Information for Canadian Small Businesses: Definitions

From: Canada Revenue Agency

Adjusted cost base (ACB) – the cost of a property plus any expenses you incur to acquire it, such as commissions and legal fees.

The cost of a capital property is its actual or deemed cost, depending on the type of property and how you acquired it. It also includes capital expenditures, such as the cost of additions and improvements to the property. You cannot add current expenses, such as maintenance and repair costs, to the cost base of a property.

For more information on ACB, see archived Interpretation Bulletin IT-456R, Capital Property – Some Adjustments to Cost Base, and its Special Release.

Appeal – a process by which you ask a court to review the decision that the CRA's Appeals Branch made for the Minister of National Revenue.

Arm's length – refers to a relationship or a transaction between persons who act in their separate interests. An arm's length transaction is generally a transaction that reflects ordinary commercial dealings between parties acting in their separate interests.

"Related persons" are not considered to deal with each other at arm's length. Related persons include individuals connected by blood relationship, marriage, common-law partnership, or adoption (legal or in fact). A corporation and another person or two corporations may also be related persons.

"Unrelated persons" may not be dealing with each other at arm's length at a particular time. Each case will depend upon its own facts. The following criteria will be considered to determine whether parties to a transaction are not dealing at arm's length:

  • whether there is a common mind which directs the bargaining for the parties to a transaction
  • whether the parties to a transaction act in concert without separate interests; "acting in concert" means, for example, that parties act with considerable interdependence on a transaction of common interest
  • whether there is de facto control of one party by the other because of, for example, advantage, authority or influence

For more information, see Income Tax Folio S1-F5-C1, Related persons and dealing at arm's length.

Articles of incorporation – legal document filed with a provincial or territorial government, or the federal government, which sets out the purpose and regulations of a corporation.

Assessment – the CRA's formal calculation of taxes, duties or other amounts to be paid or refunded. This definition also applies to a reassessment.

Assets – any property that you or your business owns. Assets include money, land, buildings, investments, inventory, cars, trucks, boats, and other valuables. Assets can also include intangibles such as goodwill.

Bad debt – money owed to you that you cannot collect.

Balance – the amount left in an account after recording all deposits and withdrawals.

Budget – a plan outlining an organization's financial and operational goals.

Business expenses – costs that are considered reasonable that your business incurs to operate and earn income. You can deduct business expenses for tax purposes.

Business number (BN) – a nine-digit number given to your business to simplify its dealings with the federal government and the provincial, territorial, and municipal governments. A business will have one BN.

Calendar year – a period of twelve months that begins on January 1 and ends on December 31.

Canada Pension Plan (CPP) – a pension plan that provides contributors and their families with partial replacement of earnings in the case of retirement, disability or death.

Capital cost allowance (CCA) – you may have acquired depreciable property like a building, furniture, or equipment to use in your business. You cannot deduct the initial cost of these properties in the calculation of the net income of the business or professional activities of the year. However, since these properties wear out or become obsolete over time, you can deduct the cost over a period of several years. This deduction is called CCA.

Capital gains – the profit you make when you sell, or are considered to have sold, a capital property for more than the total of its adjusted cost base and the amount it cost to sell it.

Capital loss – the loss you realize when you sell, or are considered to have sold, a capital property for less than the total of its adjusted cost base and the amount it cost to sell it.

Capital property – generally, any property of value, including depreciable property, that you buy for investment purposes or to earn business income. Common types of capital property include principal residences, cottages, stocks, bonds, land, buildings, and equipment used in a business or rental operation.

Commercial activity – any business or adventure or concern in the nature of trade carried on by a person but does not include either:

  • the making of exempt supplies
  • any business, adventure or concern in the nature of trade carried on without a reasonable expectation of profit by an individual, a personal trust, or a partnership where all the members are individuals

Commercial activity also includes the making of a supply of real property, other than an exempt supply, by any person, whether or not there is a reasonable expectation of profit, and anything done in the course of making the supply or in connection with the making of the supply.

Confidentiality – the CRA protects income tax, GST/HST, excise duty, excise tax, and other related tax and duty information. The only people with access to this information are those who are authorized by law or those whom the taxpayer, registrant,or licensee has either:

Corporation – a form of business authorized by federal, provincial, or territorial law to act as a separate legal entity. Its purpose and by-laws are set out in its articles of incorporation. A corporation may be owned by one or more persons.

Cost of goods sold – the actual cost of items sold in the normal course of business during a specific period.

Debt – an amount that is owed. If you borrow money or buy something on credit, you have created a debt.

Deemed – a legal term used for something that is considered something else in a specific situation. It is also used to describe something that has not yet happened but is considered to have happened in a specific situation.

Depreciable property – the property on which you can claim CCA. It is usually capital property from a business or property. The capital cost can be written off as CCA over a number of years. You usually group depreciable properties into classes. Diggers, drills, and tools that cost $500 or more belong in Class 8. You have to base your CCA claim on the rate assigned to each class of property.

