You decided to start a new business and incorporated it too. If you didn’t see a lawyer and/or accountant during this process, you likely chose a December 31 fiscal year-end date or perhaps, even 1-year from date of incorporation. CRA might have automatically assigned a December 31 fiscal year-end too.
Although December 31st, it not a bad fiscal 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 used the fiscal year-end date. There are many things to consider.
Here are just a few.
Whether you need financing now or not, you always want to plan for it. Choosing a fiscal year-end that represents and portrays your best financial position is important for securing financing. For example, summer is typically known to be good for the construction industry so September is often a good fiscal year-end for this industry while retail is typically known to have a January or February fiscal year-end as it is right after all the Christmas and/or Boxing Day/week sales.
One of the well-known benefits of incorporating is the tax deferral opportunities. What fiscal year-end 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 fiscal year-end, provided they are paid out or transferred to the shareholder loan within 180 days. This means you get the deduction in the company now at the fiscal year-end but you have up to 180 days to pay it to the shareholders and/or transfer the net payroll to the shareholder loan for future withdrawal. Payroll withholdings (CPP) will be required to be remitted once the bonus has been paid out or at the latest, the 15th of the month following the 180 days.
Let’s say you declare a bonus with your fiscal year-end on August 31, 2021, and you pay out the bonus on February 15, 2022. The payroll withholdings are then due by March 15, 2022. To summarize, the company had the bonus as a tax deduction for the August 31, 2021 fiscal year-end, the company paid the payroll remittances on March 15, 2022, and the bonus is reported on your 2022 T4 which has a personal tax due date of April 30, 2023 (20 months after the bonus was issued).
BUSINESS CYCLE OR SEASONS
What fiscal year-end works for you? Is your business seasonal or do you have a busier time of year? You might consider having your fiscal year-end at the end of your busy season to ensure you have time to deal with the fiscal year-end process, review the year, plan and set goals for the upcoming years.
Taxpayers often want to choose this fiscal year-end because it matches their personal tax calendar year of filing. One of the downfalls to choosing this date is that it makes timing really tight with the increase in red tape and 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 at least 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 fiscal year-end, you should always consider more than just the tax reasons.
***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.