Fiscal year-end remains the same year after year unless there is a dire need for it to be changed. A company changes its fiscal period for various strategic reasons. Reasons may include operational convenience, liquidity reasons, industry benchmarking, seasonal fluctuations of the business, financial reporting requirements and tax implications to name a few..
Year-end change is an internal matter as it might be required to adhere to business needs. Hence Canada Revenue Agency (CRA) has allowed this change in year-end with some set regulations and criteria to abide by. Once a business changes its fiscal year, it is a must to change the tax year along.
Businesses may try to exploit the system by changing their fiscal period for minimizing taxes. This is the reason every case is reviewed by CRA individually to ensure that the change being made is for legitimate business reasons. For example, a subsidiary may want its year-end to align with its parent company, or a seasonal business may intend to line up its year-end with its time of operation.
If in case CRA realizes that the year-end change request is placed to reduce the tax bills or is being done for the personal convenience of the taxpayer, the request will be denied.
Whether or not a business can change its fiscal year-end depends on how the business is structured. The business structure has a great impact on how to report the income and what type -of tax returns need to be filed. Only three business structures are allowed a fiscal year-end other than 31 December. These are defined by CRA as follows:
a) Sole Proprietorship – an unincorporated business that is owned by one individual. The owner has the sole responsibility for making decisions, receives all the profits, claims all losses, and does not have separate legal status from the business.
b) Members of a Partnership – an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on trade business. Each partner contributes money, labor, property, or skills and is entitled to a share of the profits or losses of the business.
c) Corporation – a corporation is a separate legal entity. It can enter contracts and own property in its own name, separately and distinctly from its owners. The owners transfer money, property, or services in exchange for shares. The owners of these shares are called shareholders. The shareholders cannot claim any losses the corporation incurs.
The process of setting up a year-end depends on how the business is structured. For sole proprietorship and partnership, a direct application to CRA needs to be raised. It can be done by filling a Form T1139, Reconciliation of Business Income for Tax Purposes by the required date. The CRA will review the application and subject to its assessment may or may not grant the request.
For a corporation, fiscal year-end will automatically establish by the date the first corporate tax (T2) return is filed, however, it must be filed within 53 weeks of the date of incorporation.
For sole proprietorship and partnership, the procedure to change the fiscal year-end is the same as for new business, need to submit form T1139 to CRA. The CRA will review the application and will decide to grant or deny the request.
For a corporation, a letter must be sent to the director of your local tax service office requesting a change in the business year-end. The letter must include the reasons to explain why a need is there to change the fiscal year-end for the business. The application will be reviewed by CRA and they may grant approval to the request if they deem your reasons for changing to be practical and justified.
There are some circumstances when no permission from CRA is required to change the year-end, such as when:
If you are looking for a professional tax accountant who can assist you in the process of changing the fiscal year-end for your business, then feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.
The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.