Disposition – generally, this is the disposal of property by sale, gift, transfer, or change in use.

Duty – the tax imposed under the Excise Act, 2001 and the Excise Act, as well as the tax charged under certain sections of the Customs Tariff.

Election – a formal choice made between different options available under tax legislation that may be applied to your financial tax affairs. Generally, you make an election using a specific form and have to submit it by a set deadline.

Employment insurance premiums – amounts that an employer has to deduct from the employees' insurable earnings. These deductions are sent to the CRA. Employers must also pay their share of employment insurance premiums.

Employment Insurance Program – a federal program that gives financial support to Canadians if they are temporarily out of work. The employee and the employer pay amounts into the Employment Insurance Fund.

Excise – taxes and duties on the manufacture, sale, or use of goods and items.

Exempt supplies – supplies of property and services that are not subject to the GST/HST. This means you do not charge GST/HST on your supplies of these property and services. You generally cannot claim input tax credits for the GST/HST paid or payable on property and services you acquired to make exempt supplies.

Fair market value (FMV) – generally, it is the highest dollar value that you can get for your property or a service in an open market from an informed and willing buyer. You must be an informed and willing seller and deal with the buyer at arm's length.

Fiscal period – the 12-month period for reporting income-earning activities. The fiscal period may or may not match the calendar year. Your business creates its fiscal period when it files its first income tax return.

Goodwill – an intangible asset that belongs to a business. When you purchase a business at arm's length for more than the fair market value of its assets less its liabilities, the excess is goodwill.

Income – the total sum of money or other assets you earn in a period of time from your work, business, or investments. It includes money from salaries, wages, benefits, tips, commissions, and profits from operating a business or profession.

Income statement – a financial statement that sums up the profits or losses of your business for a specified period of time. An income statement is also known as a profit and loss statement.

Information slips – the forms that an employer, a trust, or a business prepares to tell employees and the CRA how much income the employee earned, and how much tax was deducted.

Input tax credit (ITC) – a credit that GST/HST registrants may be eligible to claim to recover the GST/HST paid or payable for property or services they acquired, imported into Canada, or brought into a participating province for use, consumption, or supply in the course of their commercial activities.

Instalments – a periodic payment you have to pay to the CRA on certain dates. For example, GST/HST, instalments are periodic payments that may also be payable by persons who file annual returns.

Inventory – generally, the total value of the goods on hand that your business intends to sell, use to manufacture goods, or use to provide a service. In certain cases, inventory can include services.

Lease – a contract to rent property to a person for a set period of time at a specified rate.

Liability – money or a debt you or your business owes.

Licensee – a person who holds a licence issued under the Excise Act, 2001, the Excise Tax Act, or the Excise Act.

Loss – when your expenses are more than your revenues.

Motor vehicle – an automotive vehicle designed or adapted for use on highways and streets. A motor vehicle does not include a trolley bus or a vehicle designed or adapted to use only on rails.

Net income – the income that is the result of your gross income minus your allowed expenses.

Non-arm's length – generally refers to a relationship or transaction between persons who are related to each other.

However, a non-arm's length relationship might also exist between unrelated individuals, partnerships, or corporations, depending on the circumstances. For more information, see the definition of arm's length.

Notice of assessment – a document that the CRA sends to you after it assesses your tax return or rebate application. It tells you if the CRA made any changes to your return or rebate application and explains the changes. The notice of assessment also tells you if you owe tax or will get a refund.

Objection – the first step in the formal process to resolve a dispute between you and the CRA.

Operating expenses – the routine costs of running your business. They include expenses for gasoline, electricity, and office supplies. They do not include the cost of buildings or machinery that are expected to last for several years. See Capital cost allowance.

Participating province – a province that has harmonized its provincial sales tax with the GST to implement the harmonized sales tax (HST). Participating provinces include New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island. They do not include the Nova Scotia offshore area or the Newfoundland offshore area except to the extent that offshore activities are carried on in that area.

Passenger vehicle – a motor vehicle designed or adapted primarily to carry people on highways and streets. It seats a driver and no more than eight passengers. Most cars, station wagons, vans, and some pick up trucks are passenger vehicles. They are subject to the limits for CCA, interest, and leasing.

A passenger vehicle does not include:

  • an ambulance
  • a clearly marked police or fire emergency response vehicle
  • a motor vehicle you bought to use more than 50% as a taxi, a bus used in the business of transporting passengers, or a hearse used in a funeral business
  • a motor vehicle you bought to sell, rent, or lease in a motor vehicle sales, rental, or leasing business
  • a motor vehicle (except a hearse) you bought to use in a funeral business to transport passengers
  • a van, pick up truck, or similar vehicle that seats no more than the driver and two passengers and that, in the tax year you bought or leased it, was used more than 50% to transport goods and equipment to earn income
  • a van, pick up truck, or similar vehicle that, in the tax year you bought or leased it, was used 90% or more to transport goods, equipment, or passengers to earn income
  • a pick up truck that, in the tax year you bought or leased it, was used more than 50% to transport goods, equipment, or passengers to earn or produce income at a remote work location or at a special work site that is at least 30 kilometres from the nearest community with a population of at least 40,000
  • a clearly marked emergency medical service vehicle used to carry paramedics and their emergency medical equipment

Payroll deductions – amounts deducted from an employee's wages or salary, including deductions for income tax, Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) contributions, and Employment Insurance (EI) premiums.

