Cross border Tax: US Canada

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Accounts payable

These are amounts owed by a business or an individual to their suppliers.

Accounts receivable

These are amounts owed to a business or an individual by their customers.

Accrual

An accrual is done at the end of an accounting period (usually monthly) to record costs which have been incurred but not paid for or previously recorded, and to record revenue which has been earned but not received or previously recorded.

Accrual basis accounting

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

Accrued Interest

Interest which has accumulated since the last interest payment date.

Accumulated depreciation

The total of all depreciation which has been written off over the years against fixed assets.

Accumulated income payment (AIP)

Accumulated income payments (AIP) may be made, under certain conditions, when the beneficiary to an RESP does not pursue post-secondary education. An AIP is a payment from a Registered Education Savings Plan (RESP) to a subscriber of the plan, and is made from the earnings portion of the RESP. These payments may only be made under certain circumstances, and are subject to regular income tax and an additional 20% tax. Up to $50,000 of AIPs can be transferred directly to the subscriber's RRSP if sufficient contribution room exists, thus avoiding both taxes.

Accumulated Income Payments (AIP) can only be made if each beneficiary for whom contributions were made under the RESP
    a. has reached 21 years of age and is not eligible to receive educational assistance payments; or
    b. has died, and
the RESP has existed for at least 10 years.  There are also other conditions

Active business Income

The first $300,000 (for 2005, federally) of active business income of a Canadian controlled private corporation, or CCPC, is taxed at lower rates. The tax reduction is called the small business deduction. Income from most businesses qualifies as active business income. However, active business income does not include investment income, income from a specified investment business, or income from a personal services business. Investment income, which is excluded from active business income, includes taxable capital gains less allowable capital losses, property income less property losses, and foreign business income. ITA 125(7)

The May 2006 federal budget proposes to increase the amount of income eligible for the lower tax rate to $400,000, effective January 1, 2007.

Adjusted cost base (ACB)

Adjusted cost base (ACB) includes the original purchase price, and all costs related to the purchase of an item.
The adjusted cost base of an investment in securities would include the purchase price, as well as any commission paid. See also cost basis.
The adjusted cost base of an interest-paying investment such as a bond would not include any amount paid for interest accrued since the last interest payment date.
The adjusted cost base of a fixed asset such as machinery or equipment would include installation costs, customs brokerage and legal fees, and any other costs expended to get the asset into operation.
The adjusted cost base of a rental property would include any repairs or renovations that cannot be expensed for tax purposes. Examples of this type of repair would be a new roof, new appliances, etc.
There may be costs related to any fixed asset (for instance, major repairs that extend the life of the asset) that must be added to the adjusted cost base instead of being expensed.

Allowable business investment loss (ABIL)

An allowable business investment loss (ABIL):

	is 50% of a business investment loss
	is treated differently from allowable capital losses in that it can be used to reduce all sources of income
	can be carried back or carried forward as a non-capital loss. See the glossary item non-capital loss for carry-back and carry-forward periods.
	if unused after 10 years can then be treated as a net capital loss and carried forward indefinitely to be deducted against taxable capital gains

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

Amortization

Amortization is the gradual expensing of an asset over a number of years, instead of expensing it in the year of purchase. Usually relates to intangible assets such as goodwill. Depreciation is the term used for amortization of a fixed asset.

Amortization is also the term used when a loan is being repaid over time. The amortization schedule is a document which shows the payment dates, payment amount, interest and principal portion of each payment, and the balance of the loan after each payment, until the balance reaches zero.

Annual report

Public corporations must make available to their shareholders a yearly report which includes the financial statements of the corporation.

Arbitrage

The simultaneous purchase of a security on one stock exchange and sale of the same security on another stock exchange, often in a different country. This is done to make a profit from the difference in prices between the two stock exchanges, due to different prices, and currency fluctuations. The person doing the simultaneous purchase and sale is called an arbitrageur.

Arm's length

Two people, or entities, are said to be dealing at arm's length with each other if they are independent, and one does not have undue influence over the other. However, the Income Tax Act deems some people NOT to be at arm's length with each other (non-arm's length). This is the case with "related persons", who are "individuals connected by blood relationship, marriage or common-law partnership or adoption". Blood relationships do not normally include aunts, uncles, nieces, nephews, or cousins for purposes of the Income Tax Act.

"Related persons" also include a corporation and
     i.   a person who controls the corporation, if it is controlled by one person
     ii. a person who is a member of a related group that controls the corporation, or
     iii. any person related to a person described in (i) or (ii).

Two corporations can also be "related persons".

