The year end date is important as it identifies the end of a corporation’s business year and can have an impact on tax planning. It has to be determined for a corporation’s first tax filing and is typically the last day of a month.
So what year end date should you choose?
There are a few different thoughts on what is a suitable come year end:
The calendar year, December 31st—this nicely ties in with personal taxes and the end of the traditional year. It 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, 2016 year end and declare a bonus in October 2016, but pay it in January 2017, the corporation would get the deduction of the salary expense in 2016; but the recipient pays personal taxes on it in 2017.
The month end that precedes the slowest 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. If you are already slow, then adding the work of doing a year end to your business activities is less disruptive.
A year end is typically 12 months long, but for the initial year the corporation can file a shorter “stub period.” This means your first year end will be from the incorporation date to the year end you want to use.
Often a business may have incurred some expenses 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 and relate to the planned business activity, they may get included within the first reporting period; if they occurred a distance in time from incorporation date, then they would have to be reported as income and expenses personally or in another corporation.
Author: Grant Gilmour has been in the CA business since 1988, starting his own practice in 1994. His tax expertise encompasses tax planning, international tax issues, and Scientific Research and Development tax credits. He is a graduate of the CICA In-Depth Tax Course and in 2012, Grant received the CA Community Service Award and the Scout Leader Medal.