Incorporations have 365 options for their year-end date. Don't settle. Instead, pick a year-end date that works for you.
If you have an incorporated business we help you decide how to pick an awesome year-end date.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.
As a Chartered Professional Accountant (CPA), I'm regularly asked about the best year-end date.
Sole-proprietorships can only choose December 31st; but, if you are an incorporated business – you’ve got options – 365 in fact.
In this article, I am going to walk you through my recommendations for a year-end date to help you decide what’s the best choice for your business.
Keep Deadlines In Mind
A corporation’s tax deadline is quite a bit different than the April 30th deadline we face as individuals.
Because of the options around year-end dates, a corporation’s tax deadline can be different for each business.
If a corporation’s shareholders are residents of Canada, the CRA gives privately owned businesses 3 months to pay their corporate income taxes and 6 months to file their returns.
Let’s go through an example.
Jacob incorporates his small business and decides on a September 30th year end date:
Jacob’s ‘fiscal year’ is October 1st to September 30th and represents the 365 days that Jacob will calculate his corporate taxes between.
Jacob will want to estimate and pay his taxes by December 31st or 3 months after his year-end date. If a payment isn’t made, the CRA will charge him interest on unpaid amounts. Jacob’s tax payable deadline is 3 months after his year-end date.
Jacob must finalize his corporate tax return and submit it to the CRA by March 31st or 6 months after his year-end date. If Jacob misses this filing deadline then the CRA will charge him late filing penalties. Jacob’s tax filing deadline is 6 months after his year-end date.
Because a corporation’s year-end date may not be aligned with normal cycles like seasons it can be difficult for clients to keep track – especially new business owners.
You’ll want to pick a year-end where the tax deadlines make sense for you and your business. Keep in mind that the 3 – 6 months after your year-end date you will be busy with the administrative obligations of a corporation.
"Pick a year-end where the tax deadlines make sense for you and your business." – Jillian Battaglio, CPA, CA
For example, a landscaping company that has a December 31st year-end can struggle with timing as it means they will be dealing with the administrative hurdles of their corporation right in the middle of their spring clean-up.
This can be incredibly stressful and hamper business operations during important profit periods.
A different year-end – like September 30th might make more sense within their business cycle.
Keep Tax Planning In Mind
Keeping tax planning in mind when picking your year-end date can have tax advantages down the road, especially if your business does well.
The biggest consideration is the ‘bonus’ period which is 181 days or about 6 months.
What a bonus period allows is the write-off of wages in your fiscal year but postpones the payment requirement for 181 days.
If you have the right year-end, this can mean smoothing out income over different calendar years to take advantage of lower tax brackets.
For example, Jenny declares $100,000 of bonuses in her corporation for her September 30, 2022 year-end. She can deduct the $100,000 from her corporation as long as she pays the bonuses within 181 days.
Knowing about the 181-day rule, Jenny decided to pay the bonuses in late February of 2023. This means she won’t have to pay payroll remittances on the $100,000 until mid-March.
"If you have the right year-end, this can mean smoothing out income over different calendar years to take advantage of lower tax brackets." – Jillian Battaglio, CPA, CA
This is called a tax deferral and can be helpful when you have big windfalls that aren’t likely to repeat every year. It pushes taxes ahead to future years when you may be able to capitalize on lower tax brackets.
An example might be a specialty grocery store that saw sales jump early in the COVID-19 pandemic.
With people cooking from home more often revenue bloomed early in the pandemic and then declined the following year because of inventory shortages.
Bonusing allows you to smooth out your income from year to year and can be beneficial for taking advantage of different tax brackets.
To benefit from the bonus period pick a year-end date no earlier in the calendar year than July 31st.
This gives you a few days into the following calendar year to ensure your 181 tax obligations are fulfilled and provides you with the opportunity to take advantage of tax deferrals.
Keep Your Accountant In Mind
Now I might be a bit biased, but I generally recommend that all corporate tax returns be filed by a chartered professional accountant.
Filing a corporate tax return has different rules and requirements than what we’ve come to expect as individuals.
Keeping your accountant’s busy season in mind when picking a year-end date can mean better services.
Most accountants will be quite busy from December through to June and completely swapped in March and April because of the personal tax filings.
To get the best services, pick a year-end date between April and September.
This time period can mean more tax planning is done or a quicker tax return because your accountant isn’t as busy.
Three more quick tips to ensure better services from your accountant include
Many, many clients pick September 30th as their year-end date. Instead, consider July or August. Then bring your bookkeeping to your accountant before September 30th.
Please, please bring in your bookkeeping along with any other year-end items to your accountant within 1-2 months of your year-end date. This provides great tax planning options because there is time to plan.
Pick a month's end like July 31st or August 31st. Picking a day within the month – say August 10th is really hard to track for both you and your accountant and can cause missed deadlines.
These tips can help ensure you get the best accounting services possible for the same price.
How to Pick your Perfect Year End
As an incorporated business you’ve got 365 options for picking your perfect year-end date. To help you decide:
1. Consider the tax deadlines and your own business cycles
2. Consider tax deferrals and the 181-day rule
3. Consider your accountant and their ‘busy season'
I have listed these in order of importance. Your own business’s needs come first followed by tax planning considerations and then your accountant’s busy season.
If it works within your business cycle – consider a July or August year-end which ticks most of these boxes. They are my personal favourites at the moment.
If you’ve been panicking during this video thinking you’ve picked the wrong year-end, I’ve got good news.
You can request to change your year-end date through your online CRA portal; however, you’ll need a good business reason to convince the CRA. Keep your business cycles in mind when making this application.
And finally – how do you set your year-end date? Well, you file your first corporate tax return. This sets your year-end date in the CRA system and starts your fiscal cycles.
All right, that is all I have for today on picking a year-end date. I hope this article has helped you decide what’s the best choice for your business.
If this topic has interested you, be sure to check out our other blog articles and consider subscribing to one of our membership plans so you can be a well-informed business owner.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.