Site Map


Book Reviews

For Advisors

Financial Planning


Mutual Funds

Estate Planning

Tax Planning

Contact Doug Hudson

Glossary If you can't find it here, try investorwords.com



Accrued income
Income that has been earned but not yet received. For example, if you buy a compounding Guaranteed Investment Certificate (GIC), interest accrues annually or semi-annually but is paid only at maturity, although it will be taxable each year.

Acquisition fee
A fee charged when you buy a mutual fund, generally expressed as a percentage of your purchase price. If you pay an acquisition fee, there are usually no charges when you sell your investment. Also called the front-end load, or sales charge.

A.M. Best
An organization that rates the financial stability of insurance companies. Also known as Best's Rating.

The gradual extinction of a debt over time. The payments are a blend of principle and interest, with the bulk of the early payments consisting of a higher percentage of interest and less principal. Towards the end of the loan, the opposite is the case.

A contract entered into with a life insurance company to purchase a steam of income payments, normally for a fixed period, such as 10 years, or life.

Assessment notice
The summary that you receive from Revenue Canada after you file your tax return. This tells you of any errors made on your return, how much tax you must pay, any refund owing, and how much you can contribute to your Registered Retirement Savings Plan (RRSP) for the current tax year.

Asset allocation
A term describing the proportion of a portfolio invested among the three main types of investments - cash or short-term equivalents such as Treasury bills (T-bills); longer-term interest-bearing securities such as bonds; and stocks or equities. Your asset allocation strategy depends on your investment objectives, age, time horizon, tolerance to risk, and other factors.

Attribution rules
Legislation under which interest, dividends, or capital gains earned on assets you transfer to your spouse will be treated as your own for tax purposes. Interest or dividends (but not capital gains) stemming from property transferred to children under 18 also will be attributed back to you. However, transfers to children 18 or older are exempt from the attribution rules.


Balanced fund
A mutual fund that invests in both equities and income-bearing securities. Balanced funds are designed to produce a mix of both capital gains and income, with less variability than equity funds normally exhibit.

Bank rate
The interest rate at which the Bank of Canada lends short-term funds to chartered banks. Based on current Treasury bill rates, the bank rate influences lending rates set by the chartered banks. If you follow interest rate movements, you'll notice that bank lending rates move up or down when the Bank of Canada rate changes significantly.

A person who benefits from the terms of a trust, a will, an RRSP or other deferred income plan, or an insurance policy.

Bond fund
A mutual fund that invests primarily in fixed-term debt securities such as government and corporate bonds. In addition to generating interest income, a bond fund may generate capital gains or losses as bond values increase or decrease in response to interest rate changes.


Canada Deposit Insurance Corporation (CDIC)
A federal Crown Corporation that insures certain deposits at member institutions for up to $60,000. The insurance applies to the institution, not to individual investments. Thus, if you have three GICs worth $50,000 each for a total of $150,000 at one bank, you are insured for only $60,000. If they are held at separate banks, each is covered for up to $60,000. However, RRSPs and jointly-held deposits have a separate $60,000 limit at each institution.

Canada Pension Plan (CPP) and Quebec Pension Plan (QPP)
A mandatory earnings-related pension plan contributed to by all working Canadians and their employers from age 18 to 70.

Canadian Bond Rating Service
An agency that rates the creditworthiness of debt securities of Canadian corporations and governments.

Capital gain/loss
A capital gain is the profit that results when you sell a capital asset for more than its cost. A capital loss arises when you sell for less than its cost. The costs associated with the purchase or sale will reduce your capital gain or increase your loss. Only three-quarters of a capital gain is included in income for tax purposes. Capital losses generally can be used only to offset capital gains, not other income.

The insurance industry equivalent of CDIC. This industry-funded organisation provides varying amounts of protection for different types of insurance company products.

Consumer Price Index (CPI)
An index published by Statistics Canada each month measuring changes in the cost of living, or inflation. It's based on the average cost of a "basket" of goods and services across the country. The most familiar CPI figure is the percentage increase (or decrease) over the past 12 months.


Disability insurance
Insurance that pays you an ongoing income if you become disabled and are unable to pursue employment or business activities. There are usually limits to how much you can receive, based on your pre-disability earnings. Most policies also have a waiting period before you can begin collecting benefits, typically 30 to 90 days.

Investing so that all your eggs are not in one basket. By spreading your investment among different regions (for example, Canada, Europe, and Asia), currencies, and types of securities (for example, both stocks and bonds), you cushion your portfolio against sudden swings in any one area. Mutual funds have become a popular way for average investors to get the benefits of greater diversification. (See also asset allocation.)

