Active business
Includes any business, as well as an adventure or concern in the nature of trade, but excludes: (i) a business that derives its income from property (including interest, dividends, royalties and rent) and has less than six full-time employees; and (ii) a business that provides personal services through a corporation, has fewer than six full-time employees and where, were it not for the presence of the corporation, the individuals providing the services would be considered employees or officers of the entity using those services.

Active business income (ABI)
Uses corporate income as the benchmark for calculating certain tax credits. It includes income derived from an active business (includingincidental income from its active business, such as interest earned on customers’ delinquent receivables) and specifically excludes income derived from property such as capital gains, interest, dividends, royalties and rent.

A relationship that exists between persons for purposes of determining whether certain stop-loss rules apply. For example, individuals are affiliated with themselves and their spouse or common-law partner (but not with their children). They are also affiliated with a corporation that they and/or another affiliated person control.

See Depreciation. The term “amortization” is also used to describe the systematic repayment of a debt’s principal and interest.

A form of investment that yields a sequence of periodic, usually equal, payments made at equal intervals of time (e.g., $1,200 every month). In return for a single payment to the provider, the annuitant receives a series of payments for a specific term that can begin immediately or be deferred into the future. Annuities can have a variety of options associated with them.

“At arm’s-length” indicates that the parties to a transaction are unrelated and have separate interests in entering the transaction. A “non-arm’s-length” transaction would be one between related parties or between parties with a common interest acting in concert.

A person for whom a trust is created and who receives, or may become entitled to receive, benefits under a will, insurance policy, retirement plan, annuity, trust or other contract.

Calendar year
The period between January 1 and December 31 of any given year.

Capital asset
An asset intended to be used on a continuing basis by a business in its daily operations for production or supply of goods and services, for rental to others or for administrative purposes. It is not an asset intended for sale in the ordinary course of business, such as an inventory item. A depreciable asset is an example of a capital asset.

A carry-forward arises when a loss or tax credit is not fully utilized in the current period and, as a result, the unused portion may be used in a future period. For example, a loss carry-forward arises when a taxpayer has incurred a loss in the current period and cannot use it to offset income from a previous period. The loss can be carried forward to offset future income.

Common-law partner
A person of the opposite or the same sex who has either cohabited with you for at least one year in a conjugal relationship or is the parent of your child.

An accounting procedure that aims to distribute the cost of tangible capital assets, less any expected salvage value, over the estimated useful life of the asset in a rational and systematic manner. The depreciation for a period is the portion of the total cost allocated to that period.

Fair market value (FMV)
The highest price that can be obtained for the sale of an asset between informed parties who deal at arm’s-length and are under no compulsion to act.

Fiscal year-end
The point in time that a business has chosen to account for its profits and losses. Generally, a corporation may choose any date in the year, but special rules exist for individuals and partnerships. Once a business establishes a fiscal year- end date, it cannot be changed for tax purposes without the CRA’s approval.

Flow-through share
A form of investment specifically related to the resource industry. Unlike a typical share, certain expenditures incurred by the corporation can be renounced by the corporation and “flowed through” to the shareholders. The shareholders can then deduct these items on their own tax returns.

An intangible asset that represents the superior earning power of a business. Generally, the value assigned to the goodwill of a business is the fair market value of the business as a whole, less the fair market value of the net tangible assets and identifiable intangible assets that comprise the business.

Holding company
A corporation whose principal purpose is to hold investment assets, such as shares in other companies and portfolio investments.

Information returns
Forms or documents containing tax-related information about individuals, corporations, trusts or other entities that the CRA requires them to file so it can administer the provisions of the Income Tax Act.

Joint venture
An economic activity resulting from a contractual arrangement whereby two or more entities jointly control an economic activity. Unlike other investments, none of the venturers can exercise unilateral control over the joint venture, regardless of the ownership interest any of them might hold. A joint venture has no legal status itself. The venturers may own property in common, but each has a direct share in the property.

Limited partnership
In a limited partnership, the limited partners have limited liability. This is a similar responsibility to that of shareholders of a corporation and means that liability is restricted to the amount invested in the partnership. There must be at least one general partner who is fully liable for the debts of the partnership. The general and limited partners share the profits of the partnership in accordance with the terms of a partnership agreement.

Marginal tax rate
The income tax rates that apply to each dollar of additional income at different levels of taxable income. As an individual’s income level rises, his or her marginal tax rate also rises.

Non-refundable tax credit
A tax credit earned during the year that is applied to reduce income tax payable for that year but is limited to reducing taxes to a nil balance. If there is an unused portion of the tax credit after reducing taxes to a nil balance, it cannot be used to create a refund. The basic personal credit is an example of a non-refundable tax credit.

The determination of whether a person is a non-resident is a question of fact based on residential ties with another country or the amount of time away from Canada.

An arrangement between persons carrying on a common business to earn a profit. It can be formed by a group of individuals, by corporations or by a combination thereof. The partners share the net profits and not the gross returns of a business. A partnership can be formed by verbal or written agreement and is governed by provincial law.

A fee that has to be paid to probate a will. The fee varies from province to province, but it is essentially levied on the fair market value of an individual’s estate that passes through his or her will on death. Assets passing outside the will—for example, by right of survivorship or direct beneficiary designation—are not subject to probate.

An income item created when the balance of the undepreciated capital cost (UCC) of a class of depreciable assets becomes negative. This can occur when the proceeds of the disposition of a capital asset (which is limited to the original cost of the asset) is applied to reduce the UCC of the class and results in a negative balance. In essence, a capital cost allowance (CCA) had been recorded in excess of the asset’s remaining economic value. On the sale of the assets of that class, a portion of the previous CCA is recovered.

The process of foregoing, or giving up, a particular benefit in a formal manner. Certain tax credits or deductions can be renounced in favour of an alternative treatment.

Generally, an income amount that relates to a future period and therefore can be set aside and included in income for that period. A reserve is excluded from the current period’s income and included in the next period’s income. A new reserve would be established in the next period, if applicable.

The determination of whether a person is a resident of Canada is a question of fact. The factors considered are residential ties with Canada, length of time in Canada, object, intention and continuity with respect to stays in Canada.

Retained earnings
The total net after-tax income of a corporation, minus distributions of dividends to shareholders that have accumulated since incorporation.

Share capital
Basically, the owner’s investment in a corporation, represented by common and preferred shares. A monetary value is assigned to shares when they are first issued from a corporation’s treasury.

Small-business limit
The amount of corporate income that qualifies for the low rate of tax. The federal small-business limit is currently $500,000. This limit is shared between associated corporations.

The person to whom you are legally married.

The term “superannuation” is synonymous with a pension benefit and includes any amount received out of a pension fund or pension plan. Some examples of items that would be considered a superannuation payment would be Old Age Security payments, Canada Pension Plan payments and payments from a privately established pension plan.

Testamentary trust
A trust created as a consequence of the death of an individual.

An entity in which a person (a trustee) acting on behalf of a trust holds property for the benefit of one or more other people (beneficiaries). A trust can be created at any time (inter vivos or testamentary) and is taxed as a separate taxpayer.

A person who, alone or with other trustees, administers the operation of a trust and makes various decisions with respect to the trust—for example, when and how much trust income and/or capital to distribute to the trust’s beneficiaries—based on the terms of the trust document.

A deduction used to reduce net income for tax purposes.