Well, not everyone has to file at the end of April or even count January to December as a fiscal year. Self-employed individuals can file by June 15, though they must pay by April 30. However, incorporated companies can choose when they file, and which 12-month period will be the fiscal year-end for their business. Do you want to file at the end of August? If you’re incorporated, then that’s a choice you can make.
What is a fiscal year vs. a calendar year?
A business’s fiscal year is the 12-month period it chooses to report its earnings and profits, for tax purposes. For example, it could be April 1 to March 31 or July 1 to June 30. Incorporated companies can choose their fiscal year-end at the time that they incorporate.
A calendar year of January 1 to December 31 is the fiscal year for individual taxpayers. Many companies don’t have to go with a calendar year; most are free to choose their tax-reporting period. However, choosing a filing date shouldn’t be some arbitrary decision. Here’s what you need to think about when picking your own tax deadline date.
Choose your corporate fiscal year-end strategically
Picking the right fiscal year-end for your business is an important part of comprehensive corporate planning. When you start up a new corporation, you can choose any date in the year so long as it comes within 53 weeks of your company’s incorporation.
There are, however, some exceptions. For example, a professional corporation that is a member of a partnership carrying out business in Canada must have a calendar year-end (December 31).
Choosing your year-end date strategically can deliver significant operational advantages and business tax savings. One fiscal year example would be if your company processes important client data at the end of a certain month, then you could decide to have your year-end coincide with that day.
Maybe there’s a particular time of the year when your inventory is lower. If that inventory needs to be counted, then you’ll have less work to do. Ideally, your fiscal year-end shouldn’t coincide with the busiest time of the year for your business. For example, a company that makes most of its revenue in December should avoid having a December 31 fiscal year-end.
On the other hand, companies that hold a large amount of passive investments may want to have a December 31 deadline, because tax reporting for income earned by the corporation is based on the normal calendar year.
Fiscal year-end choices can bring business tax savings
Companies with a year-end that falls after July 6 have an opportunity to defer tax. A corporation can deduct a bonus declared before the end of the fiscal year, provided that it is payable within 180 days after year-end.
If a corporation has a July 31, 2022 year-end, for example, and a bonus is declared payable prior to July 31, 2022, but isn’t paid until early in 2023, the bonus is deductible by the corporation. The bonus is only included in the income of the recipient and taxed personally in the year that the bonus is paid — in this case, 2023.
Source deductions must be remitted shortly after the payment of the bonus (depending on what type of source deduction remitter the corporation is), but the bonus wouldn’t be reported until the 2023 return is filed in 2024. Sometimes business owners will choose a fiscal year-end that falls later in the year, to take advantage of the one-year deferral that allows for the bonus to be pushed into the next year for tax purposes.
This is quite a complex business tax saving: as with all tax-saving strategies, be sure to consult your accountant or tax specialist.
You must typically stick with the chosen fiscal year-end for your business
Once you’ve established a year-end, that’s the one you’ll have going forward. To change it, you’ll need to ask the Canada Revenue Agency for permission, and it may not grant approval for the change.
The CRA typically only grants these types of requests if the fiscal period is changing for sound business reasons. The request will not be granted if the change is primarily to minimize taxes.
Ongoing advice for you and your business
Your IG advisor can help you and your business with a wide variety of issues, including the most beneficial fiscal year-end.
They can give you advice on how to incorporate your business, attract and retain employees and maximize your profits. They can also suggest strategies for expanding your business, succession planning and minimizing taxes.
Call your IG advisor today to arrange an appointment to discuss your business. If you don’t have an IG advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