The amount paid per share, usually quarterly, from a corporation's after-tax profits. Not all shares pay dividends, and companies may reduce or even suspend dividend payments if they are not doing well. Some companies pay dividends in the form of additional shares of the corporation. Dividends from Canadian companies - either in cash or shares - qualify for the Dividend Tax Credit and are taxed at lower rates than other income. Dividend income may be paid to mutual fund unitholders.

Dollar-cost averaging
A way to "smooth out" your investment costs, and possibly reduce your average cost, by investing regularly. For example, instead of investing your $6,000 RRSP contribution in a mutual fund each February, you make monthly contributions of $500 throughout the year, regardless of the mutual fund's unit price. Your $500 buys more units if the unit price is lower, and fewer units if the price has risen. By spreading your purchases, you need not worry about buying at the "right time."

Dow Jones Industrial Average
An index that tracks the daily share value of 30 large U.S. companies listed on the New York Stock Exchange. The Dow Jones generally mirrors the exchange as a whole. The S&P500 index, which tracks 500 companies, is considered to be more representative of the broad U.S. market.


Earnings per share
The after-tax earnings or profits of a company, divided by the number of the company's outstanding common shares. For example, if a company earns $1 million and has 1 million shares outstanding, its earnings per share, or EPS, equals $1. If profits rise and the number of shares remains the same, the company's EPS rises.

Emerging markets fund
A mutual fund that invests primarily in countries that are becoming industrialised (also called developing economies). Emerging markets funds tend to be volatile, so values can fluctuate dramatically.

Equity fund
A mutual fund that invests primarily in equities - that is, shares of corporations and companies sold on the stock market. The objective of an equity fund usually is long-term growth through capital appreciation. However, some income may be earned from dividends, and some interest could be earned when the fund is not fully invested in stocks.

Exchange rate
The rate at which one currency can be traded for another. The exchange rate we see most often is between Canadian and U.S. dollars. Generally, the larger the amount of currency being traded, the more favourable the exchange rate available.


Face value
The stated value of an investment at maturity. For instance, corporate bonds are usually issued with face values of $1,000, municipal bonds with face values of $5,000, and federal government bonds with face values of $10,000. Life insurance policies, bank notes, currency, some shares, and other securities all have face values.

Fair market value
The amount a willing buyer would pay and a willing seller would accept in an open and unrestricted market, assuming that both parties are knowledgeable, are dealing at arm's length, and neither is under any compulsion to act. Stock and bond prices quoted in daily newspapers, for example, are at fair market value


Gross Domestic Product (GDP)
A measure of the production of all goods and services in a country, usually expressed as an annual total. Year-over-year changes in GDP are used to measure the strength or weakness of the economy. A number of more than about 2% (after allowing for inflation) indicates moderate strength, while 4% represents strong growth. Growth of less than 2% a year indicates a weaker economy.

Group insurance
Life and health insurance provided by employers or other organisations to their employees or members. Group insurance is usually inexpensive because of volume discounts.

Guaranteed Investment Certificate (GIC)
An interest-bearing deposit with a term usually from one to five years, although longer terms may be available. Interest on a GIC may be paid periodically (monthly, quarterly, semi-annually, annually), or may compound and become payable on maturity. The interest income is taxable every year regardless of whether it is actually received.


Income fund
A generic term for funds that invest primarily in fixed-term securities such as mortgages, bonds, and Treasury bills. The objective of most income funds is to earn a steady stream of interest, although capital gains could be realised as well from time to time. Some income funds also invest in shares of preferred and high-quality stocks.

Income splitting
The tax-planning strategy of arranging for income to be transferred to family members who are in lower tax brackets than the one earning the income, thus reducing taxes. Although attribution rules limit income splitting, there are still a number of legitimate ways to do so, such as through the use of spousal RRSPs (see definition).

Index fund
A mutual fund that mimics the index of a stock exchange, such as the Toronto Stock Exchange 300 Composite Index (see definition). The fund buys the same shares as are in the index, in proportions that reflect their weightings in that index.


Joint and last survivor annuity
Annuity payments that are guaranteed to continue (usually on a monthly basis) until the death of the second annuitant. Joint and last survivor insurance A type of insurance that covers two people, typically a husband and wife, in which benefits are paid on the death of the second person. Also called a "last to die" policy.


The practice of investing with borrowed money to increase potential profit. One of the biggest advantages to leveraging is the tax-deductibility of the interest.

