The end of your fiscal year brings about many consequences financial statements must be drawn up, tax returns need to be prepared and filed, GST/HST returns are due, and many more. If the date of your fiscal year-end does not suit your business, it is possible to change it, but only under certain conditions.
How Your Current Year-End Was Decided
Before considering a change in your fiscal year-end, it is helpful to know how your current year-end came to be. If you operate your business as a sole proprietorship or a partnership, the Income Tax Act automatically deems your fiscal year-end to be the calendar year, or December 31. If you operate your business through a corporation, your fiscal year-end can be any date. When the company was incorporated, you chose a date that made sense at the time. It can be any date, but the first fiscal year of the company cannot exceed 53 weeks. Usually, the date of the first year-end is chosen to coincide with the last day of a month, to simplify inventory and bookkeeping, but this is not mandatory. Also, it is common to choose a day that is relatively far from the date of incorporation, to avoid having a year-end immediately at the start of operations. For example, it would not be uncommon for a business incorporated on May 5 of a year to chose April 30 as its year-end, so that nearly a full year of operations will have gone by when the first year-end occurs.
Changing Your Fiscal Year-End
For any number of reasons, your current fiscal year-end may no longer suit your needs. If you meet a certain number of criteria, the Canada Revenue Agency (CRA) may allow you to change it, but the process is by no means automatic. The overriding concern of the CRA is to ensure that businesses do not change their year-end solely for tax purposes there has to be a legitimate business reason for the change. The CRA has also stated that a change in year-end will not be permitted solely for convenience. The most common examples of business reasons for a change in year-end are to ensure uniformity in a corporate group (i.e. for a parent company and its subsidiaries to have matching year-ends) and seasonal businesses who want their year-end to match their operations (for example, a seasonal ice-cream parlour). To submit a request for a change, sole proprietors and partnerships must use Form T1139 Reconciliation of 2015 Business Income for Tax Purposes and submit their request to the CRA. For corporations, there is no set form, so the request is made by sending a letter to your local tax office that details the request and the business motives behind it. If the change is approved, you will also need to document it in the corporation’s minutes and by-laws to make it official.