Financial Dictionary
financialtools.ca started with a simple idea: give Canadians free, accurate calculators for the money decisions that matter. The Financial Dictionary is the next tool in that mission.
Here you will find clear, jargon-free definitions of the words Canadians actually encounter, from RRSPs to amortization to the OAS clawback. Everything is written for Canada, not adapted from American content that gets our rules wrong, and available in both official languages. Understanding the words is the first step to understanding your money, so every definition connects to a calculator where you can see the concept in action.
This section grows continually, and every definition is reviewed by a CFP® professional.
A
- Accelerated Biweekly PaymentsPaying half your monthly payment every two weeks. The 26 half-payments equal 13 months a year, quietly shortening your amortization.
- Accrued InterestThe interest a bond has earned since its last coupon payment. A buyer pays it to the seller on top of the quoted price.
- AmortizationPaying off a debt gradually through scheduled payments that cover both interest and principal, or spreading an asset's cost over its useful life.
- Amortization PeriodThe total time it would take to pay off your mortgage completely at the current payment level, commonly 25 years in Canada.
- AnnuityA contract with a life insurer that converts a lump sum into guaranteed income, often for life. The other path for retirement savings besides a RRIF.
- Average (Effective) Tax RateYour total income tax divided by your total income: what you actually pay overall, always lower than your marginal rate.
B
- Bank of Canada Policy RateThe overnight interest rate the central bank sets eight times a year. It steers prime, variable mortgages, savings rates, and the economy.
- Basic Personal AmountThe amount of income every Canadian can earn before paying federal income tax, delivered as a non-refundable tax credit.
- BondA loan you make to a government or company in exchange for regular interest and your money back at maturity.
- Bond DurationA measure of how sensitive a bond's price is to interest rate moves: roughly, the percentage price change for a 1% rate change.
- Bond LadderSplitting money across bonds or GICs maturing in successive years, so something matures regularly no matter where rates go.
- Bridge FinancingA short-term loan that covers the gap when you buy your next home before the sale of your current one closes.
C
- Canada Disability Savings Bond (CDSB)Up to $1,000 a year of free RDSP money for lower-income beneficiaries, $20,000 lifetime, no contributions required.
- Canada Disability Savings Grant (CDSG)RDSP matching of up to 300% on contributions, up to $3,500 per year and $70,000 lifetime, depending on family income.
- Canada Learning Bond (CLB)Free RESP money for children from modest-income families: up to $2,000 per child with no contribution required.
- Capital Gains Inclusion RateThe fraction of a capital gain that is taxable: 50% in Canada. The proposed 2024 increase to two-thirds was cancelled.
- Capital Gains TaxThe tax on profit from selling an investment or property. In Canada, half the gain is added to your income and taxed at your marginal rate.
- CESG (Canada Education Savings Grant)The 20% federal match on RESP contributions: up to $500 a year and $7,200 lifetime per child, plus extra for modest incomes.
- Clean Price vs. Dirty PriceA bond's quoted (clean) price excludes accrued interest; the dirty price you actually pay includes it.
- Closed MortgageThe standard Canadian mortgage: a lower rate in exchange for limits on prepayment and a penalty if you break the term early.
- CMHC (Canada Mortgage and Housing Corporation)The federal Crown corporation behind most mortgage default insurance in Canada, housing programs, and market research.
- CollateralThe asset a lender can seize if you stop paying. For mortgages, how the charge is registered (standard vs collateral) affects switching lenders.
- Commuted ValueThe lump sum today that replaces your future defined benefit pension if you leave the plan. It moves inversely with interest rates.
- Compound InterestInterest earned on both your original money and the interest it has already earned. The engine behind long-term investment growth.
- Contribution RoomThe maximum amount you are allowed to contribute to a registered account like a TFSA or RRSP without penalty.
- CouponThe fixed interest a bond pays, named for the paper coupons investors once clipped. A 4% coupon on $1,000 face pays $40 a year.
- CPP (Canada Pension Plan)Canada's contributory public pension. You and your employer pay in during your working years; it pays a monthly benefit from as early as 60.
- Credit ScoreA number between 300 and 900 that tells lenders how reliably you repay debt. It shapes your mortgage rate, credit limits, and approvals.
D
- Debt Service Ratios (GDS and TDS)The two percentages lenders use to decide how much mortgage you can afford: housing costs (GDS) and all debts (TDS) as shares of gross income.
- Defined Benefit PensionA workplace pension that promises a set lifetime income based on your salary and years of service. The employer carries the investment risk.
- Defined Contribution PensionA workplace pension where contributions are fixed but the retirement income depends on how the investments perform. You carry the risk.
