of living.  Current and historical CPI data can be obtained from the Bank of Canada and Statistics Canada web sites.

Contract

A contract is a legally binding agreement between two parties.

Contributed surplus

When shares are issued by a corporation and sold above par value, the amount in excess of par value becomes contributed surplus, which is a part of shareholders' equity on the balance sheet. 

Convertible

A convertible bond, debenture or preferred share is a security which may be exchanged, usually for common shares of the company, at a set price, for a fixed period of time.

Corporation

A corporation is a separate legal entity, which is formed by application to either the federal government, or one of the provincial/territorial governments.  The corporation issues shares (capital stock) to one or more shareholders.  A corporation has limited liability.  This means that the liability of the shareholders is limited to the amount of their investment in the shares of the corporation.  However, shareholders who are directors of the corporation can be held legally liable for some debts of the corporation (such as GST and payroll taxes) in certain circumstances.

See also Canadian controlled private corporation, and public corporation.

Cost basis (stocks)

The cost basis is calculated separately for each security owned.  It is the total cost of all shares owned, and is divided by the total number of shares owned to get the cost basis per share, or weighted average cost per share.  This cost per share is used in calculating any capital gains or losses when some or all of the shares are sold.  See also adjusted cost base.

Coupon

A coupon is the interest payment portion of a bond.  When a bond is issued, a brokerage company will buy bonds and will sometimes split them into two parts to sell separately.  One part is the interest payment (coupon), and the other part is the maturity value of the bonds, sold as strip bonds.

Covered call option

Covered put option

Cumulative Net Investment Loss (CNIL)

The CNIL balance is the amount by which the total of all investment expenses exceeds the total of all investment income for all tax years after 1987.  The CNIL can be calculated by filling in CRA's form T936 for each year after 1987.

Current account

The current account of Canada is a measurement of the flow of goods, services, and investment income to and from other countries. If Canada is receiving more money from investment income and exports of goods and services than it is paying out, then there is a current account surplus.  Investment income includes interest, dividends, and property rental income. 

Current assets

These are assets which are expected to be either consumed or converted to cash within one year, or are able to be readily converted to cash.  Examples are accounts receivable, inventories, short term investments, and prepaid expenses such as insurance.

Current liabilities

These are debts which are due to be paid within one year, such as accounts payable, accrued liabilities, and the portion of long term debt which is due within 1 year.

Current ratio  (C/R)

Current assets divided by current liabilities.  This is a measure of the liquidity of the company.
Example:  current assets $25,000, current liabilities $20,000, C/R = 25,000/20,000 = 1.25

Cyclical stock

Day order

An order to buy or sell securities, valid only on the day for which the order is placed.

Day's sales outstanding

Also called average collection period, this ratio is calculated as

trade accounts receivable balance x 365
annual credit sales

The trade accounts receivable amount used in the ratio should be the amount before any deduction for uncollectible accounts.

The following is an example of the calculation:

For a firm with terms of net 30 days, days outstanding of 91.25 would indicate a severe problem in the collection of accounts receivable.

See also accounts receivable turnover and aged accounts receivable.

Debenture

A debenture is a type of debt issued by a corporation.  It is not secured by any specific assets, as is a bond.  A debenture is backed by assets of the corporation that have not been pledged as security for other debt.

Debt/Equity ratio (D/E)

This measure of financial strength is calculated as a company's total debt divided by its total shareholders' equity.  The lower the number, the better.

Deemed disposition

A capital gain or loss normally only occurs when a property is actually sold.  However, there are instances where a property may be deemed to be sold.  That is, you must treat the situation as if you have actually sold the asset.  Types of deemed dispositions:
1.  Securities are transferred from a non-registered investment account into a registered retirement savings plan (RRSP), registered disability savings account (RDSP), tax-free savings account (TFSA), or registered retirement income fund (RRIF).  In this case, the deemed proceeds will be the market value of the securities at the time of transfer to the registered account.  Note that if a loss has occurred in the transfer to an RRSP, RDSP, TFSA or RRIF, it will not be deductible for tax purposes.  See our article Transfer shares to a registered account, but not at a loss.
2.  Property is gifted to a third party.  In this case, the property is deemed to have been sold at its fair market value at that time.
3.  Use of property changes from personal use to business or investment use, or vice versa.  Again, the property is deemed to have been sold at its fair market value.  An example is a personal residence being converted to a rental property, or a rental property being converted to a personal residence.  See our article on Change in use of real estate.
4.  A taxpayer ceases to be a resident of Canada for tax purposes.  Certain properties are excluded, and in some cases where capital gains occur, a tax payment can be delayed until the property is sold.
5.  When an individual dies, all of their capital property is deemed to have been sold immediately prior to death.  See our Wills and Estates page.

Deferred life annuity

Deficit

When referring to the government deficit, this is the excess of expenditures over revenues for a one year period.  The National Debt is the total debt of the Federal government, and when there is a deficit the debt is increased.

When referring to the financial statements of a corporation, a deficit occurs when a corporation has accumulated more losses than profits over the years.  This shows up as a negative amount of Retained Earnings on the balance sheet.

Defined Benefit Pension Plan (DBPP)

Registered pension plans (RPPs), which are regulated by either federal or provincial legislation, are either Defined Benefit Pension Plans or Defined Contribution Pension Plans.  With a defined benefit plan, the employees know in advance what their pension will be when they retire.  The company makes contributions to the plan based on actuarial calculations of what contributions are necessary to fund current and future pensions.  The plan funds are invested, and the company must make higher contributions if the investments perform poorly.

With defined benefit pension plans there is some risk to the employee, because these plans are never funded enough that 100% of current and future pension obligations can be covered.  If the company becomes insolvent, employees may not get their full pension. 

If an employee leaves their job prior to retirement, a pension lump sum (commuted value) can be transferred to a locked-in RRSP, or in many cases can be taken as a deferred pension.  If the lump sum goes to a locked-in RRSP, withdrawals cannot usually be made until the employee is within 10 years of retirement age.  If the employee is already within 10 years of retirement, then the funds can probably be used to purchase a locked-in Registered Retirement Income Fund, also called a Life Income Fund (LIF), or Locked-in Retirement Income Fund (LRIF).   The age at which the employee can access the locked-in RRSP is usually determined by referring to the original pension plan.

Defined Contribution Pension Plan (DCPP)

Registered pension plans (RPPs), which are regulated by either federal or provincial legislation, are either Defined Benefit Pension Plans or Defined Contribution Pension Plans.  With a defined contribution plan, also known as a Money Purchase RPP, the employees do not know in advance what their pension will be when they retire, but they do have some control over how their pension funds are invested.  The company makes contributions to the plan usually based on a percentage of the employee's wages.  Often the employee can also contribute, which may result in a higher contribution by the employer.  The plan funds are invested in individual accounts for each employee.  The employee usually has a choice of types of securities in which to invest their funds.

With defined contribution pension plans the risk to the employee is that the investments may perform poorly.  However, the upside is that if the investments perform well, all profit increases go to the employee.  If the company becomes insolvent the employee will not lose any of the pension, because the funds are in the employee's name.

If an employee leaves their job prior to retirement, they will be able to transfer the assets in their pension plan to a locked-in RRSP, also known as a Locked-in Retirement Account (LIRA).  This differs from a Group RRSP, where any assets transferred to an RRSP would not be locked in.

