Glossary of Canadian Tax, Financial, Investing and Accounting Terms
Accrual basis accounting vs cash basis accounting
Accumulated income payment (AIP) re RESPs
Adjusted cost base (ACB), or cost basis
Anniversary day of an investment contract
Assistance holdback amount re Registered Disability Savings Plans
For purposes of the Income Tax Act, 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. A taxable benefit will arise when an employee is provided an automobile which is used partly for personal use. See the topic Auto taxable benefits on the Small Business page.
The definition of automobiles excludes:
A passenger vehicle is an automobile that was purchased or leased after June 17, 1987. For income tax purposes, there are limitations on the expenses that can be claimed for a passenger vehicle. There are special rules for GST registrants for claiming input tax credits on the purchase of passenger vehicles.
Average collection period
Tax Tip: Pay down all non-tax-deductible debt with over 8% interest, then see our Save and Invest page.
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.
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.
The Bank of Canada rate that is quoted in the press is actually the target overnight rate, also referred to as the Bank's policy interest 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.
The Bank has a system of eight fixed dates each year on which it announces whether or not it will change the policy interest rate.
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.
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.
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.
This is the total shareholders' equity (as stated on the balance sheet), divided by the total number of common shares outstanding
A bull market is a rising market (prices rising). A person who expects that the market will rise is called a bull.
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.
A callable security is one which can be redeemed by the issuer before the expiry date.
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.
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 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 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.
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.
Cash basis accounting vs accrual basis accounting
Cashflow per share is cashflow divided by the total number of common shares outstanding.
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.
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.
See our Statistics page for more information on the function of the Bank of Canada.
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.
For more information see the Canada Revenue Agency web page Children's Special Allowances.
CICA is the Canadian Institute of Chartered Accountants. The CICA publishes the CICA handbook, which provides the primary source of generally accepted accounting principles.
Collateral is property which is pledged as security for the repayment of a loan.
Commercial paper is a short term debt instrument issued by a corporation and sold through brokerages to investors.
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.
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.corporation.
Consolidated financial statements group together the financial results of a parent company and its subsidiaries.
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.
A contract is a legally binding agreement between two parties.
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.
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.
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
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.
The CNIL is used in the calculation of the $750,000 capital gains deduction available on the sale of qualified capital property.
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.
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.
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 assets divided by
current liabilities. This is a measure of the liquidity of the
A cyclical stock is one which tends to have greater price fluctuations over an economic cycle. Manufacturing and resources tend to be cyclical sectors.
An order to buy or sell securities, valid only on the day for which the order is placed.
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.
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.life annuity
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. See Government of Canada Debt in Selected Years.
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.
Directors are the people elected by shareholders to oversee the management of the company.
A discretionary account is a brokerage account where the client has authorized the broker to buy and sell stocks without contacting the client.
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.)
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.
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.
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%
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.
Performing an investigation to verify information, often regarding a business which is being considered for purchase.
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
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.
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.
Earnings before interest, taxes, depreciation and amortization.
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.
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.
Consider the same corporation, but this time it has $20 million in debt as well as the $10 million in cash. The buyer would need an additional $20 million to pay off the debt, or else would have to pay interest on the debt. Thus, the net cost would be $100 million, less $10 million, plus $20 million, or $110 million.
When a stock is sold ex-dividend, this means the purchaser is not entitled to the most recently announced dividend.
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.
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.
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.
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.
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.
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 is calculated as EBITDA (earnings before interest, taxes, depreciation and amortization) minus taxes paid during the year, minus capital expenditures, minus dividends, and plus or minus changes in working capital. See also cashflow and operating cashflow.
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.
Analysis of a company and its financial strength, in order to determine its value. Fundamental analysis is used by value investors.
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. Recently, this has changed and now financial statements must be prepared either according to International Financial Reporting Standards (IFRS), or Accounting Standards for Private Enterprises (ASPE).
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.What are GST and HST.
Gross margin, also called gross profit, is determined by deducting cost of goods sold from total revenue.
The gross margin percentage is gross margin divided by total revenue.
See Group RRSPs on our Company Pensions page.
A growth investor purchases shares in companies which are expect to grow their revenues and earnings at above-average rates.
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.derivatives to lessen risk. life annuity.
A call option is in the money when the share price is above the strike price.
A put option is in the money when the share price is below the strike price.
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.
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 .
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.
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.IPPs on the Company Pensions page.
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.
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.
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.
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.
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.
The inventory turnover ratio is calculated as
cost of goods sold
Inventory turnover can be determined 2 different ways:
Generally, the higher the inventory turnover the better. If the ratio is too low, or is decreasing, it means that more of the company funds are being tied up in inventory, and items in inventory could be becoming outdated. In a business where prices are consistently dropping and products are constantly changing, such as computer hardware, it is wise to turn over the inventory as frequently as possible. This has to be balanced against running short of inventory and losing sales as a result.
This is a company which is primarily engaged in the business of investing in securities. There are several kinds of investment companies:
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.
Both closed-end funds and UITs have a fixed number of shares. Open-end funds and exchange-traded funds have a variable number of shares.
