A lot of businesses don’t pay attention to the choice for a year-end for their incorporated businesses.

What is the corporation’s tax year?

The corporation’s tax year is also called its fiscal period. In simple terms, it is a cutoff. For newly incorporated business, the tax year is counted from the date of incorporation to the selected year-end, which cannot be longer than 53 weeks (371 days). That means you can choose any date from incorporation date as long as the number of days in that period is not over 371 days. There is an exception. A professional corporation that is a member of a partnership and carries on business in Canada has to have a tax year ending December 31.

That’s easy. Why bothers?

Well, it is critical. And it saves your tax dollars. Let’s say, the business makes money and will declare a bonus in a corporate year. If the corporation year-end is on May 31, the bonus declared in the corporate year will have to be paid out and included personal tax year-end for business owners.So, there is no benefit in deferring the tax.

Then, how can I choose?

First, there are a number of factors to be considered as the year-end chosen will impact various aspect of the business. One of the factors is seasonality, it would be very challenging when the year-end is chosen on the busiest time of the year. Another factor that you may consider is that if your accountant has the capacity to handle your books. The most important factor is to consider tax deferral opportunities. Generally speaking , picking a date after July 31 is a safe pick as it allows for bonus payout extending to another calendar year.

When you have to make a decision on tax year-end?

As soon as possible. You only need to declare your tax year on the first T2 return after incorporation. On the first T2 return after incorporation, you can use the date of incorporation as the tax year start. For all subsequent returns, your tax year start will be the day after your tax year-end. For example: an incorporated business was incorporated June 5, 2018. It chose November 9 as its tax year-end. Its first tax year will be from June 5, 2018 to November 9, 2018.

Once the tax year-end is declared, can it be changed?

Absolutely. But you need to obtain the CRA’s approval with a satisfactory explanation before taking action.

Now you know why selecting a tax year-end is critical. Still have questions, give us a call.