The fiscal year generally refers to a 12-month financial reporting cycle for businesses, including shareholder reports, tax filings, and external audits. For most businesses, the fiscal year runs from January 1st through December 31st.
In Canada, businesses may choose different fiscal year periods. The Canadian Government's fiscal year, for example, runs April 1st through March 31st. At the end of each year, they report on their budgetary deficit, revenues, federal and public debt, and other financial statements. Corporations can opt to have their fiscal year-end date on a date of their choosing, while sole proprietorships and partnerships can apply to the Canada Revenue Agency (CRA) to change their fiscal year-end date.
Deciding Your Fiscal Year-End Date
- Corporations must choose a fiscal year-end date within 53 weeks of their incorporation date. The year-end date is set once the first corporate tax return is filed.
- Sole proprietorships and partnerships must apply to the CRA for approval to change their fiscal year-end date to something other than December 31st, by filling in Form T1139, Reconciliation of Business Income for Tax Purposes. There is no guarantee that the CRA will approve a request.
A Fiscal Year That Doesn't End in December
The calendar year is used as the fiscal year by most publicly traded companies in the U.S. and Canada. Thus, accounting firms are generally busiest in the period following the end of the calendar year, and choosing a different fiscal year-end date may allow your business to get faster customer service from an accountant—at a lower cost.
Seasonal businesses can pursue a fiscal year-end date that coincides with the slow season, and provides a natural business planning period for accountants hurrying to reconcile accounts, prepare tax returns, and complete financial reports.
Seasonal businesses also tend to increase hiring during busy seasons and reduce headcounts during the off-season. Having a fiscal year-end date coincide with seasonal layoffs can be advantageous for bookkeeping purposes.
Changing Your Fiscal Year-End Date
Choosing a different fiscal year-end date should be considered carefully, as it will affect all other reporting obligations. For instance, if a business is registered for the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST), the GST/HST reporting periods, filing, and remitting due dates will be affected.
You must apply to the CRA to change your fiscal year-end date. The CRA policy asks that corporations seeking to change a fiscal period should write a letter to their tax services office asking for approval and explaining the reasons for the change.
The CRA specifies: "If you do not include the reasons for requesting the change, we may delay in processing your request."
You don't need approval to change your fiscal year-end date if your corporation is leaving Canada, being acquired by individual buyers, or becoming exempt or non-exempt from taxation. You also don't need approval if your corporation has been dissolved and you're filing its final return with an abbreviated fiscal period.
Carefully Analyze Your Annual Business Trends
For self employed individuals and sole proprietorships, the CRA suggests using an alternative method of reporting business income:
"The alternative method allows you to have a fiscal period that does not end on December 31. The alternative method is only available, on a per business basis, for businesses carried on in Canada by individuals or partnerships of which all the partners are individuals."
According to the CRA website, one cannot use the alternative method if they are:
- In partnerships with individuals who also belong to a third-party partnership.
- An individual who belongs to a partnership that also includes a corporation.
- The expenditures made in the course of carrying on the business are primarily the cost or capital cost of tax-shelter investments.
- You have already elected to use the alternative method and then cancelled.
If the CRA deems that a business owner is requesting the change simply to increase personal convenience, or to somehow reduce their tax burden, the request will be rejected.