- Dividend Tax CreditThe credit that offsets the corporate tax already paid on Canadian dividends, making them one of the most tax-efficient forms of investment income.
- Down PaymentThe cash you put toward a home purchase: minimum 5% on the first $500,000, 10% above that, and 20% for homes of $1.5 million or more.
E
- Eligible vs. Non-Eligible DividendsThe two tax classes of Canadian dividends: eligible (public companies, better credit) and non-eligible (small business income, smaller credit).
- ETF (Exchange-Traded Fund)A fund that trades on an exchange like a stock, usually tracking an index at a fraction of mutual fund fees.
F
- Face Value (Par Value)The amount a bond repays at maturity and the base its coupon is computed on, normally $1,000 or quoted per $100.
- FHSA (First Home Savings Account)A registered account for first-time buyers: contributions are tax-deductible like an RRSP and withdrawals for a first home are tax-free like a TFSA.
- Fixed-Rate MortgageA mortgage whose interest rate is locked for the entire term, so your payment never changes until renewal.
- Fund FactsThe plain-language two-page disclosure Canadian sellers must give you before you buy a mutual fund: fees, risk, performance.
G
- GDS Ratio (Gross Debt Service)Housing costs as a share of gross income. Insured mortgages cap it at 39%: the first gate your mortgage application must pass.
- GIC (Guaranteed Investment Certificate)A deposit that guarantees your principal and pays a set interest rate for a fixed term. Insured by CDIC up to $100,000 per category.
- GIS (Guaranteed Income Supplement)A non-taxable monthly top-up to OAS for lower-income seniors. The amount shrinks as your other income grows.
- GST and HSTCanada's value-added sales taxes: the 5% federal GST everywhere, harmonized with provincial tax into HST in five provinces.
H
- HBP (Home Buyers' Plan)A program letting first-time buyers withdraw up to $60,000 from an RRSP tax-free for a down payment, repaid over 15 years.
- HELOC (Home Equity Line of Credit)A revolving credit line secured by your home equity, usually at prime plus a spread. Interest-only minimums make it flexible and risky.
- Home EquityYour home's market value minus everything you still owe on it: the part you actually own, and the base for HELOCs and refinancing.
I
- Index FundA fund that simply holds everything in a market index instead of picking stocks. Low fees, and it beats most active managers over time.
- InflationThe general rise in prices that erodes what each dollar buys. The Bank of Canada targets 2% a year; savers and retirees feel it most.
- Interest Rate Differential (IRD)The penalty formula for breaking a closed fixed mortgage: the rate gap on your remaining balance for the remaining term.
L
- Land Transfer TaxThe provincial (and sometimes municipal) tax you pay when you buy a property, due in cash at closing on top of your down payment.
- LIF (Life Income Fund)The locked-in version of a RRIF: your LIRA converts to it in retirement, with the same minimum withdrawals plus an annual maximum.
- Life AnnuityAn annuity that pays guaranteed income for as long as you live, however long that is. Insurance against outliving your money.
- LIRA (Locked-In Retirement Account)Where money from a former employer's pension goes: it grows like an RRSP but stays locked until retirement, then converts to a LIF.
- LLP (Lifelong Learning Plan)A program letting you withdraw up to $20,000 from an RRSP tax-free to fund full-time education for you or your spouse, repaid over 10 years.
M
- Marginal Tax RateThe tax rate you pay on your last dollar of income. It determines how much of any raise, bonus, or RRSP deduction you keep.
- MER (Management Expense Ratio)The annual percentage a fund quietly deducts for management, operations and taxes. Canada's mutual fund MERs are among the world's highest.
- Mortgage Default InsuranceInsurance required when your down payment is under 20%. It protects the lender if you stop paying, not you or your family.
- Mortgage RefinancingReplacing your mortgage with a bigger or restructured one, up to 80% of your home's value, to access equity or better terms.
- Mortgage RenewalSigning a new term when your current one ends. Your rate resets to market, and it is your best window to renegotiate or switch lenders.
- Mortgage Stress TestTo qualify for a mortgage, you must prove you could afford payments at the greater of your rate plus 2% or 5.25%, not just your actual rate.
- Mortgage TermThe length of your current mortgage contract, often 5 years in Canada. When it ends, you renew, renegotiate, or pay off the balance.
- Mutual FundA professionally managed pool of investors' money, priced once a day. Still Canada's most widely held investment, and often its most expensive.
N
O
- OAS (Old Age Security)Canada's residence-based public pension, paid monthly from age 65 and funded from general tax revenue. No work history required.
