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Annuities
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are products issued by a life insurance company which provide a
guaranteed monthly income for a fixed term or until death. Two main
categories are registered annuities (purchased with money from an RRSP)
and prescribed annuities (purchased with non- registered funds). When an
RRSP is placed with a life insurance company, it is technically called a
"deferred annuity".
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Asset Classes
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The four main asset classes in investing are:
- Short Term - savings
accounts, Canada Savings Bonds, treasury bills, money market mutual
funds.
- Fixed Income - government and corporate bonds, GIC's and term
deposits with over twelve months to maturity.
- Real Estate
- Equity
Investments - representing ownership of companies through stocks or
shares.
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Asset mix or asset allocation
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refers to the distribution of investments into these various asset
classes. Most investment professionals consider this the single most
important decision an investor makes.
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Attribution rules
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are the various sections of the Income Tax Act which set the rules on
transferring investment capital from one family member to another. In
general, any investment income generated attributes back to the source
of the capital, rather than the person to whom it has been transferred.
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Average Tax Rate
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The ratio of taxes paid to the tax base. Accordingly, the average income
tax rate is the ratio of income tax paid to income. A single individual
with an income of $50,000 who pays $12,832 in income tax has an average
tax rate of 25.7 per cent ($12,832 divided by $50,000).
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Back-end load or Deferred Service Charge
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refers to the commission structure on many mutual funds that are
distributed through commission based financial advisors. No
commission is deducted from the initial investment, but a diminishing
"deferred sales charge" is applied if withdrawals are made before the
Back-end Load has expired (typically 5 to 9 years). The sales person, nonetheless, gets paid up front.
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Banker's Acceptance
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Short-term negotiable commercial paper issued by a non-financial
corporation but guaranteed by a bank.
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Basis Point
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One one-hundredth of a percentage point. If the bank rate decreased from
5.45% to 5.35%, it went down 10 basis points.
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Bonds
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are debt obligations issued by governments (and corporations). When an investor purchases a
bond, the investor is loaning his money to the issuer of the bond. The
bond guarantees regular payment of a certain interest rate and a return
of principal on the maturity date.
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Business Cycle
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The succession of periods of recession and recovery. Economic activity
tends to fluctuate: periods when real gross domestic product (GDP) is
falling are called recessions; periods when real GDP is rising are
called recoveries (expansion).
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CDIC
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(Canadian Deposit Insurance Corporation) is the arm of the federal
government that insures deposits in member institutions like banks and
trust companies, up to a maximum of $100,000 per Canadian dollar account.
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Capital Cost Allowance (CCA)
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A tax deduction for business-related capital property that provides for
the depreciation of these assets. Businesses can deduct up to a fixed
percentage of the depreciated cost each year. There are approximately 40
CCA classes described in the Regulations to the Income Tax Act. The CCA
rate applicable to each class is usually intended to reflect the
economic life of the assets of that class. Where the CCA rate is clearly
in excess of that required to reflect the economic useful life, it can
be considered to be an accelerated CCA.
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Capital gains
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is a term used in the Income Tax Act to describe a type of income
resulting from the sale or disposition of capital property that has
increased in value since purchased. Typically capital gains arise from
the sale of stocks, real estate, business assets, farm property and
certain types of bonds. Capital gains do not have to be brought into
income until the property is sold, and at that time only 50% of the gain
is included in income.
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Consumer Price Index (CPI)
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Measure of price changes produced by Statistics Canada on a monthly
basis. The CPI measures the retail prices of a "shopping basket" of
about 300 goods and services including food, housing, transportation,
clothing and recreation. The index is "weighted," meaning that it gives
greater importance to price changes for some products than others - more
to housing, for example, than to entertainment - in an effort to reflect
typical spending patterns. Increases in the CPI are also referred to as
increases in the cost of living. For more information, visit Statistic
Canada's Consumer Price Index Web page.
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Debenture
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is a certificate of indebtedness of a government or company backed only by the
general credit of the issuer and unsecured by property or assets.
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Deposit brokers
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are investment specialists who act as agents for small banks and trust
companies, insurance companies and sometimes mutual fund companies.
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Dividend tax credit
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is the reduction in federal and provincial tax on dividend income, which is the income
an investor receives from owning shares of corporations. This credit is
to offset the fact that the company paid tax on profits before
distributing dividends.
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Dividend mutual funds
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are investment pools that invest primarily in preferred shares or higher yielding common shares, with the
objective of maximizing dividend income and the resulting dividend tax
credit.
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Enduring Power of Attorney
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A Power of Attorney is a document that allows you to authorize one or more
persons to make decisions for you concerning your assets and financial affairs.
