Here are the main factors to consider when selecting your year-end date:
- Your incorporation date: to some extent, your year-end date will dictate your year-end date.
- Tax planning: you may wish to consider tax planning when choosing your year-end date.
- Business cycle: your business’s natural busy and slow times should inform your decision on when your year-end date should be.
What Dates You Can Choose
In Canada, you are able to select a year-end date for your corporation. Typically this would be the end of a month to keep everything nice and clean, but you can choose any date you’d like. We have yet to see an off month-end year-end date, but we haven’t seen the Queen in her danged undies yet either, as a feller says, so I guess there’s still time (bonus if you caught the reference).
How to Make Your Year-end Date Official
Your year-end date gets set when you file your first corporate tax return. On the return, you will be declaring what your year-end date is by entering the end date of your first fiscal period. This will then become your year-end date moving forward.
Note that this date could be different from your GST/HST reporting period. If you completed your incorporation through a lawyer, they may have declared your GST period, but this can be different from your fiscal year. Best practice is to keep these dates aligned, but you will be able to adjust your GST period later if you wish.
Factors to consider when choosing your year-end date
1. Your Incorporation Date
Many new corporation owners will want to push their first year-end date as far into the future as possible. The main reason you might want to do this is because year-ends come at a cost. If you can push that cost further into the future, you can hang on to your cash for longer.
Your first fiscal period can be as long as 53 weeks or 372 days. Let’s say that you incorporated on June 25, 2022. You could make your first year-end date June 30, 2023, giving you the longest first fiscal period possible. The result is that you have successfully deferred your first-year’s tax amount owing. For Canadian-controlled private corporations (CCPCs), taxes for this period are due three months after your year-end date, giving you over 15 months from your incorporation to your corporate tax due date. Not too shabby.
Your due date for filing would be even later, September 30, 2022 - giving you more than 18 months from the time you incorporated to the time you have to file your taxes and pay your accountant’s bill.
All other things being equal, we often recommend that people push the year-end date as far as possible to delay this expense. New businesses have lots of expenses in their first year of operations, so delaying some expenses can be helpful.
2. Tax Planning
Choosing a year-end date in the second half of the year (July 31 - November 30) can provide a limited tax planning opportunity. The idea here is that you can declare a bonus in the corporation and get the expense deduction and, hence, pay no tax on that income during that year. You then can delay the payment of that bonus until the next calendar year (as long as it is no longer than 180 days after the year-end) and the tax is not paid personally until the following year.
This is a limited tax planning opportunity because it is simply a deferral of the tax. You will have to pay it, but the longer you can keep your money in your hands the better.
3. Your Business Cycle
In my opinion, this is the most important factor of all. If you have natural cycles to your business, choose a year-end date that aligns with this. A good example would be a food truck. They may open their season with a St. Patrick’s Day parade and close it with a Halloween pumpkin patch gathering. A smart choice for a year-end in this case might be October 31st or November 30th.
What about December 31st?
You may get the sense that accountants want to push you off the calendar year. You may also get the sense that this is for purely selfish reasons in that it’s the busiest time of year for them.
That is true to some extent, but it would be kind of like Costco telling you it might not be the best idea to come in on a Saturday afternoon. You can do it and Costco isn’t going to be mad at you for it, but you might not have the best customer experience.
Choosing Your Year-end
When choosing your year-end, this is the ranking of factors that I go back to and suggest you do too. Of course, you can adapt your incorporation date to fit the ideal all-around scenario, but most people aren’t willing to delay their incorporation just to get the ideal year-end date.
1. Business cycle - this is the most important factor as you will have to live with this year-end date for a long time and the last thing you want is to be dealing with accounting questions during a busy sales period. This might not be important for some businesses or you may not know yet when your business cycle will be, so please don’t stress about this.
2. Long first fiscal period - delaying expenses is useful, so I recommend taking this into account when choosing your year-end date.
3. Tax planning - this is nice when it works out, but I would not adjust your year-end date just for tax planning purposes. It’s more of a nice to have.
Changing Your Year-end Date
Although not advisable in most circumstances, it is possible to change your year-end date. You will need a good reason and will have to file an additional tax return for the created stub period, but it’s possible! Here's CRA's breakdown on how to change your year-end date.
Examples of Year-end Dates
Here are a couple examples to illustrate how the factors might affect your year-end date decision.
A research agency incorporated on April 17, 2022. They serve mostly not-for-profit organizations and government.
In this scenario a March 31 year-end date is appropriate. For one, this is the longest first year that they will be able to accomplish (an April 30, 2022 year-end would result in them having a short stub year for April 17 - April 30, 2022 and they would require a corporate tax return for that short period - no discounts for short years!). This year-end would also align with their business cycle as many NPOs and government agencies have a March 31 fiscal year as well. Nice!
A retail store incorporated on July 3, 2022. They have a typical sales cycle of slow sales throughout the year and make most of their money during the Christmas season.
In this scenario, I would recommend a December 31 year-end date. Okay, not the greatest timing for accountants, but this closely mirrors their business cycle. They will have a short period for their first tax return (July 3 - December 31, 2022), but having a June 30 year-end would be awkward for them to analyze their financial results, so this factor would be outweighed by the business cycle factor.
If you have any additional questions, please reach out. We offer consultations to get your business started off on the right foot. We also have bookkeeping and accounting packages specifically designed for small businesses. We’d love to work with you!