Depreciation

Depreciation is the expensing, over a period of years, of the cost of fixed assets (except land), usually based on the estimated useful life of the fixed asset.  There are various methods of depreciation, with two of the most common being straight line and declining balance (usually double declining balance).  

Straight line depreciation - the original cost of the asset is written off in equal amounts over the estimated useful life.  
Example:  machinery with an estimated useful life of 5 years, original cost $50,000.
Straight line depreciation amount = $50,000/5 (or $50,000 x 20%) = $10,000 each year

Declining balance depreciation - a fixed percentage is applied to the remaining book value (undepreciated balance) each year to determine the depreciation amount.  With double declining balance, a percentage of twice the straight line rate is used.

Derivative

A financial product whose value is derived from fluctuations in the value of an asset, such as options and futures.  See also hedging and speculator.

Director

Directors are the people elected by shareholders to oversee the management of the company.

Discretionary account

A discretionary account is a brokerage account where the client has authorized the broker to buy and sell stocks without contacting the client.

Diversification

Diversification is a method of reducing risk by buying assets in different industries, different countries, and different types of securities such as bonds, stocks, etc. (Don't put all your eggs in one basket.)

Dividend

An amount distributed out of a corporation's retained earnings (accumulated profits) to shareholders.  Dividends on preferred shares will usually be for a fixed amount.  Dividends on common shares may fluctuate depending on the profits of the company.  Some companies pay dividends on common shares, and some do not.  See also dividend tax credit, and dividend tax credit rates.

Dividend reinvestment plan (DRIP)

A DRIP is a dividend reinvestment plan, whereby when a dividend is issued to the shareholder, it is used to purchase further shares of the company instead of paying out a cash dividend.  These purchases are usually done with no brokerage fees. Shareholders can only participate in a DRIP if they have shares registered in their own name, instead of in street name.  The dividends that are reinvested in more shares are still considered taxable dividend income.

Dividend tax credit

Starting in 2006, an enhanced dividend tax credit  is available for dividends received after 2005 from:

With the enhanced dividend tax credit, 145% of the dividend received will be included in income.  The additional 45% is referred to as the gross-up.  The tax credit is calculated as 11/18ths of the gross-up.  The result is a federal tax credit of

For an individual with no income other than taxable Canadian dividends which are eligible for the enhanced dividend tax credit, approximately $66,000 can be earned before any federal taxes are payable.

Dividend yield

This is the % obtained by dividing the dividend per share by the current market price per share, x 100.

Example:  market value per share $37, annual dividend $1.85, yield = 1.85/37 x 100 = 5%

Dollar cost averaging

Instead of purchasing a large number of shares at one time, a smaller number of shares are purchased at regular intervals over a period of time.  This reduces volatility, because stocks usually go up slowly, but can go down quickly.

Due diligence

Performing an investigation to verify information, often regarding a business which is being considered for purchase.

Earnings per share  (EPS)

Net earnings of the company divided by the total number of common shares outstanding.

Note that beginning in 2002, corporations are no longer required to amortize the cost of their intangible assets such as goodwill every year.  Intangible assets are recorded at cost on the balance sheet.  That cost must be reviewed annually to determine if its current value is less than cost, in which case the value would be written down on the balance sheet.  Due to this change in accounting rules,  corporate net earnings will be increased over prior years, as will earnings per share.
It is best to look at the history of a corporation's earnings per share for the past decade, which can usually be found in their annual report.  Most annual reports are available on the company's web site.  
Analysts also predict the future earnings per share for corporations.  This information can be found on many investing web sites, some of which are listed in our Links page.

Earnings per share fully diluted

Net income of the company divided by the total number of common shares that would be outstanding if all convertible financial instruments (convertible debentures, convertible preferred shares, stock options, etc.) were converted into common shares.

EBITDA

Earnings before interest, taxes, depreciation and amortization.

Educational assistance payment (EAP)

An educational assistance payment (EAP) is a payment from a Registered Education Savings Plan (RESP) to a beneficiary of the plan, and is made from the earnings and Canada Education Savings Grant (CESG) portion of the RESP.  This payment is taxable in the hands of the beneficiary of the RESP.

See RESPs - Be Aware, and Beware! on our Save Money page.

Effective interest rate

Eligible capital property

Employment Income

Other types of employment income, which may not be on a T4 slip, include:

Self-employment income is not included in employment income.

Employers are required to withhold income tax, Employment Insurance and Canada Pension Plan premiums, and remit them to Canada Revenue Agency.  See our CPP/EI page for details and rates on CPP and EI.  To calculate how much tax, CPP and EI you will pay on your annual employment income, use the tax calculator for your province/territory.  Go to the Tax Rates page and choose the link to your province.

See also "What employment expenses are deductible?" on our Personal Income Tax page.

Enterprise value

The enterprise value of a corporation is calculated as its market cap plus debt and preferred shares, less cash and short term investments.  This value is also referred to as a theoretical takeover value.  

Consider a corporation with a market cap, or market value, of $100 million, which has no debt, but has $10 million in cash and short term investments.  In a takeover, the buyer would pay $100 million, but would then have the $10 million in cash, for a net cost of only $90 million.

Ex-dividend

When a stock is sold ex-dividend, this means the purchaser is not entitled to the most recently announced dividend.

Ex-dividend date

The ex-dividend date is the first trading day on which the seller of the stock, not the purchaser, is entitled to the most recently announced dividend.  When the trade date is before the ex-dividend date, the purchaser is entitled to the dividend.  The ex-dividend date is two business days prior to the record date.  See also settlement date.

Exchange traded funds (ETFs)

ETFs are funds which hold shares of individual companies.  The index-linked ETFs that we recommend have the goal of achieving the same return as a stock index, and they will diversify your investments among many different countries and industries.

The MER, or management expense ratio for ETFs is usually much lower than for mutual funds, and there are no front end or back end loads (fees) for ETFs.  They are traded like a stock, with brokerage commissions paid on the purchase and sale.  There are many types of exchange traded funds available, such as SPDRs (Standard & Poor Depositary Receipts, also know as Spiders), iShares (Canadian and US), Diamonds, and others.

See also:

Recommended ETFs for your RRSP.

Tax treatment of income from ETFs.

US estate tax may be payable by Canadian residents on US assets owned at the time of death.

Face value

The face value of a bond is the value the bond is worth at maturity.  A newly issued bond usually sells at face value.  Between issue date and maturity date, the market value of the bond will fluctuate depending on current interest rates, and the bond will trade at a premium or a discount.

Financial statements

These usually consist of a Balance Sheet, Income Statement, Cashflow Statement, and Notes to the Financial Statements.  Most public corporations publish their financial statements in an Annual Report which is sent to shareholders.  They also usually publish quarterly financial statements, which may or may not be sent out to shareholders.  Most public corporations also have their financial statements available on their corporate web sites, or will mail copies to interest parties.

Fiscal period/fiscal year

Many businesses prepare their accounting records on a calendar year basis, with December 31 as their year-end date.  Their fiscal year is the same as the calendar year.  Some businesses prefer to have their year-end date coincide with a slow period in their business, so they may choose another date as their year-end.  If they choose March 31, then their fiscal year, or accounting year, is April 1 to March 31.