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 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.
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.
- also known as financial leases
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.
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.
A life annuity provides the purchaser with regular periodic payments (weekly, monthly, etc.), usually for the rest of their life. The amount of the payments will depend on current interest rates, the age and sex of the purchaser (and perhaps their spouse), and the type of annuity being purchased. There are many different types of life annuities. Depending on the type of life annuity:
With an immediate life annuity, payments are started within one year after the purchase of the 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.
A limit order is an order to buy or sell securities on the stock market at a specified or better price.
See also market order.
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.
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.
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.
A listed stock is one which is listed, or traded, on a stock exchange.
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"
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.
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.
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.
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.
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 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.
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.
An order placed to buy or sell a security immediately at the best current price possible.
See also limit order.
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.
MERSee management expense ratio. defined contribution pension plans on our Company Pensions page
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.
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.
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 What expenses are included as motor vehicle expenses? on the Small Business page.
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).
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.
Naked call option
Naked put option
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 capital lossSee capital gain or loss.
The part of income remaining after all expenses and taxes have been paid. Also called net profit.Net assets less intangible assets.
When shares of a corporation have no stated face value, they are said to be no par value shares.
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.dividend does not accrue or accumulate if unpaid.
A non-refundable tax credit can only be used to reduce federal or provincial/territorial taxes to zero. It will not generate a payment from the government if no taxes are payable. See:
The tax rate used to calculate non-refundable tax credit is the lowest federal tax rate, and for provincial/territorial tax credits is the lowest provincial/territorial tax rate, except for Quebec. Quebec residents calculate their non-refundable tax credits at a rate of 20%.
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.
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.
An open order is an order to buy or sell stock, which has not yet been filled.
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.
Shares that a company has sold and issued to shareholders, also called "issued" shares.
An OTC security is any equity security which is not listed on the major stock exchanges.
OTC securities are not qualified investments for RRSPs.
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.
The par value is the stated face value of a stock or bond.
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.
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.
Pay yourself firstSee our Pay Yourself First article.
A stock which sells for less than a dollar, and is considered to be speculative.
See also capital stock.
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.
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.
Market value per share divided by book value per share
Market value per share divided by annual cashflow per share
Market value per share divided by annual net income per share
Market value per share divided by annual free cashflow per share
Market value per share divided by annual sales per share, or total market cap divided by total annual sales.
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.structured products. principal residence exemption.
In proportion to. A pro rata refund for a partially fulfilled contract would be for the proportion of the contract which is unfulfilled.
A written promise to repay an unsecured loan.
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.
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.
Put options - see Call Options and Put Options
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.bid/ask.
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.
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.
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.
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.
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.
The amount of sales, rental, interest and other income earned by a business. The revenue of a business is reported on the income statement.
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.
For tax purposes, income from self-employment includes
On the personal income tax return (T1), the above types of income are reported on lines 135 to 143. Canada Pension Plan (CPP) premiums must be paid on net self-employment income The self-employed person pays both the employee and employer portions of the CPP premiums.
Rental income may be classed as property income or as business income, depending mainly on the number and level of services provided in conjunction with the rentals. When it is classed as property income, it is entered line 126 of the T1 personal tax return.
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 call and put options and mutual funds it is normally one 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.stock
A shareholder owns stock (shares) in a corporation. The shareholders are the owners of a corporation.
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.
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".
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.
See $750,000 capital gains deduction on the Small Business page.
Income Tax Act s. 248(1)
A specified shareholder of a corporation is a person who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation. As well, a taxpayer is deemed to own each share of the capital stock of a corporation owned by a person with whom the taxpayer does not deal at arm's length. See also personal services business.
One who will take on additional risk in order to increase returns.
The difference between bid and ask prices.
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.
A dividend paid in the form of shares or partial shares of the paying corporation.
A stock exchange is an organization which is in the business of providing securities trading services.
Stock indexSee index.
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.
An instruction to a broker to sell a stock if it falls to a specified price.
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.
More caution should be used if the structured product is sold without a prospectus.
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.
The target overnight rate is the key Bank of Canada policy 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.
Analysis of stocks and markets based on historical trends, in order to predict which trends will continue into the future.
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.
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.
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.
If a country imports more goods and services than it exports, it has a trade deficit.
If a country exports more goods and services than it imports, it has a trade surplus.
A person who buys and sells stocks looking for short term profits.
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.
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:
The capital gain or loss is calculated as:
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.
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.
An individual or other entity who holds or manages assets for the benefit of others. Examples are Trust Companies, trustees of income trusts, and executors of wills.
Uncovered call option
Uncovered put option
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.
The distribution of shares or debt of a government or company to investors.
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.
The right to purchase shares from the issuing entity, at a set price, usually for a specified period of time.
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.
To learn more about wash trades, see Reduce your foreign exchange costs inside registered accounts by washing trades, on our Stocks and Bonds page.
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.
Also called current ratio, this is the current assets divided by the current liabilities.
This is a percentage which reflects the annual return on an investment. See dividend yield.[back to top]
Revised: May 31, 2021
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