Adjusted Cost Base - The amount needed when calculating your capital gains or losses. The amount includes commissions and other current tax considerations.
Alternative Minimum Tax (AMT) - A tax levied under personal income tax to ensure that high-income Canadians claiming preferential tax deductions or credits pay a reasonable amount of tax in any given year. A taxpayer who is subject to the AMT must add back to his or her taxable income a number of tax deductions otherwise allowed, such as the non-taxable portion of capital gains. A taxpayer who is subject to the AMT also cannot claim many of thetax credits otherwise permitted, such as the federal political tax credit and the investment tax credit. A taxpayer must pay the higher of either the regular income tax or the AMT.
Annuity - A series of regular periodic payments comprising principal and interest. An annuity is a contract providing for a series of payments. In the case of retirement, an annuity is usually purchased from an insurance company who then pays the purchaser a monthly amount while still alive. Annuities may have more complicated features such as indexing, guarantee periods and benefits payable to a spouse or other beneficiary after death.
When an individual purchases an annuity, they usually pay a lump sum from their RRSP, or other source of funds, to an insurer. The insurer then takes this (premium) and divides by an annuity factor based on mortality, current interest rates and payment features.
Back-end Load - A sales charge levied when mutual fund units are redeemed.
Bid & Asked Prices - A bid is the price someone is willing to pay for a security; an asked price is the price at which someone is willing to sell the security. A bid is lower than an asked, or else the security would be traded at a mutually agreeable price.
Bonds (callable) - Callable bonds also known as redeemable bonds, they give the issuer the right to pay off - or call - the outstanding debt after a specified date. This allows the corporation to retire high-interest debt when rates drop and borrow elsewhere. Investors are often paid a premium when bonds are called in recognition of the fact they are being deprived of future income.
Bonds (convertible) - Bonds that can be exchanged for a company's common shares. Convertible bonds combine the security of bonds with the opportunity to make gains from the appreciation of common stock.
Bonds (foreign pay) - Some bonds issued by Canadian institutions are denominated in foreign currencies. Foreign-pay bonds are used to raise money in international markets. For example, bonds denominated in yen will appeal to Japanese investors, and those in U.S. funds will appeal to Americans - or they may be bought by Canadians investors seeking exposure to foreign currencies.
Bonds (zero coupon) - Issued without interest coupons. They are sold at a discount to face value, with the difference between the selling price and the face value representing the investor's return.
Bond Yield - The return on a bond, based partly on the income received over the term of the bond, and partly on the principal repayments.
Break-up Value - The estimated value of a business +/- after its divisions have separated, and liabilities paid off.
Call Option - The owner of a call option has the privilege for a specified period of time of buying a particular investment security at a pre-arranged price from the person who first sold the option.
Capital Cost Allowance - A taxation term. Equivalent to depreciation, that makes allowance for the wearing away of a fixed asset.
Cash Surrender Value - The amount of cash a person may obtain by voluntarily surrendering a life insurance policy.
Cash-Value Life Insurance - Combines basic life insurance protection with tax-deferred investing. The larger portion of your annual premium pays for insurance, while a smaller amount goes into the policy's investment or cash-value account. Your investment earnings accumulate free of taxes until you withdraw them, it may take10 years or more for the tax-deferral benefits to overcome the drag of the commissions charged by insurers.
Closed-End Fund - A fund company that issues a fixed number of shares. Its shares are not redeemable, but are bought and sold on the stock exchange or the over-the-counter market.
Convertible Bond - A bond issued by a corporation that can be converted into a pre-arranged number of shares of stock by a specified date or set of dates or under defined circumstances.
Coupon Rate - The interest rate payable to the bond holders. Bond Interest is usually paid on a semi-annual basis.
Coupon vs. Yield - The coupon on a bond is literally the portion of a certificate that is clipped (detached) and presented for payment when interest is due but the coupon also is used as a term for the rate of interest a bond pays. Yield is the current return on a bond in the market. As market conditions change, yield on the bonds rise or fall. If a bond is bought at par, then the yield and the coupon rate are the same. But if the yield falls, the price of the bond must rise. And rising yields mean falling prices.
Critical Illness Insurance - A form of health insurance that provides payments to replace income when an insured person is unable to work as a result of a critical illness.
Debenture - Debentures are similar to bonds, but typically not secured by the pledge of specific corporate assets. They may, however, be secured by a "floating charge" on the issuer's assets.
