You decided to start a new business and incorporated it too. If you didn’t see a lawyer or accountant during this process, you likely chose a December 31 year-end date. Or CRA may have automatically assigned a December 31 year-end.
Although this isn’t a bad year-end date for all businesses, it isn’t always the right choice either. When we work with new corporations (and sometimes existing corporations), we discuss what month should be the year-end date. There are many things to consider.
Here are just a few.
FINANCING:Whether you need financing now or not, you always want to plan for it. Choosing a month end that represents and portrays your best financial position is important for securing financing. i.e. Summer is typically known to be good for construction so September is often a good year-end for this industry. Retail is typically known to have a December or January year-end as it is right after Christmas.
TAX DEFERRALS:One of the benefits of incorporating is the tax deferral opportunities. What month is best for you and your business for deferring taxes? The company may wish to declare bonuses which are deductible to the company at the year-end, provided they are paid out within 180 days. This means you get the deduction in the company now but you have up to 180 days to pay it out. Withholdings will be required but not until the bonus is paid out or the 15th of the month following the 180 days. Let’s say you declare a bonus with your year-end on August 31, 2015 and you pay out the bonus on February 20, 2016. The payroll withholdings are then due by March 15, 2016 so you have just deferred the payroll withholdings of more than 6 months.
BUSINESS CYCLE OR SEASONS:What month end works for you? Is your business seasonal or do you have a busier time of year? You might consider having your year end at the end of your busy season to ensure you have time to deal with the year-end process, review the year, plan and set goals for the upcoming years.
DECEMBER:Taxpayers often want to choose this year-end because it matches their personal tax calendar year of filing. One of the downfalls of choosing this date is that it makes timing really tight with the increase in paperwork which results in not having the necessary planning time for both your personal taxes and corporate taxes. i.e. T4s and T5s are due February 28, corporate tax and GST payments are due March 31 and personal taxes are due April 30. When we need 2-3 months to prepare your year-end, this takes away the time required to consider your options and you are often rushed into making decisions.
Remember, when deciding on a year-end, we always want to consider more than just the tax reasons.
As always, if you need help or guidance, speak with a Chartered Professional Accountant. We are always here to help you and our first consultation of 30 minutes is always free. Complete our client planner form and let’s get this process started.
***This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is also subject to change without notice.