The Enduring Power of Attorney (BC specifically) is one that is worded so that it will continue to
be effective if you become mentally incapable of managing your affairs.
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Equity mutual funds
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are investment pools that invest in the stocks of public companies. The
particular fund could invest in large companies, small companies or
both, situated in Canada only, in the United States only or in other
specific countries or all countries.
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Exchange Traded Index Funds
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are an interest in a trust that holds the underlying shares of a particular index.
The purpose of this investment is to replicate the movement of the index it is tracking
and this is accomplished by holding shares in proportion to their inclusion in the said index.
There may be some tracking error, but this is usually minimal.
The shares in the Trust trade on a stock exchange and can be purchased or sold at any time
during the trading day. Usually the management fees of the said trust are considerably lower
than index mutual funds. Dividends issued by the underlying securities are collected and
distributed to the investor, minus the management fees.
Some examples of these securities are the iShares S&P/TSX 60 Index Shares (TSX: XIU) that track the performance
of the S&P/TSE 60 Total Return Index, or the SPDRs (AMEX: SPY) that track the S&P 500 Total Return Index.
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Front-end loads
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are commissions payable to the broker or salesperson on the purchase of
mutual fund units. The commission is deducted from the amount invested
at the time of investment. The rate of commission can vary between zero
and 9%, although rates above 5% are very unusual today.
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Flow Through Shares
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A flow-through share is available to mining, petroleum and certain types
of renewable energy companies to facilitate financing their exploration
and project development activities. Eligible companies issue these
equity shares to new investors. Investors receive an equity interest in
the company and income tax deductions associated with new expenditures
incurred by the company on exploration and development. Flow-through
shares are available to selected companies but are of greater benefit to
non-taxpaying junior companies. These companies are often unable to use
income tax deductions against their corporate income and are willing to
forgo the deduction to new investors.
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Futures Contract
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Agreement to buy or sell a financial instrument at a particular price,
for a specific quantity, on a stipulated future date. Fixed income
futures contracts are traded in the futures market at the Montreal Stock
Exchange. The key fixed income futures contracts are the 5- and 10-year
Government of Canada bond futures contract (the CGF and the CGB
contracts) and the Bankers Acceptance contracts (BAX).
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GIC
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(Guaranteed Investment Certificate) are guaranteed deposits issued by
banks and trust companies. They are a very popular investment, although
their relative lack of liquidity is sometimes a weakness.
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Hedge
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A transaction intended to reduce the risk of loss from price
fluctuations.
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Index
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A statistical tool that measures the state of the stock market, the economy, or
a particular market sector based on the performance of stocks or other meaningful
components. Examples are the S&P/TSX 60 Index, the Dow Jones Industrial Average and
the Nasdaq 100 Composite.
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Inflation
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The average rate of increase in prices. When economists speak of
inflation as an economic problem, they generally mean a persistent
increase in the general price level over a period of time, resulting in
a decline in a currency's purchasing power. Inflation is usually
measured as a percentage increase in the consumer price index (CPI).
Canada's inflation target, as set out by the federal government and the
Bank of Canada, aims to keep inflation within a range of 1 to 3 per
cent. If the rate of inflation is 10 per cent a year, $100 worth of
purchases last year will, on average, cost $110 this year. At the same
inflation rate, those purchases will cost $121 next year, and so on.
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Interest income
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is the type of income generated by bank deposits, bonds, GIC'S, treasury
bills, fixed income investments, strip bonds and strip coupons.
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Liquidity
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refers to the "cashability" or "saleability" of a particular investment.
Any investment that is locked in for a period of time, such as a non-
redeemable GIC, is illiquid. Publicly traded instruments, such as stocks
and government bonds, are "usually" highly liquid. The investor's need for
liquidity is an important consideration when determining asset mix.
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Management fees
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are the charges paid by a mutual fund portfolio to its manager for the
investment advice and portfolio management services provided. Management
fees typically range from .75% to 2.5% per year, plus related expenses
for legal, accounting, shareholder communications, meetings, etc.
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MER
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(Management Expense Ratio) is the percentage of all management fees and
expenses to the total assets of a mutual fund. Expense ratios can range
from .75% to as high as 5% on occasion.
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Marginal Tax Rate (MTR)
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The ratio of the increase in tax to the increase in the tax base (i.e.
the tax rate on each additional dollar of income). A single individual
earning $40,000 who experiences a $1,000 increase in income and has to
pay an additional $452 in income tax has a marginal tax rate of 45.2 per
cent ($452 divided by $1,000).
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Mortgage mutual funds
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are investment pools that loan money to homeowners, secured by
mortgages. They are a low volatility investment for the investors.
