6 Canadian tax & accounting terms starting with F
Plain-language definitions, each with the CRA rule it comes from and the filings it affects.
Fair Market Value (FMV)
Fair market value is the price a property would sell for between a willing buyer and a willing seller, both informed and acting freely, used throughout tax law to value transactions.
In practice: A parent sells a rental property to their child for $300,000 when its FMV is $500,000. The CRA treats the parent as having sold at $500,000 for the capital gain, while the child's cost base may be only $300,000, creating potential double tax.
Financial Statements
Financial statements are the formal reports summarising a business's financial position and performance, primarily the balance sheet, income statement and cash flow statement.
In practice: When applying for a business loan, the bank asks for two years of financial statements. It reads the balance sheet for solvency, the income statement for profitability, and the cash flow statement to judge whether the business can service the loan.
Fiscal Year
A fiscal year is the 12-month period a business uses for accounting and tax, which does not have to align with the calendar year.
In practice: A retailer whose busiest period is December might choose a January 31 fiscal year-end, so that year-end inventory counts and accounting fall in a quieter month rather than during the holiday rush.
Fixed Asset
A fixed asset is a long-lived, tangible item a business owns and uses to generate income, such as equipment, vehicles, machinery or buildings.
In practice: A landscaping company's fixed assets include its trucks, mowers and trailers. Each is capitalised and deducted over time through its CCA class, rather than written off entirely in the year of purchase.
Fixed Cost
A fixed cost is a business expense that stays the same regardless of how much you produce or sell, such as rent, insurance and salaried wages.
In practice: A bakery pays $4,000 monthly rent (fixed) regardless of how much bread it sells, while flour and packaging (variable) rise with each loaf produced. Together they determine how many loaves it must sell to break even.
Foreign Tax Credit
A foreign tax credit reduces your Canadian tax by the amount of income tax you already paid to another country on the same income, preventing double taxation.
In practice: You earn $10,000 of foreign investment income and pay $1,500 of foreign withholding tax on it. Canada taxes the $10,000 too, but a foreign tax credit for the $1,500 already paid reduces your Canadian tax so the income is not taxed twice.
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