Deemed Disposition - Is when CRA deems that you have disposed of all your assets on your death and that any capital gains would be then deemed realized and tax would therefore be due.
Deferred Profit Sharing Plan - A plan that allows an employer to set aside a portion of company profits for the benefit of employees. A corporation makes a contribution to the plan on behalf of an employee.
Deferred Sales Charge (DSC) - An amount paid by the investor at the time of redemption of a mutual fund. The percentage used to calculate the amount decreases the longer the investor holds the shares or units, eventually reducing the amount to zero.
Defined Benefit Pension Plan - A defined benefit pension plan is a pension plan, generally sponsored by an employer, that promises to pay a certain benefit at retirement. Most (DB) plans have a benefit based on a flat amount ($20 per year of service), on career earnings or on final earnings. These plans may be contributory or non-contributory.
Defined Contribution Plan - A pension plan under which employer and employee contributions are fixed and the pension is based on these contributions.
Disability Tax Credit - A credit that reduces federal income tax by up to $960 for taxpayers with a severe and prolonged physical or mental disability. It is one of the key existing tax mechanisms for recognizing the costs of disability.
Dividend Tax Credit - An income tax credit available to investors who earn dividend income through investment in shares of Canadian corporations.
Exchange Traded Funds (ETFs) - Exchange Traded Funds are funds that are based on a specific market index or sector, but trade on the stock exchange like any company share. Unlike regular open-end mutual funds, ETFs can be bought and sold at any point in the trading day. They can be sold short and bought on margin, so they behave more like a stock than a traditional mutual fund.
Extendable & Retractable - An extendable bond gives the holder the right to exchange the bond for a longer-term bond at the same or a higher rate of interest. A retractable bond allows the investor to redeem the bond at par earlier than the original term, For example, a 10-year could be redeemed in 5 years.
Family Trust - An inter vivos trust established with family members as beneficiaries.
Fixed Income Fund - A fund whose assets are invested in preferred shares, bonds and mortgages.
Flow-Through Shares - A share that entitles its owner to claim certain deductions or credits that would otherwise only be available to the company. These deductions or credits are “flowed through” to the investors, as if the investor had directly been involved in specific company activities. These shares make sense where the investor will realize a larger benefit from the deduction and credits than the company would.
Futures - A contract traded on a recognized exchange in which the seller agrees to deliver a specified commodity or financial instrument at a future date at a specified settlement price. A risk in the futures market is that the seller must pay the price of the underlying security on settlement date, which may be substantially greater than the price on the date on which the contract was sold.
Futures are traded on a wide range of farm products, all the basic industrial metals, financial markets indexes and on several common interest-sensitive instruments, such as benchmark bonds, bankers acceptances notes and treasury bills.
Grossed-Up Dividend - Dividends paid by a Canadian corporation to an individual are increased by one-third in calculating income for tax purposes. Individuals are then allowed a 20% dividend tax credit on the grossed-up dividend against total taxes payable. If you receive a cash dividend of $750, it will be grossed up to $1000, and you will receive a $200 reduction in your federal tax and $50 to $80 in provincial tax payable.
Guaranteed Income Supplement - The amount payable to low income earners who are recipients of the OAS.
Hedge - As an example transaction by a consumer or producer of a metal designed to protect him against price fluctuations. A consumer of platinum, for instance, may "hedge" against a possible price increase by buying enough metal to cover his needs in the form of a futures contract. Futures markets were originally foe hedges, as opposed to speculators, by whom the market is now used predominantly.
Hedge Fund - Private investment fund organized to pursue an investment strategy involving uniquely risky investments such as short selling and naked options writing. Also may refer to a private or public investment fund whose objective to invest in securities that would potentially profit from a general decline in the stock market, thus offering a "hedge" or insurance for investors who have significant exposure to declines from their investment portfolios.
High-Ratio Mortgage - A conventional mortgage loan which exceeds 75% of the appraised value or purchase price of the property. This mortgage must be insured.
Income Averaging Annuity - A special type of annuity to spread the impact of income tax on certain types of taxable lump sum receipts.
Income Trust - An income trust is an entity created to pay out the cash flow generated by a business in the form of cash distributions to unitholders.
Most income trusts are based on businesses that are stable, relatively mature, and have a generous and predictable cash flow. These traits allow much of the cash flow generated by the business to be distributed rather than reinvested.
