3 Canadian tax & accounting terms starting with O
Plain-language definitions, each with the CRA rule it comes from and the filings it affects.
Operating Expense (OpEx)
An operating expense is a day-to-day cost of running a business, such as rent, salaries and utilities, deducted in full in the period it is incurred.
In practice: A company's monthly rent, staff wages and hydro bills are operating expenses, deducted in full each period. A new $20,000 server, by contrast, is capital expenditure deducted gradually.
Overhead
Overhead is the ongoing cost of running a business that is not directly tied to producing a specific product or service, such as rent, administration and insurance.
In practice: A consulting firm's overhead, office rent, admin staff, software and insurance, totals $200,000 a year. Its billings must exceed that overhead plus direct costs before it earns any profit.
Owner's Draw
An owner's draw is money a sole proprietor or partner takes out of the business for personal use, which is not a deductible expense and not a salary.
In practice: A sole proprietor earns $80,000 net profit and withdraws $60,000 for personal living costs. She is taxed on the full $80,000, not $20,000, because the $60,000 draw is not a deductible business expense.
Related terms from other letters
Terms the entries above rely on, defined the same way.
Capital Expenditure (CapEx)
A capital expenditure is money spent to acquire or improve a long-lived asset, capitalised and depreciated over time rather than expensed immediately.
In practice: Replacing a roof that extends a building's life is capital expenditure, capitalised and depreciated. Patching a leak is a repair, deductible immediately. The tax timing of the deduction differs sharply between the two.
Expense
An expense is a cost incurred to earn business income, deducted against revenue to arrive at profit, and generally deductible for tax if reasonable.
In practice: You spend $200 on office supplies and $200 on a client lunch. The supplies are fully deductible. The lunch is limited to 50%, so only $100 reduces your taxable income.
Income Statement
An income statement, or profit and loss statement, reports a business's revenue and expenses over a period, ending in net profit or loss.
In practice: A company reports $500,000 revenue, $300,000 cost of goods sold, $150,000 operating expenses and $10,000 tax. Its income statement shows $40,000 net income for the year.
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