After incorporation, one of the first things you need to do is to choose a fiscal year-end. The process is quite simple. For corporate income tax, you indicate the year-end date that is within 53 weeks from the date of incorporation on the first corporate tax return and it will be the same going forward. For GST/HST, you inform the CRA of the year-end date when you register for a GST/HST account. Many business owners believe that it is most appropriate to choose December 31 simply because it coincides with the calendar year. However, there are a number of factors that need to be considered to come up with an ideal fiscal year-end for your corporation.
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 your business provides summer camp services, you should avoid choosing fiscal year-end during the summer since you will be busy processing sales and servicing clients. Setting year-end during downtime gives you more time 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 year-end where inventory level is the lowest. This generally means that it is after a peak period and there is less inventory to count which minimizes the work required by the owner.
Choosing a fiscal year-end during the second half of the calendar year (July 1 to December 31) could provide significant tax deferral advantage if your company pays bonus to management. Bonus declare (but unpaid) during a fiscal year-end can be claimed as an expense against business income as long as the bonus is paid within 180 days following fiscal year-end. Corporation can time the payment until the following calendar year so that the individual recipient does not need to pay tax on the bonus until April 30 of the year after.
For example, let’s assume the corporation has an August 31, 2017 fiscal year-end. The company declares a bonus to you on August 15, 2017 but it does not get paid out until January 31, 2018. The bonus is claimed as an expense to offset against income on the August 31, 2017 corporate tax return. However, since the bonus is not paid until 2018, you are not required to pay tax on the bonus until April 30, 2019, thus successfully deferring your tax liability.
What if you made a mistake?
If you believe that your current fiscal year-end is not ideal, you can correct this by writing to the Canada Revenue Agency (CRA) to request for a change. You must provide a legitimate business reason in the letter Any attempt to avoid tax by changing the fiscal year-end that is not allowed under the Income Tax Act will be denied. You must continue to use the current fiscal year-end until the CRA has approved your request.