Generally, a corporation is controlled by a person or a related group if the person or related group owns enough shares to have the majority of the votes in the election of the board of directors. However, there are many situations where there is "deemed" control.

CRA's interpretation bulletin IT- 419 provides a much more detailed description of the meaning of arm's length. See also IT-64, Corporations: Association and Control.

Income Tax Act s. 251(1), s. 251(2)

Arrears

Amounts owed that were not paid when due.

Articles of incorporation

Every corporation has articles of incorporation, a document prepared by the people creating the corporation. This document sets out the structure and purpose of the corporation, and specifies rules that the corporation must follow regarding issuing or transferring shares, electing officers, conducting general meetings, voting of members, borrowing funds, paying dividends, and other corporate functions.

Ask/bid

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

Assets

Assets are items owned by or owed to a company or individual, such as cash and investments, inventories, prepaid expenses, accounts receivable, fixed assets (land, buildings, machinery and equipment), and intangible assets (goodwill, intellectual property, etc.). Assets are generally shown at cost on a balance sheet. Fixed assets and intangible assets are shown at book value (cost less accumulated depreciation or amortization). Land is a fixed asset which is not depreciated.

Automobile

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:
    -ambulances,
    -clearly marked emergency-response vehicles used in the course of an individual's employment with a fire department or the police,
    -a motor vehicle acquired primarily for use as a taxi,
    -a bus used in the business of transporting passengers,
    -a hearse used in a funeral business, as well as
    -the vehicles described as motor vehicles in the CRA chart of vehicle definitions on the Small Business page.

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.

Averaging down

Averaging down is when you purchase a security that you already own, for less than the price you originally paid. This lowers your average cost.

Tax tip: Pay down all non-tax-deductible debt with over 8% interest, then see our Save and Invest page.

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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.

See also street name.

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:

	shares of a small business corporation (SBC), or
	debt owed to the taxpayer by a Canadian controlled private corporation (CCPC)

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.

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Call option

A call is an option which gives the holder (buyer) the right to buy a specified number of shares of a certain stock at a specified price (strike price) on or before a specified date (expiry date). 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.

When a person sells a call they are obligated to sell the shares at the strike price, on or before expiry date, at the option of the holder.

See also option, put option and in the money.

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.

When the shares of a qualifying CCPC are sold, the shareholder(s) may avoid capital gains tax by utilizing all or part of the $500,000 lifetime capital gains exemption. This exemption has been increased to $750,000 by the 2007 Federal budget.

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

Gain or loss resulting from the sale of a capital asset, such as stocks, bonds, art, stamp collections, and real estate.

A taxable capital gain is 50% of a capital gain. Because only 50% of the gain is taxable, less tax is paid on capital gains than on income such as interest.

See Reduce capital gains taxes by donating capital property on our Filing Your Return page.

An allowable capital loss is 50% of a capital loss. It can only be used to reduce or eliminate taxable capital gains, except in the year of a taxpayer's death or the immediately preceding year, when it can be used to reduce other income.

See Try to earn your investment income (outside of RRSPs) at the lowest tax rate possible on our Personal Income Tax page, as well as the article on Capital Losses on our Filing Your Return page.

See the Canada Revenue Agency Capital Gains Guide T4037 for more information.

See also Business investment loss on the Small Business page.

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.

Cashflow

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

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.

See our Statistics page for more information on the function of the Bank of Canada.

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.

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

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.

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

A group of individuals.

Conglomerate

A conglomerate is a company which operates in multiple industries.

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.

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.

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.

The CNIL is used in the calculation of the $500,000 capital gains deduction available on the sale of qualified capital property.

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

A cyclical stock is one which tends to have greater price fluctuations over an economic cycle. Manufacturing and resources tend to be cyclical sectors.

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Day order

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

Debenture

A debenture is a type of unsecured bond issued by a corporation.

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 an RRSP. In this case, the deemed proceeds will be the market value of the securities at the time of transfer to the RRSP. Note that if a loss has occurred in the transfer to an RRSP, it will be considered a superficial loss, and will not be deductible for tax purposes.
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.
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.

Deferred life annuity

See 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, which has happened in recent years.

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.

For more information see our Company Pensions page.

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.

For more information see our Company Pensions page.

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.
Example: machinery with an estimated useful life of 5 years, original cost $50,000
Double declining balance depreciation amount, using 40% depreciation rate:

Year	Depreciation Expense	Accumulated Depreciation	Book Value
0			$50,000
1	50,000 x 40% = 20,000	20,000	30,000
2	30,000 x 40% = 12,000	32,000	18,000
3	18,000 x 40% = 7,200	39,200	10,800
4	10,800 x 40% = 4,320	43,520	6,480
5	6,480 x 40% = 2,592	46,112	3,888

This continues each year, and of course the book value never gets to zero.