Also attractive is the tax efficiency of income trusts. Income trusts do not pay corporate tax, thanks to a loophole in Canada's tax laws. Distributions from income trusts are taxed differently from dividends. Also, a portion of the distribution is often treated as a Return of Capital, and the taxes on this portion are therefore deferred. This deferral can reduce the unitholder's adjusted cost base and the amount of capital gains he or she pays when selling the units.
As with all investments, income trusts are not without risk. Although unlikely, the tax loophole could one day be eliminated. The distributions are not guaranteed and may be cut at any time. Even if distributions are maintained, the gains made from the distributions may be wiped out by a falling share price. And not all income trusts are created equal. Make sure you understand the underlying business well before you invest.
Index-Linked GIC - A Guaranteed Investment certificate that pays no interest but the return on the investment is linked to the stock market. Some link the return to the TSE 35 or TSE 100. The final return is the index gain plus averaging in the final year.
Informal Trust - Also known as in-trust account or "bare" trust, this is an investment account registered in an adult's name in trust for a child. The account is used to save/invest funds for a child, and the funds must be reserved for and used by the beneficiary child.
Inter Vivos - From the Latin for "between living persons," usually refers to a trust established during the lifetime of the person setting up the trust (the "settlor"), as opposed to a "testamentary" trust in a will which takes effect only at death.
Inter Vivos Trust - A trust created while the person making the trust is still alive.
Joint and Last Survivor - 1) A type of annuity that pays benefits until both annuitant and the annuitant's spouse die.
2) The Banking industry will register a Guaranteed Investment Certificate with the same type of effect, the certificate is with the words "JTWRS" (Joint Tenants With Rights to Survivor) allows the full ownership to be transferred to the other registered person named on the note.
Joint Tenants with Right of Survivorship - A type of account registration on a GIC, term deposit or joint bank account. On the death of one account holder, ownership of the account assets is transferred to the remaining holder or holders.
Junk Bond – A bond which pays an unusually high rate of return to compensate for a low credit rating.
Key-person Insurance - Special insurance available on the lives of the principle active shareholders or managers/or offices in a company, also used to fund buy-sell agreements.
Know Your Client Rule (KYC) - The rule that recognizes the fiduciary duty of the investment advisor to understand the client's investment objectives and make appropriate recommendations for investments.
Labour Sponsored Venture Capital Corporation (LSVCC) - A fund sponsored by a labour organization in which individuals pool their money to invest in small businesses. Individuals who invest in the shares of an LSVCC receive a 15-per-cent federal tax credit based on the cost of acquiring these shares, up to a maximum credit of $750. LSVCC shares are qualified investments for registered retirement savings plans.
Ladder Approach - A method involving purchase of several investments, each with a different maturity date, to reduce inflation, interest rate risk and default risk for fixed income investment.
Life Annuity - An annuity under which payments are guaranteed for the life of the annuitant.
Life Annuity (With a Guaranteed Term) - An annuity with a special clause that guarantees payments will continue for a specified period, even if the annuitant dies before the end of the term.
Life Income Fund (LIF) - A RRIF that receives funds from a locked-in retirement account that provides a life income by restricting the maximum withdrawals from the plan based on the equivalent payments from an annuity.
Living Will - If you become incapacitated this document will preserve your wishes and act as your voice in medical decisions, if you are unable to speak for yourself as a result of medical reasons.
Management Expense Ratio (MER) - A measure of the total costs of operating a mutual fund as a percentage of average total assets.
Management Fee - The sum paid to the investment company's advisor or manager for supervising its portfolio and administering its operations.
Market Value - The highest price that a buyer would pay and the lowest price the seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
Money Laundering - Methods by which the proceeds of crime are processed through the financial system and converted into "clean money," which cannot be traced to the person originating the transaction or to the criminal origins of the funds.
Money Market Fund - Mutual fund that invests solely in money market instruments.
Money Supply - M1: Money supply measured as the amount of demand deposits plus currency in circulation.
M2: M1 plus small-denomination savings and time deposits at commercial banks.
M3: M2 plus deposits at non-bank savings institutions.
M4: M2 plus large-denomination CDs.
M5: M3 plus large-denomination CDs.
Net Asset Value per Share - The market value of a share or unit of a mutual fund. It is the total assets of a fund minus its liabilities, and divided by the number of units outstanding.
Par Value - The principal amount, or value at maturity, of a debt obligation. It's also known as denomination or face value. Preferred shares may also have a par value, which indicates the value of assets each share would be entitled to if the company were liquidated.
