Portfolio and tax terms, defined

Most of these terms are ones you meet on a statement or a tax slip rather than by choosing to learn them. The definitions are short; what each entry really tries to give you is the thing it gets confused with, because that is where the expensive mistakes live.

Terms that depend on a dollar limit or a rate link out to the page that owns that figure, rather than repeating it here where it would go stale.

Cost and tax

Adjusted cost base

What you paid for a holding, adjusted over time for events that change it, further purchases, return of capital, reinvested distributions, corporate actions. It is the figure you subtract from proceeds to get a capital gain.

Confused with: book value. See below, and the full explanation.

Book value

An institution's record of what a holding cost, based on the activity that institution can see. Accurate about its own account and not defined to be your adjusted cost base, the two come apart after a transfer in kind, after a return-of-capital distribution, or when you hold the same security at more than one institution.

Confused with: adjusted cost base, constantly. It is the single most common cost-base error.

Identical property

Units or shares of the same security, treated by CRA as one pool per taxpayer regardless of how many accounts hold them. It is why you cannot keep a separate cost base per brokerage, and why you cannot choose to sell the cheapest units.

Confused with: per-lot or specific-lot identification, which the US permits and Canada does not for identical property. See pooling cost base across two brokerages.

Return of capital

A distribution that is not income. It is not taxed when you receive it; it reduces your adjusted cost base instead, which increases the gain you report later.

Confused with: a dividend, or with "free money". It is neither. It is a deferral. See return of capital and your ETF cost base.

Superficial loss

A capital loss the rules deny because you, or someone affiliated with you, reacquired the identical property inside a window around the sale and still held it at the end of that window. Both conditions must hold.

Confused with: a wash sale, the US concept, which is similar in spirit and different in its details. See tax-loss selling and the superficial loss rule.

Capital gain, realised and unrealised

A gain is realised when you dispose of the holding, and only a realised gain is a taxable event. An unrealised gain is a change in market value while you still hold it, visible in any portfolio report and not reportable to anyone.

Confused with: each other, in the direction that causes worry, a large unrealised gain is not a tax bill.

Disposition

The event that realises a gain or loss. A sale is the obvious one; a deemed disposition can arise without a sale, for example on emigration or death. A transfer in kind between your own taxable accounts is not a disposition.

Confused with: any movement of shares. Moving is not selling.

T5008

The slip reporting your securities dispositions. Its box 20 carries the broker's cost or book value, which CRA states plainly may not be your adjusted cost base.

Confused with: a finished tax calculation. It is information, not a determination. See box 20 is not your adjusted cost base.

Schedule 3

The form on which capital gains and losses are reported. The cost figure you enter is your own adjusted cost base, not necessarily the figure on the slip.

Accounts and room

Contribution room

The amount you are permitted to contribute to a registered account. It accrues by different rules in each account type, and the authoritative figure is the one in CRA My Account rather than any institution's estimate. See contribution room and the RRSP deadline.

Confused with: your account balance, and with what any single institution can tell you. Room is a property of you, not of an account.

Registered and non-registered

Registered accounts (TFSA, RRSP, FHSA, RESP, RRIF) have tax treatment attached and gains inside them are not taxable events. Non-registered, also called taxable, accounts have no special treatment and are where cost base and capital gains matter. See Canadian registered accounts explained.

Pension adjustment

The value of the benefit you accrued in an employer pension in a year, which reduces the RRSP room you would otherwise have earned. It is the usual reason someone's RRSP room is lower than the income calculation suggests.

Transfer in kind

Moving a holding between accounts without selling it. Not a disposition, so it does not trigger a gain, but it is the most common point at which a receiving institution's book value stops matching your real cost.

Performance

Time-weighted return

The return on the holdings, with the effect of deposits and withdrawals removed. It is the figure that is comparable to an index, because an index had no cash flows.

Confused with: money-weighted return. See which one answers your question.

Money-weighted return

The return on your money, including the effect of when you added or removed it. Two people holding identical investments can have different money-weighted returns purely from contribution timing.

Confused with: a measure of your holdings. It measures the holdings and your timing together.

Simple return

Value now against money in, with no adjustment for timing at all. Easy to compute and misleading the moment there are cash flows.

Benchmark

The reference you compare against. A comparison only means something when the benchmark matches the portfolio in currency, asset mix and cash-flow treatment, comparing a contribution-heavy portfolio's money-weighted return to an index measures mostly your deposits.

Confused with: a scoreboard. It is a counterfactual, the return from an alternative you could genuinely have held. See how to benchmark your portfolio.

Compound annual growth rate (CAGR)

The single steady annual rate that connects a starting value to an ending value over a period. It is a geometric average, so it accounts for compounding.

Confused with: average annual return, which is the arithmetic average of the yearly figures and is always the larger of the two unless every year was identical. See CAGR vs average annual return.

Drift

How far your current allocation has moved from the targets you set, usually through some holdings growing faster than others. Drift is measured against your stated targets; it is not a judgement that anything is wrong.

Holdings and risk

Asset allocation

The split of your portfolio across asset classes, regions, sectors or currencies. It is a property of everything you own together, which is why a per-account view understates concentration when you hold accounts in several places. See tracking multiple investment accounts.

Concentration

How much of your portfolio depends on a small number of positions or issuers. Two accounts that each look diversified can hold the same few names twice, and only the combined view shows it.

Look-through

Resolving a fund or ETF into its underlying holdings, so that exposure is measured on what you actually own rather than on the number of tickers. Two broad ETFs can overlap heavily.

Management expense ratio

The annual cost of a fund as a proportion of assets, deducted from the fund rather than billed to you, which is why it is easy to ignore. Small differences compound over decades.

Confused with: a fee you would see on a statement. You will not; it is already inside the fund's returns.

Read-only connection

A brokerage link that can see positions and transactions and cannot place orders or move money. It is the connection type a tracker needs; anything asking for trading permission is a different kind of integration and a different decision.

Common questions

Is book value the same as adjusted cost base?

No. Book value is your institution's record based on the activity it can see, and adjusted cost base is a taxpayer-level figure that follows you across every account. They agree for a simple holding bought and sold in one place, and diverge after transfers, return of capital, or the same security held at two institutions.

Which return figure should I use?

It depends on the question. Use time-weighted return to judge the holdings or compare against an index, and money-weighted return to see what your own money actually earned including the effect of when you invested it. Neither is the real one; they answer different questions.

Why does this glossary link out instead of giving me the numbers?

Because definitions do not date and limits do. Every contribution limit, rate and threshold is indexed or legislated and changes on its own schedule, so each one lives on the page that owns it and is re-verified there rather than being duplicated here where a stale copy would go unnoticed.