- OAS ClawbackA 15% recovery tax that reduces Old Age Security payments once your net income passes an annual threshold ($95,323 for 2026).
- Ontario SurtaxA tax on Ontario's provincial tax: 20% above one threshold, another 36% above a second, quietly raising real marginal rates.
- Open MortgageA mortgage you can pay off in full at any time without penalty, in exchange for a noticeably higher interest rate.
- Over-Contribution PenaltyThe 1% per month tax on amounts above your TFSA, RRSP (beyond the $2,000 buffer), or FHSA room, until the excess comes out.
P
- Pension Adjustment (PA)The value of what your workplace pension earned you this year. It is deducted from next year's RRSP room, which is why pension members have little.
- Posted RateThe bank's sticker mortgage rate that almost nobody pays. It exists mostly to inflate penalty math and anchor negotiations.
- Premium and Discount BondsA bond trading above face value (premium) or below it (discount), depending on how its coupon compares to current rates.
- Prepayment PenaltyThe fee for breaking a closed mortgage early: usually three months' interest or the interest rate differential, whichever is greater.
- Prepayment PrivilegeHow much extra you may pay on a closed mortgage each year without penalty, typically 10% to 20% lump sum plus payment increases.
- Prime RateThe reference rate banks charge their best customers. Variable mortgages, HELOCs, and many loans are priced as prime plus or minus a spread.
- PrincipalThe amount you actually borrowed (or invested), as opposed to the interest it generates. Every loan payment splits between the two.
Q
R
- RDSP (Registered Disability Savings Plan)A registered account for people with the Disability Tax Credit, with government grants and bonds that can far exceed your own contributions.
- Real Return BondA Government of Canada bond whose principal and coupons rise with inflation. New issuance stopped in 2022, but they still trade.
- RESP (Registered Education Savings Plan)A registered account for a child's education where the government matches 20% of contributions through the CESG, up to $7,200 per child.
- RL-1 SlipQuébec's provincial counterpart to the T4: employment income and deductions reported to Revenu Québec. Québec workers get both slips.
- RRIF (Registered Retirement Income Fund)What your RRSP becomes in retirement: investments keep growing tax-deferred, but you must withdraw a minimum amount every year.
- RRIF Minimum WithdrawalThe percentage of your RRIF you must withdraw each year starting the year after you open it. The rate rises with age.
- RRSP (Registered Retirement Savings Plan)A registered account where contributions reduce your taxable income and investments grow tax-deferred until withdrawal, usually in retirement.
S
- Second MortgageAn additional loan secured against your home behind your main mortgage. Higher rates because the second lender gets paid second.
- Segregated FundA mutual-fund-like investment wrapped in an insurance contract, adding maturity and death guarantees, creditor protection, and higher fees.
- Semi-Annual CompoundingCanadian fixed mortgages compound interest twice a year by law, so a quoted 5% costs slightly less than a US-style monthly-compounded 5%.
- Sequence of Returns RiskThe danger that bad market years early in retirement, combined with withdrawals, permanently damage a portfolio that averages would call fine.
- Spousal RRSPAn RRSP you contribute to for your spouse: you take the deduction, they own the account. A tool for evening out retirement income.
- Strip BondA bond with its coupons stripped away, sold at a deep discount and paying only face value at maturity. Taxed annually despite paying nothing.
- Successor HolderA spouse or common-law partner who takes over your TFSA at death, keeping it tax-free without using their own contribution room.
T
- T4 SlipThe slip your employer files each February showing your pay, deductions and pension adjustment: the backbone of your tax return.
- Tax BracketThe income ranges that each get their own tax rate. Only the income inside a bracket is taxed at that bracket's rate.
- Tax Credit vs. Tax DeductionA deduction reduces the income you are taxed on (worth more at higher brackets); a credit reduces the tax itself, usually at a fixed rate.
- Taxable IncomeThe number your tax is actually computed on: total income minus deductions like RRSP contributions and childcare expenses.
- TDS Ratio (Total Debt Service)Housing costs plus all other debt payments as a share of gross income. Insured mortgages cap it at 44%.
- TFSA (Tax-Free Savings Account)A registered account where investments grow tax-free and withdrawals are never taxed. The 2026 contribution limit is $7,000.
- Trailing CommissionThe ongoing slice of a mutual fund's MER paid to the selling dealer, banned on do-it-yourself discount platforms since 2022.
- Treasury Bill (T-Bill)Short-term Government of Canada debt sold at a discount and repaid at face value within a year. The safest yield in Canadian dollars.
- Trigger RateThe rate level where a fixed-payment variable mortgage's payment no longer covers the interest, so the balance starts growing.
V
Y