These deductions are sent to the CRA regularly. Employers must also pay their share of CPP or QPP contributions and EI premiums.

Penalties – amounts that you have to pay if you do not file returns or pay amounts owing on time. You have to pay penalties if you knowingly, or under circumstances that amount to gross negligence, make a false statement, leave out information on your return, or do not give the required information on a form that you must fill out.

Person– a person means an individual, a partnership, a corporation, the estate of a deceased individual, a trust, or any organization such as a society, a union club, an association, or a commission.

Prepaid expense – an expense you pay in advance. It is an expense that you will incur for property and services in a later fiscal period, or an amount you pay in interest, income tax, municipal tax, rent, dues, or insurance for later fiscal periods. A prepaid expense is listed on your balance sheet as an asset at the end of a fiscal period.

Proceeds of disposition – generally, the amount you received or will receive for your property. In most cases, it refers to the sale price of the property. It could also include compensation you received for property that has been destroyed, expropriated, or stolen.

Quebec Pension Plan (QPP) – a pension plan equivalent to the Canada Pension Plan (CPP) but offered in the province of Quebec. The Quebec provincial government handles the contributions to the QPP.

Rates of tax – the percentage of income for each income tax bracket that must be paid as tax. The Canadian Parliament sets the basic income tax rates. These tax rates increase with the amount of taxable income.

Records – documents such as account books, sales and purchase invoices, contracts, bank statements, and cancelled cheques. Your records must be in English or French. You must keep them organized at your business or residence in Canada. You must keep your records for at least six years from the end of the last fiscal year they relate to. You must make these books and documents available to our CRA officers when requested.

Refund – an amount of money the CRA gives back to you as a result of an assessment or reassessment of your tax return.

Regional excise duty office – an office that serves as the CRA's liaison with you on matters relating to the excise duty program.

Registrant – a person that is registered or has to be registered for the GST/HST.

Remittance – a payment you send through a financial institution or directly to the CRA to pay CPP or QPP contributions, EI premiums, income tax, or GST/HST. It also includes your employer's share of CPP contributions and EI premiums.

Reserves – funds you set aside to cover future expenses, losses, or claims.

Salary – the amount an employer pays an employee for work done. Each employer records this type of employment income on a T4 slip.

Shareholder – the owner of shares of a corporation.

Social insurance number (SIN) – a nine-digit number that identifies you for federal income tax purposes. You need this number in order to work in Canada or to have access to government programs and benefits. Everyone who files an income tax and benefit return must give their SIN.

Sole proprietorship – a form of business that one individual owns entirely and that is not incorporated.

Spouse – for income tax purposes, the person you are legally married to. The term common-law partner includes partners who meet certain conditions. For more information, see the General Income Tax and Benefit Guide.

Supply – the provision of property or a service in any way, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition.

Tax centres – CRA offices located in different parts of Canada where we process tax returns.

Tax payable – the amount of income tax that you have to pay based on the amount of your taxable income for the tax year. It is also the amount of tax payable on a taxable supply (for GST/HST purposes).

Tax services offices (TSO) – CRA offices located across the country that service various local areas. For the address of your tax services office, go to Tax services offices and tax centres.

Taxable benefits – amounts of money, or the value of property or services, that an employer pays or gives an employee in addition to their salary. For example, the premium an employer pays to a provincial or territorial health insurance plan for an employee is a taxable benefit.

Taxable income – the amount of income after all allowable deductions have been subtracted from net income. The CRA uses this amount to calculate tax payable.

Taxable supplies – these are supplies of property and services that are made in the course of a commercial activity and are subject to GST/HST (including zero-rated supplies).

Tax year – the term used to identify the period of time such as a calendar year or fiscal period to assess tax amounts.

Tobacco products – manufactured tobacco, packaged raw leaf, or cigars. Generally, you have to have a tobacco licence from the CRA to manufacture tobacco products in Canada.

Workers' compensation – money paid as a benefit to you if you are injured on the job. The money is paid out of an insurance plan funded by employers and administered by a provincial or territorial workers' compensation organization.

Zero-rated supplies – supplies of property and services that are taxable at a rate of 0%. This means there is no GST/HST charged on these supplies, but GST/HST registrants may be eligible to claim an input tax credit (ITC) for the GST/HST paid or payable on property and services acquired to provide these supplies.

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