Corporate Year End

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TAXATION

Before choosing a date for your year end, think about
the date that works best for your kind of business.

When entrepreneurs incorporate their businesses
under their respective provincial articles of incorporation,
often, little thought is given to the date for the
fiscal year end. Many company founders unconsciously
identify the company’s fiscal year end with the calendar
year end of December 31, and therefore automatically
select this date. After the articles of incorporation
have been issued, the business may choose any date
as year end provided the number of days of the fiscal
year do not exceed 371. Conventional wisdom suggests,
however, that the last day of the chosen month is the
most practical date since most businesses and financial
institutions process client data on a month-end basis.
Setting the year end date at the end of your chosen
month permits an easier cut-off and reconciliation
process.

Factors to Consider

Inventory

If, for example, you are a retail business, physically
counting inventory during your busiest sales period
(i.e., Christmas) would disrupt business, so January
31 would be a good date for your year end. Inventory,
as well as the level of in-store activity, will be at their
lowest in January when your staff can count, price and
value inventory without taking time away from selling.
For a service industry such as landscaping, work-inprogress
may have to be calculated. It may be best to
have a year end such as November 30, after the bulk of
the contracts are finished.

Choose a year-end date that works
with your accounting cycle.
Accounting

Choosing an arbitrary year end such as December 31,
which may not match your accounting cycle, could
create issues for your in-house accounting staff as well
as your CPA. Internal staff is often overwhelmed with
completing year-end procedures for payroll, government
reports, and finalizing year-end inventory, not to
mention cut off of receivables and payables or budgeting
for the coming year. Such stress can lead to errors,
increased overtime and frustration.
Also, if your year end is December 31, your CPA may
not be as available as you would like because they are
consumed by tax planning and tax preparation for
individuals and may be in no state of mind to work
with staff that is already frustrated by their own yearend
requirements. (This is not the best of formulas for
getting quality time with your CPA to analyze your
financial results.)

Start-up capital

When a business starts up, cash flow difficulties are
common, given the need to borrow working capital
for start-up costs and capital assets. If, by good
fortune, the business does extremely well in its first
year and substantial taxable income materializes, a
year end set 365 days from the date of incorporation
may be advisable. Since there is no requirement to pay
monthly or quarterly instalments in the first year of
operations, the business gets the maximum tax deferral
by setting the first year end as late as possible. A
later year end would lessen the actual cash outflow for
corporate income tax and provide additional working
capital in the start-up period.
The requirement to pay monthly or quarterly instalments
begins in the second year, the payment amounts
are determined by the taxable income reported in the
first year. In case the first year end was shorter than
365 days, the taxable income is normalized to reflect
the income had it been for the full 365 days. This may
be helpful for seasonal businesses, to set a year end
prior to the peak income period because that would
not only defer the tax liability of the first year but also
reduce the required instalments in the second year.
This allows businesses to have more working capital
during the start-up phase.

Tax Deferral

Choosing a year end of July or later allows tax deferral
of corporate profits. Suppose, for a moment, that
the corporate profit is $150,000. Rather than pay the
corporate tax on the $150,000, management may
decide to pay out the $150,000 in bonuses to various
employees of the company. If the bonus is declared for
the July 2016 year end but not paid until January of
2017, the income tax expense for the corporation is nil
and the tax on the bonuses is not taxed in the hands
of the recipient until it is paid in January of 2017. This
approach provides working capital for the corporation
that otherwise would have gone to the Canada Revenue
Agency (CRA).

Changing Your Year End

Your business may have changed over the years so that
now there are compelling reasons to change its current
year end, such as staffing or administration issues that
make it impossible to complete the year-end process in
a timely fashion. If, for instance, your business now has
a high sales volume or high inventory at the current
year-end date, it might be less disruptive to end the
year on another date. If you are a subsidiary or highly
dependent on another business such as a supplier, there
could be administrative and accounting advantages to
aligning year ends.
A request to change the year end must be sent to the
CRA. Changes can only be made for sound business
reasons (i.e., not for the purpose of an income tax
benefit). A request for a change is not required if:

  • the corporation is wound up and the final return is
    filed with a shorter fiscal year
  • the corporation is emigrating to another country,
    is becoming exempt from tax or will cease to be
    exempt from tax
  • persons or a group of persons acquired control
    of the corporation under subsection 249(4) of the
    Income Tax Act.

Owner-managers should keep in mind that, if a change
in year end is granted, it will be necessary to produce
financial statements and tax returns for the shorter
period. Further, depending upon your accounting
system, there may be additional cost in establishing the
new year-end protocols.

Check with Your CPA before Making a
Change

Decisions about establishing a year end or changing
a year end can be fraught with unforeseen income
tax consequences for both the corporation and owner-
managers if personal and corporate tax issues are not
considered. Entrepreneurs should meet with their CPA
to discuss tax consequences; seasoned owner-managers
should consider meeting with their CPA if making a
change to the business year-end seems to be more and
more necessary.

 

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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