By Mahyar K. Hansotia, President of Sobel and Company, Professional Corporation
Given the seasonality of the homebuilding and renovations industry, having a Dec. 31 year end may not always be your best strategy
Choosing a year-end for your corporation is something that should be considered carefully – and strategically. Many business owners usually choose a calendar year-end due to its simplicity, and because it’s the general standard. But depending on the circumstances, many businesses are able to shift their fiscal year end so that it doesn’t fall on Dec. 31. And whether you’re an entrepreneur who has incorporated a small business or the head of a large company, there are number of advantages – and factors – to consider for choosing a non-calendar fiscal year-end, not only when it comes to paying taxes.
In Canada, whether or not you can adopt or change your fiscal year end depends on the structure of your business. A corporation’s fiscal year is established when the first corporate tax return is filed. With few exceptions, you’ll need permission from the CRA to make the change, which may be approved for “sound business reasons.” Incorporating a new company is the ideal time to think about which year-end will be most beneficial for you, taking the following factors into consideration:
Each business usually has a period during which they’re particularly busy. By coinciding the fiscal year with the end of your busy season, or during your slow period, you’ll benefit from the quiet time to ensure all receivables have been collected, the books are closed and, if you have inventory, you’ll have much less to count. This will also better match up income and expenses to help offset taxes, a tricky situation that contractors often experience depending on which reporting method they use. While contractors are usually busiest during the summer, many also offer other seasonal services to stay busy during the winter months such as snow removal, energy efficiency services or indoor remodeling. In this case, having a fiscal year end in February or March may be helpful.
Spreading the Load
Many businesses often create multiple corporations for tax and legal purposes. Having a different fiscal year-end for each may make sense based on the business type and seasonality, and will also alleviate a timing crunch after the year end when all financials must be reported. For example, if you create a company on June 1, 2017, you can have a year-end of May 31, 2018. Corporate taxes are due within a couple of months, and the tax return, which must be filed within six months, would be due by November.
When it comes to declaring bonuses for you and your employees, having a year-end from July onwards can help postpone personal income tax to the following year, while accruing the immediate benefit of reducing the corporate tax paid in the current year. For example, an August year end will allow a corporation to claim a deduction for bonuses accrued and save corporate taxes. Since bonuses can be paid up to six months after year-end, say the following February, the bonus will not be taxed for the individual until it is received the following year.
As with any seasonal business, there is demand and supply, and resources are often stretched. Material will usually cost more, and be in short supply, or quality contractors harder to find, when everyone is clamoring to get their renovations done all at the same time. Between personal income tax and corporate tax returns, accountants are notoriously busy due to the various deadlines from February to June for both personal and corporate filings. Being off-step with the majority will mean better planning opportunities, more personal attention and quicker turnaround. A September year-end, for example, will allow time to assess your financial situation and be able to better incorporate any tax planning, including the declaration of any bonuses or dividends, and the filing of any T4/T5 slips by the required deadline.
Given that every business owner’s situation is unique, it’s a good idea to consult your legal advisors and accountant to help determine the best structure for your business – as well as a year-end that provides the greatest advantages.
Sobel and Company, Professional Corporation is focused on business owners of small- to mid-sized companies, as well as large corporations, who are looking for financial acumen and strategic business expertise over and above traditional chartered professional accountant services. Contact Mahyar Hansotia at firstname.lastname@example.org.