4 Canadian tax & accounting terms starting with L
Plain-language definitions, each with the CRA rule it comes from and the filings it affects.
Liability
A liability is a financial obligation a business owes to others, from supplier bills and loans to taxes payable and deferred revenue.
In practice: A company's liabilities include $8,000 owed to suppliers, a $40,000 bank loan, and $3,000 of HST collected but not yet remitted. The HST is a trust liability the directors are personally on the hook for if it goes unpaid.
Lifetime Capital Gains Exemption (LCGE)
The lifetime capital gains exemption shelters up to $1. 25 million of capital gain (2025) on the sale of qualifying small business corporation shares or farm or fishing property.
In practice: You sell your qualifying small business corporation for a $1. 2 million gain. Using the LCGE, the entire gain can be sheltered from tax, a benefit a sole proprietor selling assets could never access.
Line of Credit
A line of credit is a flexible loan that lets a business borrow up to a set limit as needed, repay, and re-borrow, paying interest only on the amount used.
In practice: A business with a $100,000 line of credit draws $30,000 to cover payroll while awaiting customer payments, then repays it when the receivables arrive, paying interest only on the $30,000 for the days it was outstanding.
Liquidity
Liquidity is how easily a business can meet its short-term obligations and convert assets to cash without loss, a core measure of financial health.
In practice: A company shows a healthy profit but has tied up its cash in inventory and slow receivables. When payroll and a tax remittance fall due the same week, its poor liquidity leaves it scrambling for cash despite being profitable.
Related terms from other letters
Terms the entries above rely on, defined the same way.
Asset
An asset is anything of value your business owns or controls that is expected to provide future economic benefit, from cash to equipment to intellectual property.
In practice: A delivery company's assets include the cash in its bank account (current), the receivables owed by customers (current), and its trucks (non-current). The trucks are capitalised and depreciated through CCA Class 10 rather than deducted in full the year they were bought.
Equity
Equity is the owners' residual stake in a business, what would be left for the owners after all assets are used to pay off all liabilities.
In practice: A company has $200,000 in assets and $120,000 in liabilities, so equity is $80,000. That $80,000 is the shareholders' stake, split between the capital they originally invested and the profits the business has retained.
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