A fiscal period is normally 12 months, but may be less than 12 months when a business starts up.

Self-employed people generally have to pay tax based on a December 31 year-end.  See How does a self-employed person choose a year-end, on our Small Business page.

Fixed assets

Also called property, plant and equipment, or capital property.  These are assets which have a long life, and can include land, buildings, machinery, and equipment.  Land cannot be expensed, or written off against income, but other fixed assets can be written off against income over a number of years.  The Income Tax Act specifies what percentage of the cost of a fixed asset can be written off each year as capital cost allowance.

Free cashflow

Free cashflow is calculated as EBITDA (earnings before interest, taxes, depreciation and amortization) minus taxes paid during the year, minus capital expenditures, and plus or minus  changes in working capital.  See also cashflow and operating cashflow.

Front-end load fund

This type of mutual fund charges a sales commission, often in the range of 2% to 5%, when the mutual funds are purchased.  Also, as with all mutual funds, trailer fees are paid annually by the fund to the advisor, broker or dealer where you hold your funds.  See also no-load fund, and back-end load fund.

Fundamental analysis

Futures

GAAP

GAAP stands for generally accepted accounting principles.  The financial statements of a business must be prepared according to GAAP.  The primary source for generally accepted accounting principles is the CICA handbook.

GIC

A GIC is a guaranteed investment certificate.  GICs are interest-bearing investments which can be short or long term.  Funds are normally locked in until the maturity date, although some GICs have the option of cashing in early.

See also index-linked GIC.

Goods and services tax (GST/HST)

Goodwill

When one corporation acquires another, goodwill (an intangible asset) will be shown on the purchaser's consolidated balance sheet if the purchaser pays more than the agreed-upon value of the fixed assets acquired.

Goodwill is calculated as the total cost of the acquired corporation minus the agreed-upon value of the assets acquired minus liabilities assumed.  Prior to 2002, a portion of goodwill was required to be amortized, or written off, by the corporation on their income statement every year.  Beginning in 2002, the value of goodwill on the balance sheet need not be written down unless it is determined that there has been an impairment in the value of the goodwill.

Gross margin

Gross margin, also called gross profit, is determined by deducting cost of goods sold from total revenue.

Gross margin %

The gross margin percentage is gross margin divided by total revenue.

Group RRSP

See Group RRSPs on our Company Pensions page.

Growth investor

A growth investor purchases shares in companies which are expect to grow their revenues and earnings at above-average rates.

Hedge fund

A loosely regulated pool of capital which tries to increase returns by using options, futures, leverage, short-selling, restructuring companies, and other means.  These are volatile investments, and the average investor should not invest a large percentage of their assets in these funds.

Hedging

Holding company

A holding company is a private or public corporation which holds some or all of the shares in one or more private or public corporations.  The main benefit of a holding company is in the tax treatment of dividends received from the other corporations owned.

Immediate life annuity

In kind

In kind means using assets instead of cash for some purpose.

Some examples:

Donations can be made in kind, by donating securities instead of cash, resulting in the elimination of capital gains taxes on any gains.

In kind contributions to a registered retirement savings plan (RRSP), registered disability savings plan (RDSP) or tax free savings account (TFSA) can be made by transferring investments into the account.  Make sure this is not done using investments on which you have a loss, because the loss will be disallowed.  See our article Transfer shares to your registered account, but not at a loss.

Withdrawals can be made in kind from an RRSP or a registered retirement income fund (RRIF) by transferring out investments..  See our article on this topic.

When an RRSP must be converted to a RRIF, all of the RRSP investments can be transferred in kind to the RRIF.

The advantage of in kind transfers is that the investments do not have to be sold.

In the money

A call option is in the money when the share price is above the strike price.

Income statement

An income statement is part of the financial statements of a business.  The income statement reports the net income of the business for a period of time, showing the totals for sales, costs of sales, operating expenses, general and administrative expenses, interest expense, income tax expense, and extraordinary expenses.  The financial statements of a business are normally prepared monthly, although some small businesses or proprietorships may prepare them less often.  Publicly traded corporations normally  publish their financial statements quarterly and annually.

Income trust

An income trust is an unincorporated business entity which pays little or no income tax by flowing earnings through to unitholders (holders of trust units).  The trust units trade on stock exchanges.  The tax situation for some income trusts is changing due to changes announced by the federal government in October 2006.  For more information see our article on the tax treatment of income trusts .

Index

A stock index is a statistical tool which provides the value of a group of securities.   For instance, the Dow Jones Industrial Average is an index which is made up of 30 U.S. industrial companies, and provides a benchmark which reflects the health of the U.S. economy.

Index-linked GIC

This is a GIC which is linked to a stock index, and is usually guaranteed to return all of  your original investment.  The income is taxed as interest, not capital gains, so these are more suitable to be held inside a registered account such as an RRSP, RRIF, etc.

Individual Pension Plan (IPP)

Input tax credit

An input tax credit can be claimed to recover GST/HST which has been paid by a GST registrant.  The input tax credit is usually the amount of GST/HST paid.  There are special rules for some situations, such as when capital personal property, capital real property, passenger vehicles or aircraft are purchased.  See our articles Input tax credits on purchase of passenger vehicles and aircraft, and Input tax credits on motor vehicle allowances.

Insider

An insider is a director, officer, or large shareholder (more than 10%) who can be presumed to have access to privileged information of the company.

Intangible asset

An asset having no physical substance, such as goodwill, trademarks, and patents.  Note that beginning in 2002, corporations are no longer required to amortize the cost of their intangible assets every year.  Intangible assets are recorded at cost on the balance sheet.  That cost must be reviewed annually to determine if its current value is less than cost, in which case the value would be written down on the balance sheet.  Due to this change in accounting rules,  corporate net earnings will likely be increased over prior years, as will earnings per share.

For tax purposes, most intangible assets are considered eligible capital property.

Interest coverage

Also called times interest earned, interest coverage reflects the ability of the company to pay its interest.  It is calculated as annual operating earnings (income before interest and taxes) divided by annual interest expense.  If the result of this calculation is 2, it means that the company's operating earnings are 2x its interest expense.

Interest rate sensitive

When an investment is interest rate sensitive, its value will fall as interest rates rise.  Most stocks are interest rate sensitive, but some, like financials and utilities, are more sensitive than others, such as consumer stocks and commodities.

Interest rates

The nominal rate is the annual interest rate before adjusting for the effect of compounding.  When an interest rate is stated with its compounding frequency (e.g. 6% compounded monthly), the stated rate is the nominal rate.

The effective rate is the annual interest rate after adjusting for the effect of compounding.

Compound interest is interest on interest.  The more frequent the compounding, the higher the interest.

Interest earned on chequing and savings accounts is usually calculated on the balance in the account at the end of each day, but is paid monthly, therefore it is compounded monthly.

Interest earned on term deposits and guaranteed investment certificates (GICs) are compounded at various frequencies.  When you are investing in these products, make sure you compare the effective rates of different options, not the nominal rate.

Mortgage interest is usually compounded semi-annually or monthly.  Payments on the mortgage can usually be paid monthly, bi-weekly, or weekly, but this does not affect the frequency of compounding.

Interest charged by Canada Revenue Agency (CRA) on overdue amounts is compounded daily.

