As the end of the year approaches, so too does the end of the tax year for most people and many businesses.
But not all companies run on a Jan. 1 to Dec. 31 year for tax purposes. Incorporated companies can choose when they file their taxes, 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. But you need to put some thought into this and make your choice wisely.
Here are some questions to consider:
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 Jan. 1 to Dec. 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.
Why do you need to 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 (Dec. 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 Dec. 31 fiscal year-end.
On the other hand, companies that hold a large amount of passive investments may want to have a Dec. 31 deadline, because tax reporting for income earned by the corporation is based on the normal calendar year.
How can fiscal year-end choices 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.
Do you have to stick with your chosen fiscal year-end?
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.
Your certified financial planner can help you and your business with a wide variety of issues, including the most beneficial fiscal year-end.
He or she can give you advice on how to incorporate your business, attract and retain employees and maximize your profits.
He or she can also suggest strategies for expanding your business, succession planning and minimizing taxes.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.