After business incorporation, one of the first things you need to do is to decide on a fiscal year-end date. For corporate income tax, this date must be within 53 weeks from the date of incorporation and it should remain the same for the following tax years. With GST/HST, you are required to inform the CRA the reporting end date of your business when you register for a GST/HST account. For the company’s accounting books, it is flexible but ideally the year-end date should be aligned with both corporate income tax and GST/HST.
Many business owners choose December 31 as the year-end date simply because it coincides with the calendar year. However, there are a number of factors that should be considered to determine the optimal fiscal year-end date for your business.
From an operational standpoint, choosing a fiscal year-end during the non-busy period of the business cycle would be ideal. This varies depending on the industry and nature of your business. For example, if you have a seasonal business and the activity levels are high during the summer, you should avoid having a fiscal year-end between the months of May to August. Similarly if you are in retail, you should avoid setting the fiscal year-end date during the Christmas period (e.g. December 31) as sales tend to skyrocket. Choosing a fiscal year-end date during the downtime provides more capacity for business planning, budgeting, forecasting, closing the books, and taking care of other year-end obligations.
Companies that manage inventory may wish to choose a fiscal year-end date where inventory level is the lowest. This generally means after the peak season with less inventory to count which helps minimize the work required by the business owner.
Choosing a fiscal year-end date during the second half of the calendar year (July 1 to December 31) may offer significant tax deferral advantage if your company plans to pay out bonuses. Bonus declared but unpaid before year-end can be claimed as an expense against business income if the bonus is paid within 180 days following fiscal year-end. Businesses can time the payment until the following calendar year so that the person receiving the bonus is not required to pay tax until the following year.
For example, if your business has a July 31 year-end and a bonus is declared prior to year-end. The company has until January 31 of the following year to pay the bonus and be able to write it off against income in the current fiscal year. Note that if you receive the bonus in January, you can defer tax for another year since individuals do not report the bonus as income until it is received.
What If You Made a Mistake?
If your current fiscal year-end is not optimal, you can correct this by requesting a fiscal year-end change with the Canada Revenue Agency (CRA). You are required to provide a legitimate business reason and the existing fiscal year-end date must be used until the change is approved. Any attempt to evade tax by changing the fiscal year-end date will be denied.