When fixed assets are depreciated for tax purposes, the depreciation is called capital cost allowance (CCA), and the method of depreciation is usually declining balance, using a rate designated by the Income Tax Act and Regulations.

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:

	public corporations resident in Canada
	other corporations resident in Canada that are not Canadian-controlled private corporations (CCPCs) and are subject to the general corporate tax rate
	CCPCs resident in Canada to the extent that their income (other than investment income, which is eligible for a special refundable tax) is subject to tax at the general corporate tax rate

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

	18.97% of the taxable (grossed-up) dividend, or
	27.5% of the actual dividend

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.

See the page on federal and provincial dividend tax credit rates for regular dividend tax credit rates and enhanced dividend tax credit rates.

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.

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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.

Employment Income

Employment income, which is usually reported on a T4 slip, includes:

	salary
	wages
	tips
	bonuses
	commissions
	honoraria (generally paid in relation to an academic activity)

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

	tips or occasional employment earnings not included on a T4
	employment income from another country
	net research grants
	cleric's housing allowance
	income from wage-loss replacement insurance plans
	GST/HST and QST rebates received regarding employment expenses
	royalties from a work or invention, if there are no associated expenses. If there are associated expenses, the net income is reported as self-employment income
	amounts received under a guaranteed annual wage plan
	taxable benefit for group life insurance premiums paid by your former employer
	amounts received from an employee profit-sharing plan

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.

The May 2006 federal budget proposes an employment tax credit on up to $250 of employment income for 2006 (x 15.25%), and up to $1,000 for 2007 (x 15.5%).

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.

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.

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 whose goal is to achieve the same return as a stock index. The MER, or management expense ratio for ETFs is 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 Depository Receipts, also know as Spiders), iShares (Canadian and US), Diamonds, and others.

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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

Analysis of a company and its financial strength, in order to determine its value. Fundamental analysis is used by value investors.

Futures

Contract to buy or sell a product at a fixed price on a specified date, usually traded on futures exchanges.

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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 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.

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)

See structured products.

Principal residence exemption

This exemption partially or completely eliminates any capital gain resulting from the disposition of a person's principal residence. A taxpayer and their spouse together may only designate one principal residence between them for each taxation year.

CRA usually considers that if there is more than 1/2 hectare (1.25 acres) of property, only 1/2 hectare of the land can be considered part of the principal residence, and there would be a capital gain on the excess when the property is sold, even if the rest is the principal residence. However, they also consider whether the property is subdividable. Thus, if the property is 2 hectares, and is not subdividable, they may consider the whole amount of the land to be part of the principal residence.

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.

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

A put is an option which gives the holder (buyer) the right to sell a specified number of shares of a certain stock at a specified price (strike price) on or before a specified date (expiry date). A put is purchased by a person who believes that the share price may be lower than the strike price on expiry date. A put is sold by a person who believes that the share price will be higher than the strike price on expiry date.

When a person sells a put, they are obligated to buy the shares at the strike price on or before the expiry date, at the holder's option.

See also call option, option and in the money.

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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

Same as bid/ask.

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:

original cost of an item	$15,000
sales proceeds of the item	$5,000
UCC of the CCA class beginning of year		$4,000
disposal (lower of $5,000 and $15,000)		($5,000)
balance of UCC after disposal		($1,000)
recapture		$1,000
final UCC		$ 0

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.

See our Company Pensions page for more information.

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.

For more information, see our RRSP/RRIF page.

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.

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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.

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.

See stock.

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.

See $500,000 capital gains deduction on the Small Business page.

Small business deduction

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 business limit for 2005 is $300,000. Income Tax Act s. 125, IT-73R6

The May 2006 federal budget proposes to increase the business limit to $400,000 effective January 1, 2007, and to reduce the current small business tax rate of 12% (2005) to 11.5% in 2008 and 11% in 2009.

Eligibility for the small business deduction also depends on the amount of the corporation's taxable capital.

For more information see the information on the small business deduction in the Canada Revenue Agency T2 Corporation Income Tax Guide.

The general corporate income tax rate (federal + provincial) varies from approximately 31% to 38% in 2005, depending on province. The reduced rate for CCPCs on the first $200,000 to $450,000 varies from approximately 14% to 21%, depending on province.

Specified investment business

A specified investment business is one 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

See 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

A strip bond is a bond that pays no interest. It is purchased at a discount from face value, and face value is paid upon maturity. See also coupon.