When the term fixed rate is used in reference to a loan, it means that the rate will not change during the term of the loan.  The interest rate on a variable rate loan will fluctuate every time there is a change in the bank's prime rate.

Inventory

Inventory can include goods for resale, spare parts, materials, works in progress, etc.  Inventory is classified as a current asset on the balance sheet,

Inventory turnover

The inventory turnover ratio is calculated as

cost of goods sold
average inventory

Inventory turnover can be determined 2 different ways:

Investment company

This is a company which is primarily engaged in the business of investing in securities.  There are several kinds of investment companies:

1.  Mutual funds, also know as open-end funds
2.  Closed-end funds, and
3.  Unit investment trusts (UITs)
4.  Exchange-traded funds (ETFs)

The shares of mutual funds and UITs are redeemable.  Investors buy and sell the shares from and to the fund company at net asset value (NAV) per share at the end of the day.  

Shares of closed-end funds and exchange-traded funds are traded on a stock exchange, at their market value. 

UITs have a termination date at which time the fund will be liquidated, and proceeds are paid out to the investors.

Large cap

Large cap (large capitalization) refers to corporations which have a total market value (shares outstanding x current market price) of over $10 billion for US companies, or over $1 billion for Canadian companies.

Leading indicator

Leading indicators are statistics which are used to forecast how the economy will be performing in the future.  Examples are unemployment rates, commodity prices, housing starts, inflation, bankruptcies, etc.

Lease

A contract for the rental of property.  The owner of the property is the lessor, and the person or company renting the property is the lessee.

If you are leasing property for a business, you will need to know if the lease is an operating lease or a capital lease, because they require different handling for accounting purposes.

Operating leases

Capital leases (also known as financial leases)

Leverage

Leverage is the use of debt to increase return on investment.  When a firm has a high debt/equity ratio, it is said to be highly leveraged.

Liabilities

Amounts owed.  These may be current, which means due to be paid within 1 year, or they may be long term, which means not due for at least 1 year.

Life annuity

With a deferred life annuity, payments are started no earlier than one year after the purchase of the annuity.

See Locked-in Retirement Account (LIRA) on our Company Pensions page for more information.

Life income fund (LIF)

A LIF is a locked-in account which has been created with funds that originated with a registered pension plan (RPP).  A LIF is treated in the same manner as a RRIF under the Income Tax Act.  LIFs are governed by federal or provincial pension legislation.  Some provinces have LIFs, some have LRIFs, and some have both.  One difference, where both exist, is the calculation of maximum annual withdrawals.

Characteristics of a LIF:

Limit order

A limit order is an order to buy or sell securities on the stock market at a specified or better price.

Limited liability

The owners or shareholders of a limited company are normally only liable for the amount they have invested in the company.  If the business fails, they are not responsible for the debt of the company.  There are some instances in which directors can be held liable for certain debts, such as GST/HST and payroll taxes.  With a professional corporation, the shareholder's personal assets may be at risk in the case of professional malpractice.

See the article Should you incorporate your small business? on the Small Business page.

Limited Partnership

A limited partnership will have two classes of partners - general partners, and limited (or special) partners.  The liability of the limited partner(s) will be limited to the amount of capital they have contributed to the partnership.  However, certain actions by a limited partner will deem them to be a general partner and end the unlimited liability, such as taking an active roll in the management of the business.  In a limited partnership there must be at least one general partner who has unlimited liability. 

Liquidity

The liquidity of a stock refers to the ease with which it can be bought and sold.  If large volumes are usually traded in the stock, it is liquid.  If small volumes are usually traded, it is illiquid.

Listed personal property (LPP)

Listed personal property is a type of personal-use property which usually increases in value over time, including stamps, coins, works of art, jewellery,  and rare books, folios or manuscripts.  Capital cost allowance cannot be claimed on listed personal property.

If you have LPP which you purchased for more than $1,000, and you sell the property for more than you paid, you will have a capital gain to report on your tax return.  The deemed cost of LPP purchased for less than $1,000 is $1,000.  If you have LPP which you purchased for $800, and you sell the property for $1,300, your capital gain will be $300.

If you sell the property at a loss, the loss can only be used to reduce the gain from the sale of other LPP.  It cannot be used to reduce other capital gains or other income.  The loss can be carried back 3 years or carried forward 7 years to be used to reduce the gain from the sale of other LPP in those years.

Information on the tax treatment listed personal property owned by an individual can be found on the Canada Revenue Agency (CRA) web page on Listed Personal Property.

Listed stock

A listed stock is one which is listed, or traded, on a stock exchange.

Locked-in retirement account (LIRA)

Locked-in retirement income fund (LRIF)

An LRIF is a locked-in account which has been created with funds that originated with a registered pension plan (RPP).  An LRIF is treated in the same manner as a RRIF under the Income Tax Act.  LRIFs are governed by federal or provincial pension legislation.  Some provinces have LIFs, some have LRIFs, and some have both.  One difference, where both exist, is the calculation of maximum annual withdrawals.

Characteristics of an LRIF:

Long

Signifies ownership of securities.  If a person is "long" 100 shares of a corporation, it means that they own 100 shares of the corporation.  See also "short"

Management expense ratio (MER)

The MER is the percentage of the value of the assets of an investment company (eg mutual fund, closed-end fund, unit investment trusts), that is deducted by the fund manager to cover the costs of managing the fund.  This is not part of the front end or back end fees paid to purchase the mutual fund, and is not a cost that is seen by the investor.  However, it reduces the return to the investor.  The MER is usually in the range of 1.5% to 3% per year.  

A much lower MER is charged by Exchange Traded Funds, or ETFs.  The MER rate can make a huge difference in investment returns over a period of 20 years.

Margin

If you have securities at a brokerage in a margin account, the brokerage will allow you to borrow a percentage of the value of your holdings.  A higher percentage is allowed for large cap stocks, and you cannot borrow anything against some small cap stocks.

Margin call

If you have bought stocks on margin, and the amount you have borrowed exceeds the margin limit that the brokerage has allowed you, you will receive a call from the broker asking you to either sell some stocks or transfer money into your account.

Marginal tax rate

A person's marginal tax rate is the tax rate that will be applied to the next dollar he/she earns.

The marginal tax rates on capital gains and Canadian dividend income are lower than on other types of income, because:

To see the marginal tax rates for different types of income for each tax bracket, see the marginal tax rate table for your province or territory.

Marked to Market

When an investment is marked to market, it is shown on the balance sheet at market value.  This results in changes in the market value being shown on the income statement as a profit or loss.

Market

The bringing together of people for the purpose of trade.  This can be done electronically in the form of a stock market, or physically in the form of a farmer's market.

Market cap

Market capitalization, or the total market value of the company, is calculated by multiplying the current price per share by the total number of common shares currently outstanding.

Market maker

A "market maker" is a firm that will buy and sell a particular stock on a regular and continuous basis at a publicly quoted price.  A stock exchange will appoint brokerages to act as market makers on certain stocks.  A trader from the brokerage will buy and sell shares on the open market, maintaining a minimum level of trading activity, and trying to reduce the price volatility in their assigned stocks.  On some exchanges, the market makers can buy shares from issuers. 

Market order

An order placed to buy or sell a security immediately at the best current price possible.

See also limit order.

Market value per share

This is the current price of a security, as determined by the investors who buy or sell the security on a stock exchange.  See also bid/ask.

