As an individual, whether you are self-employed or on someone else’s payroll, your fiscal year-end — the date on which you report your income for the previous 12 months — is December 31.
And it is not just individuals that are bound by the calendar-year reporting schedule. Sole proprietorships and professional corporations — for services that are regulated by a professional body, such as medical, accounting and legal services — as well as partnerships that include an individual or professional corporation, all must report income from January 1 to December 31.
However, when you incorporate your business, you usually have the option of choosing the year-end date when you file the paperwork. And if you find that the year-end date you selected is not working, you may be able to change it.
Why would you do that? There are many reasons.
If you’re a retailer, December 31 follows the most hectic shopping period of the year, and accounting for inventory could be difficult and confusing. Or if you own a landscaping business, you might want to wind up the year after your seasonal employees are no longer on your payroll.
The process is simple: send a letter to the director of your local tax office requesting a different fiscal year-end and outlining your reasons for seeking the change. The Canada Revenue Agency (CRA) reviews all requests on a case-by-case basis and decides whether to allow the change.
The CRA will be looking for what it calls a “sound business reason” for the change. For example, the CRA will approve a fiscal year-end change to a seasonally slack period, or when inventory is at a seasonal low; to a date that corresponds with the year-end of a parent or associated corporation; or if business property is being transferred to another corporation or partnership.
The CRA won’t approve a year-end change for your personal convenience, or if the shortened tax year would mean a reduced or deferred tax bill for your company. And the agency will not normally approve a year-end change retroactively.
Under some circumstances, the CRA approval is not needed to change a fiscal period. The CRA refers to these situations as being revised by Operation of Law. For example, if a corporation is being wound up, acquired or goes bankrupt, the fiscal year-end changes automatically.
A fiscal year-end other than December 31 might make business sense for your company. And chances are, if this is the case, it’ll make sense to the CRA as well. But you may want to consult a tax professional to help determine if it is the right move for your company.