After incorporating the business, you may come up with the question how to select a fiscal year-end. You may be buried with a lot of filing deadlines already, HST, payroll and potentially WSIB monthly filing as well. How about your corporate income tax filing deadline? Per the CRA, corporate income tax return must be received within 6 months of the corporation’s year-end. Failure to file by the due date may result in hefty penalties and interest charges. Now, you are required to select the fiscal year-end for your corporation.
So, where do I start my corporation’s year-end?
First of all, to be clear, we are talking about the corporation’s year-end. For a lot of business in sole proprietorship or partnership, they normally follow the calendar fiscal year-end, December 31. However, there is an option. They can request to choose a non-calendar year-end after completing Form T1139, Reconciliation of Business Income for Tax Purposes.
Secondly, per the CRA, corporations are allowed to select any dates for their fiscal year-end as long as the period is no more than 53 weeks. That means you can choose any date as your corporation’s fiscal year-end in between the date of incorporation to the extent of 53 weeks.
Lastly, other considerations are required to select a fiscal year-end.
Here they are:
1. Nature of the business
Some manufacturing/wholesale companies need to run large volume of inventories in certain months (“peak season”) during the year. Generally speaking, companies may be short-staffed in those particular months. If a year-end is chosen in between those months, you can imagine additional resources may be required for year-end inventory count, year-end tax filings, etc. Obviously, the cost increases.
2. Tax deferral opportunity
You may be familiar with the T1 personal and T2 corporate tax return.The bonus/salary set up as accrual in corporate side can be paid out and reported on T1 in the following year. The lag creates a great opportunity to defer tax payable on the bonus/salary.That said, the year-end needs to be chosed after July as 180-day rule kicks in.
3. Accounting firm’s busy season
Since it has been written in so many articles, choose a year-end to accommodate the accounting firm’s availability, I don’t personally agree with this reason. Business decision should be driven by the nature of the business instead of your accountant’s availability. Right?
4. Consistent with partner’s year-end
In some cases, your company have frequent and large volume transactions with another busines partner. In order to make easier for both parties’ month-end closing and reconciling process, choose the same year-end as your business partner’s.
So, I choose my year-end but now I like to change it. What am I supposed to do then?
Changing the year-end may happen sometime. Generally speaking, unless you have got the CRA’s blessing to change the tax year-end, the corporation’s year-end will be the same every year. What you need to do is to write a letter to the CRA to request for change and provide the reasoning.
Selecting a year-end may sound easy but it really needs a lot consideration. So, choose it wisely.
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