A Glossary of Investment Terms

Asset Classes:

Different types of investments. Stocks, bonds and interest-bearing [GICs, money market certificates, treasury bills] investments are the three major asset classes.

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 relating to property transferred to children under 18 also will be attributed back to you. The exception to this rule is that capital gains relating to property transferred to children under 18 will not be attributed back to you.

Balanced Fund:

A balanced fund invests in a mixture of stocks, bonds and money market securities. Also known as a 'diversified fund'.

Beneficiary

This is the person who benefits from the terms of a trust, a will, an RRSP, a RRIF, a LIF, an annuity or a life insurance policy. In relation to RRSP's, RRIF's, LIF's, Annuities and of course life insurance, if the beneficiary is a spouse, parent, offspring or grand-child, they are considered to be a preferred beneficiary. If the insured has named a preferred beneficiary, the death benefit is invariably protected from creditors. There have been some court challenges of this right of protection but so far they have been unsuccessful. See "Creditor Protection" below. A beneficiary under the age of 18 must be represented by an individual guardian over the age of 18 or a public official who represents minors generally. A policy owner may, in the designation of a beneficiary, appoint someone to act as trustee for a minor. Death benefits are not subject to income taxes. If you make your beneficiary your estate, the death benefit will be included in your assets for probate.

Another way to avoid probate fees or creditor claims in Canada against life insurance proceeds is for the insured person to designate and register with his/her insurance company's head office an irrevocable beneficiary. By making such a designation, the insured gives up the right to make any changes to his/her policy without the consent of the irrevocable beneficiary. Because of the seriousness of the implications, an irrevocable designation should only be made for good reason and where the insured fully understands the consequences.

Bond:

When you invest in a bond you are lending money to a company or a government. The company or government issuing the bond promises to repay the money according to a specific rate and payment schedule.

Bond Fund:

A fund which invests in bonds issued by companies and governments. Also known as a 'fixed income fund'.

Assuris

Assuris was founded in 1990, Assuris is a not for profit organization that protects Canadian policyholders in the event that their life insurance company should fail.

Canadian Deposit Insurance Corporation

Better known as CDIC, this is an organization which insures qualifying deposits and GICs at savings institutions, mainly banks and trust companys, which belong to the CDIC for amounts up to $60,000 and for terms of up to five years. Many types of deposits are not insured, such as mortgage-backed deposits, annuities of duration of more than five years, and mutual funds.

Compound Interest

Interest earned on an investment at periodic intervals and added to principal and previous interest earned. Each time new interest earned is calculated it is on a combined total of principal and previous interest earned. Essentially, interest is paid on top of interest.

Creditor Proof Protection

The creditor proof status of such things as life insurance, non-registered life insurance investments, life insurance RRSPs and life insurance RRIFs make these attractive products for high net worth individuals, professionals and business owners who may have creditor concerns. Under most circumstances the creditor proof rules of the different provincial insurance acts take priority over the federal bankruptcy rules.

The provincial insurance acts protect life insurance products which have a family class beneficiary. Family class beneficiaries include the spouse, parent, child or grandchild of the life insured, except in Quebec, where creditor protection rules apply to spouse, ascendants and decendants of the insured. Investments sold by other financial institutions do not offer the same security should the holder go bankrupt. There are also circumstances under which the creditor proof protections do not hold for life insurance products. Federal bankruptcy law disallows the proctection for any transfers made within one year of bankruptcy. In addition, should it be found that a person shifted money to an insurance company fund in bad faith for the specific purpose of avoiding creditors, these funds will not be creditor proof.

Diversification:

The strategy of spreading your money among a number of different investments to help reduce the risks usually associated with investing.

Fiat Money

Fiat Money is paper currency made legal tender by law or fiat. It is not backed by gold or silver and is not necessarily redeemable in coin. This practice has had widespread use for about the last 70 years. If governments produce too much of it, there is a loss of confidence. Even so, governments print it routinely when they need it. The value of fiat money is dependent upon the performance of the economy of the country which issued it. Canada and U.S. currency falls into this category.

Guaranteed Retirement Income for Life:

Segregated funds bundled inside a Guaranteed Lifetime Minimum Withdrawal Benefit.

Guaranteed Investment Certificates:

Deposit securities which pay a predetermined rate of interest for a stated term. Also known as 'GICs' or 'GIAs'.

Income Splitting

This is a 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. Even though attribution rules limit income splitting, there are still a number of legitimate ways to do so, such as through the use of spousal RRSPs.

Inflation:

When the prices of goods and services rise, causing the purchasing power of your dollar to decline.

Money Market Fund:

A fund which invests in short-term debt securities such as treasury bills and commercial paper.

Portfolio:

The holdings of securities by an individual or institution.

Risk/Return:

Rule of 72

This is a very important rule to know. The rule is that the number 72 divided by the rate of return of your investment equals the number of years it takes for your investment to double.

For example:

• At 1% your money will double in 72 years.
• At 2% your money will double in 36 years.
• At 3% your money will double in 24 years.
• At 4% your money will double in 18 years.
• At 5% your money will double in 14.4 years.
• At 6% your money will double in 12 years.
• At 7% your money will double in 10.3 years.
• At 8% your money will double in 9 years.
• At 9% your money will double in 8 years.
• At 10% your money will double in 7.2 years.

Securities:

The general term for the different investments you purchase [stocks, bonds, money market securities, T-bills, etc.].

Stock:

A stock is a share of ownership in a company. If you buy stocks of a company, you are one of the company's owners. Stocks are also called 'shares' or 'equities'.

Stock Fund:

A fund which invests in stocks. Also known as an 'equity fund'.

Tax-deferred:

Refers to when taxes are postponed on contributions to, and investment earnings within, registered retirement plans [pension plans, DPSPs, Group RRSPs] until you take your money out of the plan. Also commonly referred to as 'tax-sheltered'.

Taxable Income:

Income on which you must pay tax in the current year.

Treasury Bills:

Short-term debt securities issued by governments. Also known as 'T-bills'.

Unit Value:

The cost per unit of a fund. It is calculated by dividing the total market value of the investments in the fund by the total number of units in the fund.