Life annuity
A contract promising periodic payments while the recipient is alive. A life annuity may have a guarantee period with payments that continue to your heirs should you die before the end of the period. Annuities on a single life with no guarantee period provide the highest payments, but are riskiest because payments cease immediately upon death. RRSP funds can be used to purchase annuities.

Life Income Fund (LIF)
A type of Registered Retirement Income Fund (RRIF) that holds accumulations from locked-in RRSPs (the type of RRSP to which company pension plan benefits can be transferred). With a LIF, you can make all the investment decisions. Amounts in the LIF are tax-sheltered until withdrawn, but you must withdraw between a minimum and maximum amount each year after you reach retirement age. A LIF must be converted to a life annuity (or "annuitized") by the time you reach 80. (The exception is where pension laws of Alberta or Saskatchewan apply - see LRIFs below.)

Locked-in Retirement Account (LIRA)
A LIRA is similar to a Registered Retirement Savings Account (RRSP). The funds invested in the LIRA are tax-sheltered until used to purchase an annuity or a LIF (see definition above).


Management fee
A fee charged by a mutual fund company for managing the fund investments. It is expressed as a percentage of the fair market value of the total assets. The management fee may change, but is always disclosed to, and must be approved by, investors. This fee is charged directly to the fund.

Marginal tax rate
The top rate of income tax that is charged to individuals on their last dollar of earnings. The rate also indicates how much tax you would save on each dollar of income that does not need to be reported on your tax return. For example, if your marginal tax rate is 40%, and you contribute $1,000 to your RRSP, you will save $400 in tax.

Maturity value
Similar to face value (see definition), except that maturity value may include accumulated income. Compounding GICs, for instance, have a maturity value that includes the compound interest.

Money market fund
A mutual fund that invests exclusively in short-term (less than one year) debt instruments and other highly liquid and safe securities. Treasury bills issued and guaranteed by federal and provincial governments are common investments. Money market funds are managed so that their units usually have a fixed value of $1 or $10. Their performance is measured by the rate of interest they earn.

Mutual fund
A fund managed by an investment company that raises money from individuals and invests it in stocks, bonds, options, commodities, or money market securities. Your investment in a mutual fund is represented by shares or units. The value of your units depends on the value of assets owned by the mutual fund, less expenses incurred by the fund.


Net Asset Value (NAV) per unit
The current fair market value of each unit in a mutual fund, as determined by the total value of the fund's investments plus other assets, less liabilities. This total value is divided by the number of units outstanding, to arrive at NAV per unit.

Net worth
Total assets minus total liabilities. Banks look carefully at your net worth when lending you money, because it gives an indication of your ability to repay the loan. Net worth also is a measure of how well you have done financially over the years, and how well you are preparing for retirement.


Old Age Security (OAS)
Most people in Canada over age 65 receive Old Age Security Pension. Residence in Canada is the only requirement to receive the full pension (40 years residence between age 18 to 65). This and the Guaranteed Income Supplements will be replaced by the "Seniors Benefit".


Permanent life insurance (or Whole Life)
Life insurance with level premiums that provide coverage for your whole life. Cash values increase over time and usually you can borrow against them, although you can't cash them in unless you cancel the policy.

Policyholder dividend
An annual refund of premiums on "participating" insurance, paid by the insurer out of its net income. These dividends are not guaranteed. If the insurance company has a year with excessive claims, a smaller dividend may result or no dividends may be paid. The dividends are usually reinvested to purchase additional insurance, although some insurers may offer other options.

A term for describing all the investments you own - stocks, bonds, mutual funds, GICs, and so on. A diversified portfolio contains a variety of investments.

Present Value
The present value is the amount of money which if invested today would grow to a future amount. For example, the present value of $1,000 ten years from now, discounted at 8% is $463. Another way of looking at this is that the "Future Value" of $463 at 8% in ten years is $1,000.

Prime rate
The interest rate banks charge their most creditworthy customers. All interest rates charged by banks, including credit card rates, are based on the prime rate. Some rates are expressed as "prime plus" one, two, or more percentage points.

The amount of a loan, excluding interest, or the amount you invest, excluding income. Loan repayments are usually a blend of principal and interest. Also referred to as investment "capital."

A document that must be provided to investors before they buy mutual funds or certain other investments. The prospectus describes the product for sale, the investing objectives, past performance, management, potential risks, tax considerations, fees, and other data to help you make an informed investment decision.


