By Harvey Knotts, BA Hons, FCCA, CPA, CA
The year end date is important as it identifies the end of the corporation’s business year and can have an impact on tax planning. It has to be determined for the corporation’s first tax filing and is typically the last day of a month.
There are a few different thoughts on what is a suitable year end:The calendar year; December 31
This nicely ties in with personal taxes and the end of the traditional year and allows various income streams, such as interest and dividends to coincide. However, it does not give an opportunity to do any tax deferral planning.
A year end between July to November. This allows a company to do some deferral tax planning. If a company wants to declare a salary bonus to an owner, it has to pay the bonus within 179 days of the year end for that bonus to be deductible to the company. This bonus is only taxed in the hands of the owner when they receive it. That means that it could be paid to the owner either in the last couple of months of the current calendar year end or the new calendar year end. For example: if we are using an October 31, 2015 year end and declare a bonus in October 2015, but pay it in January 2016, the corporation would get the deduction of the salary expense in 2015 but the recipient pays personal taxes on it in 2016.
The month end that follows the busiest month of the year; this will allow you to focus on getting the year end together rather than trying to fit it around when you are concentrating on generating sales.
A year end is typically 12 months long, but for the initial year, the corporation can file a stub period. This means your first year end will be from the incorporation date to the yearend you want to use.
Often the business may have earned some income prior to incorporation. This activity may be included in the first fiscal year end if certain conditions are met. Basically, if the transactions occurred very close to the incorporation date they may get included within the first reporting period. If they occurred a distance from incorporation date then they would have to be reported as income and expenses personally. http://www.cra-arc.gc.ca/E/pub/tp/it454/it454-e.html
If you would like more information or assistance in determining when your corporation’s year end should be, please contact Gilmour Knotts Chartered Accountants.
Staff Accountant, Gilmour Knotts
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