Maturity

The maturity date of a financial instrument such as a t-bill, GIC, loan, bond or debenture is the date at which it becomes due.

MER

Minor

Momentum investor

Money market

Money market investments are short term financial investments such as t-bills, bankers acceptances, commercial paper, and GICs.

Money purchase RPP

Money supply

The money supply consists of bank notes and coins in circulation, all deposits at financial institutions, all mutual funds, individual annuities at life insurance companies, and Canada Savings Bonds.

For more information see the Statistics page.

Mortgage

Motor Vehicle

A motor vehicle is defined by the Income Tax Act as "an automotive vehicle designed or adapted to be used on highways and streets but does not include (a) a trolley bus, or (b) a vehicle designed or adapted to be operated exclusively on rails"

See the CRA chart of vehicle definitions on the Small Business page.

A passenger vehicle is always an automobile, and an automobile is always a motor vehicle, but a motor vehicle is not always an automobile or passenger vehicle.  

There are special rules for GST registrants for claiming input tax credits on the purchase of passenger vehicles.

For income tax purposes, there are limitations on the expenses that can be claimed for a passenger vehicle.

MRQ

Most recent quarter.  Some ratios reported on investment information websites may be calculated from the company's financial statements for the most recent quarter (3 month period).

Mutual fund

Also known as an open-end fund, this is an investment company which pools the money of many investors, and uses the money to invest in a variety of different securities.  The securities may be stocks, bonds, money market securities, or a combination of these.  The mutual fund has a fund manager to handle the buying and selling of securities.  The fund company does the recordkeeping for individual investors, providing reports which detail cost basis, dividend income, capital gains, etc.  For these services, the mutual fund company charges a management fee, which is usually expressed as a percentage of the asset value of the fund.  This is called the management expense ratio (MER).  This fee is taken from the fund by the fund manager to cover the costs of managing the fund.  Many mutual funds also charge fees when the funds are purchased (front end fees or loads) or sold (back end fees or loads).  The ones which do not charge these fees are called no-load funds.

[back to top]

Naked call option

Naked put option

Net Asset Value (NAV)

The net asset value of an investment company is its total assets less its total liabilities.  Mutual funds and unit investment trusts (UITs) normally calculate their NAV at the close of each business day, and then all buy and sell orders are processed at the NAV.  The NAV for a closed-end fund need not be calculated daily, because its shares trade at market value, not at NAV.

Net assets

Total assets less total liabilities, which equals owners' equity

Net capital loss

Net income

The part of income remaining after all expenses and taxes have been paid.  Also called net profit.

Net income (for tax purposes)

Net tangible assets

No par value

When shares of a corporation have no stated face value, they are said to be no par value shares.

No-load fund

This type of mutual fund does not charge sales commissions, but trailer fees are paid annually by the fund to the advisor, broker or dealer where you hold your funds.  A no-load fund may have a higher management expense ratio (MER), to make up for the lack of sales charges.  See also front-end load fund and back-end load fund.

Nominal interest rate

Non-arm's length

Non-capital loss

A non-capital loss includes unused losses from office, employment, business or property, and unused allowable business investment losses (ABIL).  

Non-capital losses can be carried back 3 years, or carried forward 7, 10 or 20 years.

Non-capital losses unused after the carry-forward period expire, and are simply lost.  Any unused ABIL after the carry-forward period becomes a net capital loss, which can be carried forward indefinitely to be offset against capital gains.

Tax tip:  If you have non-capital losses that are going to expire, you should reduce or eliminate your capital cost allowance (CCA) claimed in the current year or prior years.

For further information see the CRA web page Non-capital losses of other years.

See also capital gain or loss, which includes net capital losses.

Non-cumulative

Non-refundable tax credit

The unused portions of some non-refundable tax credits can be transferred to another taxpayer.  Some non-refundable tax credits can be used by either spouse.  See our Filing Your Return page for further information on many of these tax credits.

Non-taxable amounts

Amounts which are not required to be included in income for tax purposes include:

See the CRA page on amounts that are not taxed.

See also our article on taxable income, net income and total income for tax purposes.

Odd lot

An odd lot is a quantity of shares which is not evenly divisible by a board lot (usually 100 shares).  Shares sold in odd lots are sometimes subject to a price premium.

Office

Open order

An open order is an order to buy or sell stock, which has not yet been filled.

Open-end fund

Mutual funds are also known as open-end funds.  They do not have a fixed number of shares.  The fund issues new shares as investors purchase them, and redeem (buy back) shares as investors sell them.  The price at which the shares are bought and sold is the net asset value (NAV), which is determined at the end of each business day.

See also investment company, closed-end fund, exchange-traded fund, and management expense ratio (MER).

Operating cashflow

Operating cashflow is net income plus depreciation and amortization expenses, plus future income tax expense, and plus or minus  changes in working capital. 

Option

An option is a financial contract between two parties - the buyer (holder) and seller (writer).  The option gives the holder the right, and the writer the obligation, to buy or sell a predetermined amount of a certain stock (equity option) at a specified price (strike price), on or before a specified date (expiry date).

Options can be traded in things such as stocks, indexes, commodities and other financial instruments, but this article deals with equity and index options.

The holder of an option has a long position, while the writer of an option has a short position.

Options are traded in contracts, with each contract normally representing 100 shares of the underlying stock.

American-style options can be exercised by the holder at any time prior to expiry.  European-style options can only be exercised for a specified period of time prior to expiry.  According to the Chicago Board Options Exchange (CBOE), all equity options currently traded on US exchanges, and some index options, are American-style, while many index options are European-style.

Call option

Calls are purchased by those who expect the share price to be above the strike price at expiry date.  Calls are sold by those who expect the share price to be below the strike price at expiry date.

A call is in the money when the current market value of the stock is above the strike price.  It is out of the money when the current market value is below the strike price, and at the money when the two amounts are equal.

The writer of a call can choose to buy back the call on or before expiry date, if it has not yet been exercised by the holder.

The holder of a call can choose to sell the call on or before expiry date.

Covered vs. uncovered (naked) call

A call is covered when the writer of the call owns the underlying shares.  If the writer does not own the underlying shares, the call is uncovered.  Covered calls can be written in a registered account such as an RRSP, but uncovered calls cannot.

Put option

Puts are purchased by those who expect the share price to be below the strike price at expiry date.  Puts are sold by those who expect the share price to be above the strike price at expiry date.

A put option is in the money when the current market value of the stock is below the strike price.  It is out of the money when the current market value is above the strike price, and at the money when the two amounts are equal.

The writer of a put can choose to buy back the put on or before expiry date, if it has not yet been exercised by the holder.

The holder of a put can choose to sell the put on or before expiry date.

Covered vs. uncovered (naked) put

A put is covered if the writer of the put:

Otherwise, the put is uncovered.

Tax treatment of income from call and put options

Learning about options

The Chicago Board Options Exchange (CBOE) is a good source for information on options.  They have online tutorials and courses, delayed quotes for stocks and options, and historical price information.  They also have downloadable quotes, which can be imported into a spreadsheet program.

Outstanding shares

Shares that a company has sold and issued to shareholders, also called "issued" shares.

Over the counter (OTC)

An OTC security is any equity security which is not listed on the major stock exchanges.

