Whether you prefer the term financial, tax, or fiscal year, your company’s 12-month business cycle plays an important role in corporation tax filings, shareholder reports, and external audits.
That said, if you’ve recently incorporated your small business in Canada, you may be wondering when your official year-end should be.
In this article, we’ll explore a number of factors you should consider when choosing your corporate fiscal year-end.
What fiscal year-end dates can you choose?
Despite a few exceptions (like partnerships), the Canada Revenue Agency says companies’ fiscal years can span any 12-month period—so long as their first tax year-end date falls within 53 weeks of their incorporation date.
Most corporations, however, either:
- Follow the calendar year and use December 31 as their year-end OR
- Use the last day of the month closest to the 53-week mark (to keep your books clean, you should choose the last day of a month for your year-end—and align that date with your GST/HST reporting period)
If you incorporated on June 13, for example, you could declare May 31 the following year as your corporate fiscal year-end.
Declaring your corporate fiscal year-end
Technically, you don’t have to declare your financial year until you file your first T2 corporate tax return.
To avoid interest or penalties, this must either happen:
- Within 3 months of your year-end if you have tax payable (if your financial year ends June 30, for example, your tax balance will be due before Sept 30)
- Within 6 months of your year-end if you don’t owe tax
It’s considered best practice, however, to set your year-end date when you incorporate your Canadian business.
3 Key factors to consider when choosing your tax year-end date
Small business owners often choose a December 31 year-end date to match their personal tax filing year.
Since this can make competing for an accounting firm’s attention difficult come tax time, however, you might find choosing a different year-end makes meeting filing deadlines easier and less expensive.
Here are 3 other factors you should consider when choosing your corporate fiscal year-end.
1. Tax filing costs
Tax filing costs often include getting help updating your books, paying a year-end accountant to prepare your return, and parting with income tax funds. Since you’ll likely have many other expenses during your first business year, it makes sense to delay filing your initial tax return as long as possible.
If, for example, you incorporated on September 1, 2021, rather than defaulting to December 31 as your year-end date—and having to submit any taxes payable before March 31 the following year—you could choose a fiscal year end of August 31.
That way, you’d avoid having to file your first return until November 30, 2022 (if you owe tax) or Feb 28, 2023 (if you don’t).
2. Tax planning initiatives
If your tax plan includes bonusing out corporate income for accounting purposes, you must ensure those bonuses are paid within 180 days of your corporate fiscal year-end.
Choosing a year-end date later in the year allows your corporation to:
- Deduct bonuses as an expense in the year they’re accrued
- Delay paying bonuses until after December 31
That means you can defer recognizing bonus income personally for tax purposes until the next calendar year.
3. Seasonal work periods
Seasonal businesses (like food trucks, tutoring services, or roofing companies, for example) typically earn most of their business income over just a few months each year.
If you have a peak earning season, choosing a fiscal period that ends after your busy months are done will give you more time to bring your books up to date before filing your corporate income tax return—and more opportunity to review your annual performance before setting goals for the following year.
Can fiscal year-end dates be changed?
Once you’ve declared your financial year, changing it can be challenging since any alterations will impact other reporting obligations (including your GST/HST filing and remittance due dates).
That said, if you really need to change your fiscal year-end, you must apply for approval by writing to the CRA and explaining your reasons.
You won’t need CRA approval, however, if your year-end change is the result of your corporation:
- Moving out of Canada or being acquired
- Changing its tax exemption status
- Filing its final corporate return for a shortened tax year
Generally speaking, you’ll probably find it makes the most sense to choose the last day of the month closest to 53 weeks from the date you incorporated as your corporate fiscal year-end.
Not only will this let you postpone your initial tax bill (and professional fees) as long as possible, it will give you more time to take advantage of the small business deduction and various tax planning opportunities.
Once you’ve established your financial year, staying on top of your books every month will keep you from scrambling to update them and prepare your financial statements come tax time.
If you need assistance managing your day-to-day corporate bookkeeping, Enkel can help! Contact us today for more information.