Structured products

A broad term including many financial products such as hedge funds, exchange traded funds, limited partnerships, and mutual funds, and are structured to achieve a certain objective.
Examples:

	principal protected notes (PPNs), which may guarantee the original invested amount, and they enable the investor to share in any gains in the financial vehicle to which they are attached, such as the TSX60, S&P500, Dow Jones, commodities, etc.
	tax-structured products for non-registered investment accounts, which provide the investor with income treated in a certain way for tax purposes, such as capital gains, dividends, return of capital.
	products structured for registered investment accounts, providing investment income that is not tax-efficient when earned in non-registered accounts, such as interest and foreign dividends.

More caution should be used if the structured product is sold without a prospectus.

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.

Surplus

Earned surplus is the same as retained earnings. See also contributed surplus.

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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 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:

	income from employment and commissions
	Old Age Security pension from T4A(OAS) slips
	Canada Pension Plan or Quebec Pension Plan benefits from T4A(P) slips
	other pensions or superannuation
	employment insurance and other benefits from T4E slips
	grossed-up Canadian dividends (see dividend tax credit in Glossary)
	interest and other investment income
	net income from partnerships (limited or non-active partners only)
	net rental income
	current year taxable capital gains in excess of current year allowable capital losses
	taxable support payments received
	RRSP income from T4RSP slips
	net income from self-employment (business, professional, commission, farming, and fishing)
	workers' compensation benefits from T5007 slip (this amount is deducted later)
	social assistance payments (this amount is deducted later)
	net federal supplements from T4A(OAS) slip (this amount is deducted later)
	Universal Child Care Benefit (UCCB) payments of $100 per month for each dependent child under 6 (claimed on the tax return of the lower income spouse)

Net Income:

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

registered pension plan deduction from T4 and T4A slips

RRSP deduction

Saskatchewan pension plan deduction

annual union, professional, or like dues

child care expenses

disability supports deduction

allowable business investment losses

moving expenses

deductible support payments

carrying charges and interest expense

deduction for CPP or QPP contributions on self-employment and other earnings

exploration and development expenses

other employment expenses

clergy residence deduction

other deductions

repayment of certain amounts (other than salary and wages) that you included in income in the current year or a previous year, such as OAS benefits

repayment of EI benefits (from box 30 of T4E slip)

deductible legal fees

depletion allowances - see CRA topic Line 224 - exploration and development expenses and depletion allowance

unused RRSP contributions refunded to you or your spouse in the current year (and included in Total Income) - see CRA forms

	T476 - calculating your deduction for refund of unused RRSP contributions, and
	T3012A - tax deduction waver on the refund of your unused RRSP contributions

excess registered pension plan transfers withdrawn from an RRSP or RRIF, and included in Total Income - see CRA form T1043 Deduction for Excess Registered Pension Plan Transfers You Withdrew From an RRSP or RRIF

capital cost allowance on a Canadian certified feature film or production as per T1-CP slip

social benefits repayment re OAS pension (clawback), employment insurance, or net federal supplements

Taxable Income:

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

Canadian Forces personnel and police deduction

employee home relocation loan deduction

security options deductions

allowable other payments deduction re workers' compensation benefits, social assistance payments, and net federal supplements

limited partnership losses of other years

non-capital losses of other years

net capital losses of other years

capital gains deduction

northern residents deductions

additional deductions:

	foreign income exempt under a tax treaty (if included in Total Income)
	15% of U.S. social security benefits included in Total Income as other pensions or superannuation
	vow of perpetual poverty - deduct earned income and pension benefits given to a religious order
	qualifying adult basic education tuition assistance, if included in Total Income, from box 21 of T4E slip
	net employment income from prescribed international organizations

The Net Income amount is often used in calculating eligibility for income-tested benefits. Certain non-taxable items such as workers' compensation benefits reduce eligibility for these benefits, as they are included in Net Income, and deducted later so that they are not included in Taxable Income.

Losses of other years reduce Taxable Income, but not Net Income, so are of no benefit when calculating eligibility for income-tested benefits.

Many non-refundable tax credits use the Net Income amount in their calculation.

The tax rates which are used to calculate income taxes can be found via the Tax Rates/Credits page.

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:

original cost of an item	$15,000
sales proceeds of the item	$5,000
UCC of the CCA class beginning of year		$8,000
disposal (lower of $5,000 and $15,000)		($5,000)
balance of UCC after disposal		$3,000
terminal loss		($3,000)
final UCC		$ 0

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:

proceeds	$19,975.00
less interest	$ 165.76
net proceeds	$19,809.24
adjusted cost base	$19.750.00
capital gain	$ 59.24

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

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.

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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.

Tax Glossary