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Mutual funds
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are a method of investing in various underlying investments such as
stocks, bonds, mortgages, treasury bills and real estate. Mutual funds
provide the advantages of professional investment management, liquidity,
investment record keeping and diversification. Investing through mutual
funds is the indirect ownership of the underlying investment vehicles.
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No load mutual funds
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are mutual funds which can be purchased without commission. Typically,
these are found at banks, trust companies, some insurance companies and
some independent fund companies.
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Options
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are the right, but not the obligation, to buy or sell certain securities at a specified
price within a specified time. A put option gives the holder the right to sell the security,
a call option gives the right to buy the security. Options on publicly traded companies and
indexes may be traded on various exhanges throughout the world.
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RRIF
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(Registered Retirement Income Fund) is one of the maturity options for an RRSP.
A RRIF can hold the same investment as an RRSP, but is subject to a minimum yearly
withdrawal (included in taxable income) commencing at age 72.
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RRSP
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(Registered Retirement Savings Plan) refers to a provision in the Income
Tax Act that allows an investor to shelter investment income by placing
property with a Trustee. This property can then be invested in
qualifying investments (GIC's, stocks, bonds, mortgages, mutual funds
investing in these instruments, etc.) The tax treatment of the
investment income is irrelevant, as it is not declared for tax purposes
until withdrawn. Any withdrawal from an RRSP is added to taxable income
in the year of withdrawal, and may result in income taxes payable. Any
property contributed to an RRSP reduces taxable income by the amount of
the contribution, if within prescribed limits.
The RRSP must be matured by the end of the year in which you turn 71. The maturity options are the following:
- Registered Retirement Income Fund (RRIF)
- Qualified Annuity
- Plan Collapse (i.e., receive a cash payment for all of the RRSP minus withholding tax).
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Representation Agreement
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(Province of BC only) is the estate planning document introduced by the BC Government in 2000. It
was intended to replace the Enduring Power of Attorney and also provide the ability for a person
to legally document their healthcare wishes. It also endures beyond incapacity. For further information regarding
the Representation Agreement Act, please visit the
Representation Agreement Resource Centre.
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Reverse Savings Program
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is a method of implementing an investment savings plan through the use of debt. It is
essentially a disciplined cashflow management strategy to ensure that your savings capacity
will be utilized effectively. It involves borrowing an amount to invest upfront, and then
systematically paying off the debt with monthly payments. This methodology may be implemented
to allow for the purchase of investments not limited to smaller monthly payments, but also as
a forced savings mechanism. This type of plan has inherent risks associated with the use of
leverage and should only be utilized if all of those risks are fully understood.
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Risk
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could describe various types of investment risks, including re-
investment risk, loss of capital, loss of purchasing power and liquidity
risk. A diversified portfolio manages all of these types of risks.
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Stocks, or shares
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represent the ownership (or equity) in a corporation. For investment
purposes, this corporation is usually publicly traded (on a stock
exchange) and has an objective of ever-increasing profits.
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Stockbrokers
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also called investment advisors or investment brokers, are investment
specialists who arrange for the trades of investment vehicles such as
stocks, bonds, and other instruments between investors.
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Stripped bonds or stripped coupons
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are hybrid investment vehicles formed when a bond, typically issued by a
government, is broken down into its principal amount (the "residual"
amount) and its different coupons with various maturity dates. For
example, an investor can purchase a coupon that will pay $10,000 in ten
years. If current yields are 8%, that coupon will cost approximately
$4,200 today, the amount which, compounded at 8% for ten years, will
result in $10,000 future value. Strip coupons provide no income, but
they do create a yearly tax liability equal to the theoretical interest
payable each year. For this reason, they are attractive investments
inside an RRSP, where the taxable income does not need to be declared.
In some ways they are similar to GIC'S, but with the added advantage of
liquidity (value is subject to market volatility).
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Treasury bills or T-bills
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Government of Canada T-bills are issued in denominations ranging from
$1,000 to $1,000,000. New issues are sold by public tender at a
discount. T-bills with terms to maturity of 3, 6 or 12 months are
auctioned on a bi-weekly basis, typically on Tuesday for delivery on
Thursday. From time to time, shorter-term cash management bills are also
auctioned. The difference between the purchase price and the face amount
represents the return to the investor.
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WRAP Account
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A type of fully discretionary account (in which a client has given specific written
authorization to a partner, director or qualified portfolio manager of an investment
dealer to select securities and execute trades for him or her). A single annual fee,
based on the account's total assets, is charged instead of commissions and service charges
being levied separately for each transaction. The account is then managed separately from
all other wrap accounts, but is kept consistent with a model portfolio suitable to clients
with similar objectives.
Typically the fees associated with this account exceed 2% to the investor.
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