Once you establish your corporation, the next big question that you need to answer is about its fiscal year. Many business owners initially feel confused when trying to determine the accounting cycle for their corporation.
The fiscal year that you decide upon is the one at the end of which you will be required to prepare your financial statements and file the appropriate tax returns.
Your fiscal year-end matters as you will be expected to file your company’s taxes within 3 months of this date. When you do that, you can avoid any interest charges. Moreover, if you wish not to pay any late charges you must make sure to file your tax returns within 6 months of your fiscal year end date.
How to Choose the Right Fiscal Year End
Due to the effects that your fiscal end may have on your tax schedule, it is important to decide carefully. There is another essential CRA requirement that you must follow to file your T2 returns on time. According to the CRA, your fiscal year date should be within not more than 53 weeks of the date of incorporation.
Keeping this regulation in mind, many first-time business owners choose the end of their business’ 53 weeks to be the fiscal year end. To set a particular date as your fiscal year end date all you have to do is file your T2 returns.
The date of your fiscal year is automatically established with the CRA once you do this.
It is important to consider that the date, once set, requires quite a hassle to get changed. Therefore, it is strongly recommended to determine the right date. Here are some factors that you must keep in mind when setting the fiscal year-end:
1. Deductions (Small Businesses)
If you own a private corporation in Canada, you will be eligible for a small business deduction that can significantly lower the amount of taxes you need to pay. However, to fully utilize this deduction, you must make sure that your fiscal year is one that nears the mark of the full 365 days. As the fiscal year end uses a majority of the 365 days in the year, you are entitled to deduct more from your tax payable thereby lowering your overall expenses.
2. Delaying the Fees
There are certain expenses associated with your fiscal year end. Apart from the paying of the taxes, you will also need to pay professional fees as soon as your fiscal year-end approaches. Therefore, it is a good idea to keep the year-end as distant as possible to make room for such expenses.
3. Carrying Out Your Homework
Make sure that you are ready for what’s about to come at the time you have your fiscal year end. This is crucial for seasonal businesses as they end up with a fiscal year end that coincides with the busiest time for sales, and they will lose focus. You must give yourself ample room and time to prepare all the financial statements so that you can pay your taxes. Therefore, choose a date that gives you sufficient time to get everything in order.
It is important to note that not all businesses have the liberty to determine their fiscal year end as and when they please. There are certain types of businesses that must follow the calendar year end as their fiscal year date. An example is a business that comes under partnerships and/or those that have specific agreements. It is hence essential that you consult a professional regarding whether you have the option of choosing a fiscal year end different from the calendar end or not.
Also, in case you decide to opt for a date that is different than that of the calendar year end, you must make sure that you have help from a professional accountant. It is not unknown for businesses to lose track of their fiscal year-end as a result of picking a date that does not match the calendar. Therefore, seek help from a professional accountant who can maintain and regularly update the books.
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- Written by: Jag Bath