Overnight rate

The overnight rate is the interest rate at which financial institutions borrow and lend one-day funds to each other.  The target overnight rate is the interest rate set by the Bank of Canada, and is the rate quoted in the press.  See also prime rate and Bank of Canada rate.

Par value

The par value is the stated face value of a stock or bond.

Partnership

A partnership is a business entity which is created when two or more individuals and/or entities join together to conduct a business, with the goal of making a profit.  The business can be a partnership of individuals, corporations, trusts, other partnerships, or a combination of these.  

In order to form a partnership, an agreement is drawn up which outlines the terms of the partnership.  The terms would include required contributions of capital by each partner, rules governing the management of the partnership, and the method of allocating profits or losses among partners.

Partnerships are regulated by provincial/territorial laws.  In the absence of a partnership agreement, or if certain provisions are not addressed in the agreement, provincial or territorial laws will determine some or all of the terms of the partnership.

A partnership has unlimited liability.  The partners are jointly liable for all debts and other liabilities of the business.  If the business is sued, all the business and personal assets of the partners are at risk.  An exception to this is a Limited Partnership.

Passenger vehicle

For purposes of the Income Tax Act, a passenger vehicle is an automobile that was purchased or leased after June 17, 1987.  An automobile is a motor vehicle designed to carry people on highways and streets, and can carry a driver and no more than 8 passengers.  See the CRA chart of vehicle definitions on the Small Business page.  

There are special rules for GST registrants for claiming input tax credits on the purchase of passenger vehicles.  

For income tax purposes, there are limitations on the expenses that can be claimed for a passenger vehicle.  See Auto expenses on the Small Business page.

Pay yourself first

Penny stock

A stock which sells for less than a dollar, and is considered to be speculative.

Pension Plans

Personal services business

A personal services business exists when a person who is a specified shareholder of the corporation provides services to another entity, and the relationship between the provider of the service and the entity receiving the service could reasonably be regarded as an employee/employer relationship.  This person could also be described as an "incorporated employee".  However, if the corporation employs more than 5 full-time employees throughout the year it will not be considered to be carrying on a personal services business.  A personal services business is not eligible for the small business deduction.  ITA 125(7)

Personal-use property

Personal-use property includes cars, boats, furniture, cottages and other property purchased for personal use.

If you have personal-use property which you purchased for more than $1,000, and you sell the property for more than you paid, you will have a capital gain to report on your tax return.  The deemed cost of personal-use property purchased for less than $1,000 is $1,000.  If you have personal-use property which you purchased for $800, and you sell the property for $1,300, your capital gain will be $300.  If you sell the property at a loss, generally the loss cannot be claimed.

Portfolio

Preferred shares

Preferred shares are a class of corporate capital stock which normally holds priority over common shares in dividend payments, and in distribution of the corporate assets in a liquidation.

See also capital stock.

Prepaid expenses

A prepaid expense occurs when services or supplies are purchased but not used by the end of the accounting period, such as property taxes (if your fiscal year-end is not the same as the year-end for property taxes) and insurance.

For example, the term for insurance is normally one year or longer.  Thus, if the term is one year, but the insurance payment date is not at the end of the fiscal year, then a portion of the insurance cost applies to the next fiscal year.  At the end of the year this portion will show on the balance sheet as a prepaid expense.

Present value

The value today of a payment or series of payments to be made (or received) in the future.  To determine the present value, an interest rate (discount rate) is used.  For example, the present value of a payment of $1,000 to be made in one year, using a 5% discount rate would be $952.38 ($1,000 / 1.05).  In other words, the present value is the amount you need to invest today, at the specified interest rate, to make the specified payment or series of payments in the future.

See our Present Value/Future Value calculator.

Price/book ratio  (P/B)

Market value per share divided by book value per share

Price/cashflow  ratio (P/CF)

Market value per share divided by annual cashflow per share

Price/earnings ratio  (P/E)

Market value per share divided by annual net income per share

Price/free cashflow  (P/FCF)

Market value per share divided by annual free cashflow per share

Price/sales ratio  (P/S)

Market value per share divided by annual sales per share, or total market cap divided by total annual sales.

Primarily

Canada Revenue Agency (CRA) uses "more than 50%" as their guideline to interpret the word "primarily" in the Income Tax Act and the Excise Tax Act.  

Prime rate

The prime rate is the interest rate charged by financial institutions to their best customers.  See also Bank of Canada rate, target overnight rate, and overnight rate.

Principal protected notes (PPNs)

Principal residence exemption

Private corporation

Shares of a private corporation are not publicly traded on a stock exchange.  See also Canadian controlled private corporation, and public corporation.

Pro rata

In proportion to.  A pro rata refund for a partially fulfilled contract would be for the proportion of the contract which is unfulfilled.

Promissory note

A  written promise to repay an unsecured loan.

Proprietorship

An unincorporated business owned by one person.  For tax purposes, the net income of the proprietorship is reported as self employment income on the owner's personal income tax return.

See also Should you incorporate your small business?

Prospectus

Legal document prepared for potential investors which describes all facets of the securities or property being offered for investment.  This should always be scrutinized carefully by potential investors.  If there is no prospectus provided for a potential investment, you should seek professional advice.

Public corporation

Shares of a public corporation are listed on a stock exchange and can be purchased by the general public.  See also private corporation.

Put option

See option.

Quick ratio

The quick ratio is calculated as (cash + marketable securities + receivables) divided by current liabilities.  This ratio is an indicator of the ability of the company to meet current debts.  The rule of thumb is that a quick ratio under 1, or 100%, requires further scrutiny.  The quick ratio is similar to the current ratio, except that the current ratio includes all current assets.  Inventory and prepaid expenses are excluded from the quick ratio calculation.  Comparing the current ratio to the quick ratio gives an indication of the impact of inventory on the company's working capital.

Quote

Real estate investment trust (REIT)

An investment vehicle which allows people to invest in a portfolio of real estate holdings by purchasing units of the trust.  This gives the holders more diversity and liquidity than investing directly in real estate.  REITs are not taxed as corporations, but flow their income through to unitholders.

Recapture

When a depreciable fixed asset is sold, its capital cost allowance (CCA) class is reduced by deducting the lower of its original cost, or its proceeds of sale.  If, at the end of a fiscal year, the balance of the class is negative, a gain has occurred.  This gain is referred to as a "recapture" of CCA, and must be included in business or property income for the year.

Example:  

The recapture of $1,000 is included in income, and the UCC of the class is then zero.

Recapture rules do not apply to passenger vehicles included in Class 10.1.  See Passenger vehicles - expense limitations on the Small Business page re class 10.1 vehicles.

Tax tip:  When recapture is expected, it is beneficial to purchase assets for that class prior to year-end, rather than wait until the following fiscal year, in order to reduce or eliminate the recapture.

Record date

When dividends are declared by a corporation, the dividend announcement includes the amount of the dividend and the record date.  The dividend is paid to shareholders who hold the stock on the record date.  Because it takes 3 days for trades in shares of corporations to be settled, a person must buy the stock at least 3 days prior to the record date (at least the day prior to the ex-dividend date) in order to be entitled to the dividend.  See also trade date and settlement date.

