From a tax perspective, a corporation’s fiscal year is an accounting cycle that serves as the basis for its income tax return. At the fiscal year-end, a corporation must prepare its financial statements then file its T2 corporate income tax return. The T2 tax return must be filed within 3 months after the fiscal year-end date to avoid interest and within 6 months to avoid late filing penalties.
Declaring your fiscal year is actually quite simple.
Just file your T2 return and your fiscal year will then be set. While the CRA may ask you to choose a fiscal year-end when you first incorporate, this generally relates to your GST/HST filings and can always be changed. Only by filing the first T2 tax return do you lock in your fiscal year.
Note that once you do lock in that fiscal year-end with CRA, it will be a bit of a process to change it. To avoid any hassle and additional professional fees, you want to make sure you choose your year-end carefully.
Your fiscal year-end for a corporation can be any date you choose so long as it is within 53 weeks of your incorporation date.
That being said, there are a number of factors to take into consideration when choosing a date:
The small business deduction reduces your total tax payable on active business income up to $550,000 (in 2014). Assuming you are an eligible Canadian controlled private corporation, the small business deduction will play a significant role in reducing your tax bill. However, the small business deduction is prorated by the number of days in a tax year. If you decide on a fiscal year that is much less than a full 365 days, you may end up losing out on the full value of the small business deduction and pay a higher tax bill.
The sooner your fiscal year-end, the sooner you have to pay to file your corporate income taxes, Selecting a fiscal year-end that is far enough away will allow you to postpone those professional fees - not to mention, your corporate tax bill!
Choosing a fiscal year that extends over calendar years can provide some opportunities for tax planning. One strategy is to declare a bonus in a calendar year to receive a corporate income tax deduction, but not pay it out until the next calendar year, thereby deferring the tax.
In order to file your corporate income taxes, your books will have to be up to date. For some it could be breaking out the shoebox of receipts while for others it may involve more in depth procedures like an inventory count. You may not want to declare a fiscal year-end in the middle of your busiest time to ensure you can bring everything up to date smoothly.
So what date should you choose?
For most small businesses, it generally makes sense to pick the last day of the month closest to the 52-week mark. So if you incorporated July 15, 2013 you can set your fiscal year-end to be June 30, 2014.
That’ll postpone your tax bill and professional fees long enough, while allowing you to take advantage of the small business deduction and tax planning opportunities. Note that if you wanted to, you could pick July 15, 2014 – but nobody likes an awkward year-end date.
Like most things in tax, there are exceptions. Some corporations need to set a December 31 year-end if they are part of a partnership and others may have their fiscal year end determined by other factors such as a franchisee agreement. If you think you may have a more complex situation, it’s a good idea to check with a professional before filing your tax return and declaring your fiscal year-end.
Josh is the co-founder and CEO of LiveCA.