Pension Adjustment (PA) - A pension adjustment is the deemed value, for tax purposes, of benefits accruing to members of a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP). The PA is used to reduce RRSP contribution room, as it is deemed to represent the value of the benefit that you are accruing under another tax deferral plan. In general the PA is calculated as 9 times the benefit accruing under an RPP or DPSP less $1,000.
As an example, say I earned $40,000 last year. This year I would be able to contribute $7,200 to my RRSP. However, last year I was in my employer's registered pension plan. Under the plan I accrue, or earn, a benefit of 1.5% of my salary. The value of the benefit I earn is therefore $600 for the year and the PA is $4,400. The PA reduces my available RRSP room, so instead of $7,200 of room I can only contribute up to $2,800.
The PA system is an attempt to equalize tax deferred savings programs in Canada so members of a company sponsored RPP don't have any advantage by accruing benefits in the plan and also being able to contribute the same amount to their RRSP as someone who is not in an RPP.
Pension Income Deduction - The first $1,000 of pension income from certain sources is deductible from one's income for tax purposes. Applies to income from a pension or superannuation fund at any age, and where income is obtained from "private" sources, RRSP from age 65.
Present Value - The value today of something (usually money) to be delivered in the future. This recognizes that interest and certain contingencies make a dollar in the future worth less than a dollar today.
Price-Earnings Ratio - The price of a stock divided by the profit the company makes per share. A $10 stock of a company that is earning the equivalent of $1 for each of its shares has a ratio of ten. Also known as the PE multiple. It's a measure of whether a stock is cheap or expensive.
Probate - The process used to make an orderly distribution and transfer of property from the deceased to a group of beneficiaries. The probate process is characterized by court supervision of property transfer, filing of claims against the estate by creditors and publication of a last will and testament.
Real Estate Investment Trust (REIT) - A closed-end investment company that specializes in real estate or mortgage investments.
Real Estate Investment Trusts issue shares that trade on stock exchanges like shares of common stock. There are two types of REITs:
Mortgage REITs invest primarily in real estate debt such as mortgages.
Equity REITs primarily own real estate, such as shopping centers, apartments and industrial buildings.
Some trusts are a combination of the two and are called Hybrid REITs
Real Return Bonds - The Canadian federal government issues 30-year bonds with interest rates that are adjusted to account for inflation. The base rate is adjusted according to a formula based on the consumer price index.
RESP - Registered Educational Savings Plan. A savings plan designed to help an individual save for the purpose of providing for university education. Receipt of the income is treated on a preferred basis if used for specified university purposes.
Retiring Allowance - The amount money in a lump sum or in equal payments that is received by an employee upon retirement or upon the death of his or her spouse.
Retiring Allowance Rollover - A retiring allowance rollover can be transferred to a registered retirement savings plan (RRSP) to defer tax. This is in addition to the normal limits for RRSP contributions. A portion of a retiring allowance may be transferred to an RRSP. An individual may transfer up to $2,000 for each year of service before 1996 plus up to $1,500 for each year of service before 1989 in which no pension or deferred profit-sharing planbenefits were earned. The 1995 budget eliminated the rollover for years of service after 1995 given the maturation of pension plans and the ability to carry forward unused RRSP limits.
Reverse Mortgage - Reverse mortgages allow individuals with significant equity in their homes to use it as a source of income. Individuals receive either a lump sum or a series of payments and use their residence as collateral. The principle and interest is repaid from the estate upon death or sale of the home. Reverse Mortgages are currently available to residents of British Columbia and Ontario. The amount of equity ranges from 15% to 45%.
Registered Life Income Plan (LIF) - LIFs are also locked like RRIFs. They operate identically to a RRIF but must be converted to annuities by the end of the calendar year in which the individual turns 80. There is also legislation for maximum withdrawals from LIFs.
Registered Retirement Income Fund (RRIF) - A registered retirement income fund (RRIF) is an investment vehicle used to produce income in retirement. Generally RRIFs are established by transferring money from an RRSP into the RRIF. Payments must then commence from the RRIF at the latest in the year following the year the RRIF is established. RRIF withdrawals are subject to minimum amounts prescribed by Canada Customs and Revenue Agency (CCRA). You may withdraw amounts above the minimum amounts at any time. The RRIF continues as a tax sheltered vehicle and investment income accumulates tax free. All withdrawals are subject to income tax.
Minimum withdrawal amounts are based on age in whole numbers at the start of the year and the RRIF fund value at the start of the year.