Registered education savings plan (RESP)

An RESP is an education savings plan that has been registered with Canada Revenue Agency (CRA).  It is a method for parents to save for their children's post-secondary education.  The payments to an RESP are not tax deductible, but the earnings in the RESP grow on a tax-free basis.

See RESPs - Be Aware, and Beware! on our Save Money page.

Registered pension plan (RPP)

Registered pension plans are pension plans that are regulated by federal or provincial pension legislation, and must be registered under the Income Tax Act.  There are two types of registered pension plans - defined benefit pension plans (DB), and defined contribution pension plans (DC).  Defined contribution plans are also known as money purchase RPPs.

Registered retirement income fund (RRIF)

Registered retirement savings plans (RRSPs) must cashed out (taxable) or converted to RRIFs (tax-free) no later than the year in which the RRSP holder turns 71.  The 2007 Federal budget revised this age from 69 to 71, for both RRSPs and RPPs.  See the article on conversion of RRSP to RRIF, on the RRSPs/RRIFs page, for special rules for RRIF holders who turn 70 or 71 in 2007.

Once the RRSP is converted to a RRIF, the holder must withdraw a minimum amount each year, except in the first year.  These withdrawals are taxable to the holder.  The withdrawals qualify as pension income for purposes of the pension income tax credit for taxpayers 65 and over.  Starting in 2007 the withdrawals may be split with a spouse (pension splitting).

It may be beneficial to convert at least a portion of an RRSP to a RRIF when the taxpayer turns 65, in order to generate income eligible for the pension tax credit, and for pension splitting.

The holder of the RRIF controls what investments are held in the account.

See the article on the pension income tax credit on the Filing Your Return page, and the article on pension splitting on the Personal Tax page.

Our RRIF calculator can be used to calculate your minimum RRIF withdrawals, fixed annual withdrawals adjusted for inflation, or withdrawals using a fixed number of years.  The RRSP/RRIF calculator can be used if you have not yet converted to a RRIF.

Registered Retirement Savings Plan (RRSP)

An RRSP, or Registered Retirement Savings Plan, is a savings or investment account which allows you to defer paying tax on funds deposited to it.  When you make a contribution to your RRSP, you get a tax deduction for the amount contributed.  The deduction reduces taxable income, so the higher your marginal tax rate, the greater the tax savings will be.

Retained earnings/accumulated deficit

The net income, or net profit, generated by a company each year is transferred to Retained Earnings, which is a part of Shareholders' Equity on the balance sheet.  Retained Earnings are the accumulated profits of the company, and show as a positive amount on the balance sheet.  If the company has accumulated losses instead of profits, this is called Accumulated Deficit, and shows up as a negative amount on the balance sheet.

Return on assets  (ROA)

The return on assets is a measure of the company's profitability and efficiency.  It is calculated by dividing the annual operating income (income before interest and taxes) by the average total assets.  The average of total assets can be determined by adding the year's beginning and ending balances of total assets, and dividing by two.

Return on equity  (ROE)

This ratio reflects the profitability of the investment to the common shareholders.  It is calculated by dividing the annual net income less any preferred stock dividend requirements by the average common shareholders' equity during the year.  The average common equity is usually determined by adding the year's beginning and ending balances, and dividing by two.

Revenue

The amount of sales, rental, interest and other income earned by a business.  The revenue of a business is reported on the income statement.

Securities

Securities include negotiable financial instruments such as common shares, preferred shares, bonds, debentures, mutual funds, put and call options, warrants, etc.

Segregated funds

A type of mutual fund, sold by insurance brokers, which is guaranteed to return all or part of your initial investment.  Segregated funds may be protected from creditors under certain circumstances.  When a preferred beneficiary is designated, the funds are paid to the beneficiary upon death, avoiding probate.

Self-employment income

See also:

Is your income considered rental (property) income or business income?

Are you an employee, or self-employed?

Canada Revenue Agency (CRA) publication T4002 Business and Professional Income Guide.

Settlement date

The settlement date for securities transactions is the date on which payment is made to settle the trade.  The settlement date for stocks and bonds is normally 3 days after the trade date, and for options and mutual funds it is normally the day after the trade date.  The settlement date is the date on which possession of the security is transferred from the seller to the buyer.  If you sell an investment at the end of the year, and the settlement date is after yearend, the sale is not recorded for tax purposes until after yearend. 

See the article What is the tax treatment of different investments? on the Personal Tax page.

Share

Shareholder

A shareholder owns stock (shares) in a corporation.  The shareholders are the owners of a corporation.

Shareholders' equity

This consists of all amounts received when shares were issued (share capital), plus retained earnings, less treasury shares, and is shown on the balance sheet portion of a corporation's financial statements.  Also equal to total assets less total liabilities.

Short

A person is "short" a security when they sell shares they do not own, by borrowing them from their brokerage company.  This is called making a "short sale", or "selling short".  This is normally done when the person believes that the price of the security is going to fall, so that they can cover the sale by buying back the stock later at a lower price.  See also "long".

Small business corporation (SBC)

The Income Tax Act defines a small business corporation as a Canadian controlled private corporation (CCPC), in which all or substantially all of the fair market value of the assets are used principally in an active business carried on primarily in Canada.  The assets  may include shares or debt of one or more other small business corporations that are connected with the corporation.

Small business deduction

Income Tax Act s. 125

The small business deduction is a reduction in corporate taxes for Canadian controlled private corporations, or CCPCs.  The reduced rate of tax is available on active business income up to the corporation's business limit for the year.  The federal business limit for $400,000 for 2008, and $500,000 for 2009.

Eligibility for the small business deduction also depends on the amount of the corporation's taxable capital employed in Canada.  For more information see the information on the small business deduction in the Canada Revenue Agency T2 Corporation Income Tax Guide.

See also:

Specified investment business

A specified investment business is a corporation whose principal purpose is to derive income (interest, rent, dividends and royalties) from property, unless the business employs more than 5 full time employees.  Income from property would include rental or leasing income from land or buildings, but would exclude income from renting or leasing moveable property such as machinery and equipment.  A specified investment business is not eligible for the small business deduction.  ITA 125(7)

Specified shareholder

A specified shareholder of a corporation is a person who, either alone or together with others with whom that person is not dealing at arm's length, owns 25% or more of the voting shares of the corporation, or owns shares of the capital stock of the corporation having a fair market value of 25% or more of the fair market value of the issued and outstanding shares of the corporation.  See also personal services business.  ITA 18(5)

Speculator

One who will take on additional risk in order to increase returns.

Spread

The difference between bid and ask prices.

Standby charge

The standby charge is an amount included in the income of an employee or shareholder when a company owned or leased automobile is available for the personal use of the employee or shareholder.  See Auto taxable benefits on the Small Business page.

Stock

A certificate representing partial ownership (share) of a company (or a base for making soup).  See also capital stock, common shares, and preferred shares.

Stock dividend

A dividend paid in the form of shares or partial shares of the paying corporation.

Stock exchange

A stock exchange is an organization which is in the business of providing securities trading services.

Stock index

Stock split

This is when a corporation issues additional shares to its shareholders.  For instance, a 2 for 1 stock split would result in each shareholder holding twice the number of shares that they previously held.  However, the market value per share would be only half of the previous market value per share.

Stop loss order

An instruction to a broker to sell a stock if it falls to a specified price.

Street name

A security registered in street name is registered in the name of the brokerage company, not the owner.  This is how most shares are held when purchased through a brokerage company.