Redemption fee
A charge applied when you sell (redeem) mutual fund units. Also referred to as "deferred," "back-end," or "rear-end" load. It is expressed as a percentage of market value at the time of sale. A redemption fee often declines over a number of years until it is eliminated. This encourages investors to hold on for the long term. When a redemption fee is charged, there is often no front-end load.

Registered Retirement Income Fund (RRIF)
A way to generate income for retirement. RRIFs enable you to continue sheltering your retirement savings from tax after you collapse your RRSP. You cannot make contributions to a RRIF (other than from RRSPs), and must withdraw a minimum amount each year after the year you open the plan. With RRIFs, you can make your own investment choices.

Registered Retirement Savings Plan (RRSP)
A way of saving for retirement that shelters your earnings from income tax. Within prescribed limits, contributions to an RRSP are tax-deductible, and income earned within the RRSP escapes tax until it is withdrawn. This tax deferral allows you to save much faster than you otherwise might. Withdrawals from the RRSP, usually at retirement, are taxed at regular rates. (See also spousal RRSP.)

Risk tolerance
A term describing how much investment risk or variability you are willing to accept.


Senior's Benefit
An income-tested, guaranteed annual tax-free income. This plan was recently scrapped by Paul Martin after considerable pressure was brought to bear on him (grey power).

Specialty fund
A mutual fund that invests in a particular type of investment such as gold, real estate, or natural resources. Specialty funds can be very volatile because they invest in a narrow sector of the economy, without as much diversification as other mutual funds.

Spousal RRSP
An RRSP that is owned by your spouse, to which you can contribute. However, spousal contributions reduce the amount you can contribute to your own RRSP. Provided no money is withdrawn within two years after the year of your last contribution, the money will be taxed in your spouse's hands upon withdrawal. Spousal RRSPs are used by many couples to improve the tax effectiveness of their retirement planning.

Standard and Poor's (S&P) 500
An index of the 500 largest, most actively traded stocks on the New York Stock Exchange. It provides a guide to the overall health of the U.S. stock market. The S&P 500 is a much broader index than the Dow Jones Industrial Average, and reflects the stock market more accurately.

Stripped bonds and stripped coupons
Bonds with the interest coupons removed. Also called "zero-coupon bonds." Strips are the interest coupons themselves. Since neither actually pays interest (they are merely redeemable on maturity at face value), they sell at a discount to face value. The size of the discount depends on current interest rates and the length of time to maturity.


Term certain annuity
An annuity providing guaranteed income to you or to your estate, for a specified term

Term insurance
Life insurance policies that have no savings component. Sometimes called "pure insurance." They are renewable, in periods of one to 20 years, and usually cannot be obtained past about age 75. Premiums rise with each renewal, and can become prohibitively costly later in life. When buying term insurance, make sure you don't have to prove your insurability each time you renew.

Term to 100
A type of permanent insurance without the cash accumulations. This life insurance is usually cheaper than permanent insurance but more expensive than term insurance. Premiums are fixed and guaranteed to age 100, whereas term insurance premiums rise with each renewal.

Toronto Stock Exchange (TSE) 300 Composite Index
An index that tracks the 300 largest and most actively traded issues on the Toronto Stock Exchange. A weighting is assigned to each stock, so larger firms have more influence on the index value than do smaller stocks.

An organisation that rates the financial stability of Canadian insurance companies.

Treasury bill (T-bill)
A short-term discounted security issued by a government, with a maturity generally from 30 to 364 days. T-bills have a face value and sell at a discount based on current interest rates.

A legal vehicle entity through which you can transfer ownership of assets to trust beneficiaries - typically a spouse or children - without giving up control of those assets. You also may act as a trustee of the trust, which means you administer the assets, arrange for distributions, file tax returns, and otherwise ensure that the terms of the trust are met.


Universal life insurance
Life insurance with an investment component as well as a death benefit. The policyholder has the flexibility to increase or decrease the investment amount.


Vesting and Vesting of Employer Contributions to a Pension Plan
The point at which, should you leave your employment, not only will you receive your pension plan contributions, but also those that the employer made on your behalf or a pension.


A legal document detailing how you want your assets to be distributed upon your death. A will may also cover other wishes, such as who should take care of your children. You should always enlist professional help when drafting a will. If you die without a will ("intestate"), your assets will be distributed according to provincial law.


The total proceeds from an investment. The yield may be fixed - 8% payable on a GIC - or may vary. The current yield of a bond, for example, depends on its purchase price. As a bond's price falls, its yield rises, and vice versa.

back to main page