The percentages for RRIFs established after 1992 for ages over 70 are prescribed by CCRA. For ages under 71 and RRIFs established prior to 1993 (for ages up to 78) the formula for the minimum withdrawal is 1 divided by 90 minus current age.
There are also locked in RRIFs or LIFs which operate identically to a RRIF but must be converted to annuities by the end of the calendar year in which the individual turns 80. There is also legislation for maximum withdrawals from LIFs.
Rider - A clause or a condition in an insurance policy which may restrict, add to or more specifically define applicable coverage.
Royalty Trusts - An investment trust that gets income from royalties. The most common form of income is from owning a stake in an oil or gas well.
Royalty trusts have many features in common with REITs.
RPP - Registered Pension Plan. A government approved pension plan which allows both employee and employer to contribute to save for retirement.
RSP Carry-forward - Starting in 1991, if you don't make your full RRSP contribution each year, you can "bank" it for use in later years.
RSP Contribution Room / Limit - Your total tax-sheltered retirement savings limit for a given year has two parts: the pension adjustment and your RRSP. The pension adjustment (see below) puts a value on your employer sponsored plan, if any. The better the plan, the lower your personal RRSP limit, or RRSP contribution room.
RSP Deferred Profit Sharing Plan (DPSP) - One form of tax-sheltered employer-sponsored savings plan. The employer must make at least a minimum contribution when there are profits to support it. You may generally make cash withdrawals when you quit or retire. How much you receive depends on how much the employer contributes and how well that money is invested.
RSP Registered Pension Plan (Defined Benefit) - Defined-benefit plans cover more people than any other form of RPP. The employer promises to fund a pension based on a set formula - for example: 1.5% of average salary for the final three years of service. Because these credits represent future income, not current contributions, their PA calculation can be complex.
RSP Registered Pension Plan (Defined Contribution) - Also known as a money-purchase plan. The employer promises to contribute a set amount each year, but your pension amount isn't guaranteed, It will depend on how well the fund is invested and on interest rates at the time you retire.
Segregated Fund - A pooled investment fund, much like a mutual fund, that is established by an insurance company and segregated from the general capital of the company. Its chief distinction from a mutual fund is its guarantee that, regardless of fund performance, at least a minimum percentage of the investor's payments into the fund will be returned when the fund matures. The Insurance Companies Act governs segregated funds.
Spousal RRSP - An RRSP where one spouse makes the contributions and claims the tax deductions, but where title to the plan proceeds is in the name of the other spouse.
Stock Linked GICs - A type of debt security sold to individuals by banks and trust companies. The principal investment is guaranteed by CDIC. Any return is NOT. The return on the investment is subject to how well the stock market performs and if linked to an index (E.g., TSE-500) how it performs.
Stock Options - Rights to purchase a corporation's stock at a specified price.
Stop-Loss Order - This is when you tell your broker to sell the stock if it drops to a certain price.
Strip Bonds - The capital portion of a bond from which the coupons have been stripped (removed). The holder of a strip bond is entitled to its par value at maturity. But not the annual interest payments.
Systematic Withdrawal Plan - Plans offered by financial institutions allowing the investor to receive payments from their investment at regular intervals.
Tax Deferred Annuity - A tax-deferred annuity is a type of investment that guarantees payment of specific amounts of money at specific times, or a single lump sum payment. It also allows for the postponement (but not eliminate) taxes on earnings. You only pay tax when you receive money from the annuity.
Tax Deferred Savings - An RRSP is an example of a tax-deferred savings plan (but don't eliminate). Unlike taxable savings, the taxes on the interest, dividends and capital gains of the tax-deferred savings are postponed until you cash them in or draw income from converting the RRSP into an RIF or other type of income withdrawal plan.
Taxable Income - Includes income from all sources, before deduction.
Term Insurance - Life insurance which pays if death occurs within a stated period of time. There is not usually a cash value under a term insurance policy.
This is pure life insurance. You choose the number of years (the term) you are insured and the amount your survivors get if you die within that term. The term you choose can be for a given number of years, for example 10 or 20, or up to a certain age, for example 65 or 100. The main features of term-to-100 policy are: 1. Fixed premiums, 2. Fixed death benefits, 3. No cash value.
Testamentary Trust - A trust created under the terms of a will and takes effect on the death of the testator.
Universal Life Insurance - Universal life insurance (like whole life insurance) provides coverage for your entire life and builds up savings over time. Unlike whole life, you can use the interest from your accumulated savings to help pay your premiums, which are flexible. The people you name as beneficiaries collect a death benefit if you die while covered.