Strip bond

Structured products

Substantially all

Canada Revenue Agency (CRA) uses "90% or more" as their guideline to interpret the words "all or substantially all" in the Income Tax Act and the Excise Tax Act.  

Superficial loss and other disallowed losses.

Surplus

[back to top]

Target overnight rate

The target overnight rate is the key Bank of Canada interest rate which is usually quoted in the press.  This is the rate that the Bank of Canada would like financial institutions to use when they borrow and lend one day funds to each other.  When the Bank of Canada changes the target overnight rate, this affects the interest rates charged and paid by financial institutions.  See also Bank of Canada rate, overnight rate and prime rate.

Taxable capital employed in Canada

Taxable capital gain

Taxable income, net income and total income

Personal income taxes are calculated on Taxable Income.

To calculate Taxable Income, first Total Income is calculated, then items are deducted to get Net Income, then other items are deducted to get Taxable Income.

Total Income:

To calculate Total Income, add:

Net Income:

To calculate Net Income, deduct the following items from Total Income:

Taxable Income:

To calculate Taxable Income, deduct the following items from Net Income:

Technical analysis

Analysis of stocks and markets based on historical trends, in order to predict which trends will continue into the future.  

Terminal loss

When a depreciable fixed asset is sold, its capital cost allowance (CCA) class is reduced by deducting the lower of its original cost, or its proceeds of sale.  If all the assets in a class have been sold, but at the end of the fiscal year there is still a balance of  undepreciated capital cost (UCC) remaining in the class, this balance can be fully written off against business or property income as a "terminal loss".  This terminal loss is not deductible in some situations, such as when a "luxury vehicle" in class 10.1 is sold.  See Passenger vehicles - expense limitations on the Small Business page re class 10.1 vehicles.

Example:  

The allowed terminal loss is $3,000, and the UCC of the class is then zero.

Tax tip:  Note that if any asset had been purchased and added to the class just prior to year-end, there would be no terminal loss allowed because there would still be an asset left in the class.  In this case it would be beneficial to postpone the purchase of the new asset until after year-end.

Ticker symbol

A ticker symbol is a 1 to 5 letter symbol which is used to represent a security listed on a stock exchange.  The ticker symbol for General Motors, for instance, is GM, and for Intel is INTC.

Times interest earned

Also called interest coverage, times interest earned reflects the ability of the company to pay its interest.  It is calculated as annual operating earnings (income before interest and taxes) divided by annual interest expense.  If the result of this calculation is 2, it means that the company's operating earnings are 2x its interest expense.

Trade date

The trade date for securities transactions is the date the the transaction was entered into.  Payment is made for the transactions on the settlement date.  When the transaction is made in a foreign currency, such as when foreign shares are purchased using a US dollar trading account, for calculating the cost basis in Canadian funds, the exchange rate on the trade date should be used.

See the article What is the tax treatment of different investments? on the Personal Tax page.

Trade deficit

If a country imports more goods and services than it exports, it has a trade deficit.

Trade surplus

If a country exports more goods and services than it imports, it has a trade surplus.

Trader

A person who buys and sells stocks looking for short term profits.

Trailer fees

Mutual funds pay a trailer fee to the advisor, broker, or dealer where you hold your mutual funds.  This annual fee is part of the management expense ratio (MER), so is not a fee that you see being deducted from your account.  See also front-end load fund, back-end load fund, and no-load fund.

Treasury bills (T-bills)

Short term government debt, which is sold to investors at a discount from face value, and matures at face value.  

When a treasury bill is held to maturity, the difference between proceeds and adjusted cost base (purchase price) is considered interest income for tax purposes.  If the treasury bill is purchased in one year and matures in the next year, the amount of accrued interest must be calculated at December 31 to include in the income tax return for that year.  If a treasury bill is disposed of prior to maturity, a capital gain or loss may result, as well as the interest income.  Example:
A T-bill with face value of $20,000 is purchased on June 1, with a maturity date of September 1 (92 days).  The purchase price is $19,750, giving a yield of 5.022%.  The interest income is $250 if the T-bill is held to maturity.
The T-bill is sold on August 1 after being held for 61 days, for proceeds of $19,975.  Interest income can be calculated in 2 ways - using the yield rate, or using the number of days.  
Using yield rate, interest income = $19,750 x 5.022% x 61days divided by 365 days = $165.76
Using # of days, interest income = $250 x 61 days divided by 92 days = $165.76
The capital gain or loss is calculated as:

Treasury shares

Shares that have been bought back by the issuing corporation. Shares bought back can be cancelled, or retained as treasury shares.  Treasury shares are issued, but not outstanding, and do not receive dividends or have voting rights.

TTM (trailing twelve months)

Trailing twelve months is usually the total of the last 4 quarters of financial information reported by the company.  Companies produce annual financial statements at the end of their fiscal year, and usually produce interim financial statements every 3 months.

Trustee

Uncovered call option

See covered vs. uncovered (naked) call.

Uncovered put option

See covered vs. uncovered (naked) put.

Undepreciated capital cost (UCC)

The capital cost of a fixed asset (excluding land) is added to a capital cost allowance class when the asset is acquired.  Each year, the allowed capital cost allowance is deducted from the balance in the class, and the remaining amount is called the undepreciated capital cost.

See also recapture and terminal loss.

Underwriting

The distribution of shares or debt of a government or company to investors.

Unincorporated

An unincorporated business, such as a proprietorship, is one which has not gone through the process of being formed into a corporation.

Unlisted stock

A stock that does not trade on a stock exchange, but may be traded over the counter (OTC).

Value investor

A value investor is a person who purchases shares which appear to be a good value based on price/earnings, price/sales, price/book, price/cashflow, debt/equity and other financial ratios.

Voting stock

Shares of a corporation which give the shareholder a right to vote on matters pertaining to the corporation.  A corporation may have voting and non-voting stock.

Warrant

The right to purchase shares from the issuing entity, at a set price, usually for a specified period of time.

Wash trade

A wash trade is the activity of buying and selling the same investment in a short period of time (usually on the same day), with no change in beneficial ownership.  Wash trades are illegal when they are done to artificially inflate the trading volume or market value of a stock.

A legal use of wash trades that is beneficial to investors, is the washing of trades of foreign currencies, such as when trades which normally settle in US$ are made in a Canadian$ account such as an RRSP.  These wash trades are used to eliminate the exchange rate difference between purchases and sales of US$ investments.

Weighted average cost

When an investor purchases shares in a single corporation on more than one occasion, the weighted average cost per share is calculated as the total cost of all the shares divided by the total number of shares purchased.

Example:  Investor A purchased shares of Corporation A on three different occasions:

Total cost = $7,587, divided by total shares (400) = weighted average cost of $18.9675/share.

If the investor subsequently sells 100 shares, then the cost basis allocated to the sold shares (for tax purposes) would be $18.9675 x 100, = $1,896.75.  The cost basis of the remaining 300 shares would be $7,587 - $1,896.75 = $5,690.25.

Working capital

Current assets minus current liabilities.  This reflects the company's ability to cover its short term debts.

Working capital ratio

Also called current ratio, this is the current assets divided by the current liabilities.

Yield

This is a percentage which reflects the annual return on an investment.  See dividend yield.