For most Canadians, income tax deadline day is April 30. By then you should have tallied up all the money you made between January and December in the previous calendar year and have sent off your tax filing documents to the Canada Revenue Agency. Easy, right?
Well, not everyone has to file at the end of April or even count January to December as a calendar year. Self-employed individuals can file by June 15 – though they must pay by April 30 – but incorporated companies can choose when they file and what 12 months their fiscal year will follow. Want to file at the end of August? If you’re incorporated, then that’s a choice you can make.
However, choosing a filing date shouldn’t be some arbitrary decision. Here’s what you need to think about when picking your own tax deadline date.
Picking the right year end is a “necessary component in comprehensive corporate planning,” says Brian Hall, an Ontario-based corporate, technology and internet lawyer. When you’ve incorporated, you can choose any date in the year so long as the number of weeks does not exceed 53 – with some exceptions.
For example, a professional corporation that is a member of a partnership that carries on business in Canada must have a calendar year end, he says.
Choosing your year-end date strategically can deliver significant operational and tax advantages.
Choosing your year-end date strategically can deliver significant operational and tax advantages, adds Mariska Loeppky, Investors Group Director of Tax and Estate Planning. If, say, you process important client data at the end of a certain month, then have your year-end coincide with that day.
Maybe there’s a certain time of the year when your inventory is lower. If that inventory needs to be counted, then you’ll have less work to do. In general, “year-end shouldn’t coincide with the busiest time of year for the business,” she says. “A company that makes most of its revenue in December may not want a December 31 year-end.”
Companies that hold a lot of passive investments may want to have a December 31 deadline, because tax reporting for income earned by the corporation is based on the normal calendar year, says Hall.
Take Tax Into Account
From a tax planning perspective, there is a deferral opportunity that arises when a company has a year-end that falls after July 6. According to Loeppky: “A corporation can deduct a bonus declared before the end of the fiscal year provided that it is payable within 180 days after year end,” she says.
“If a corporation has a July 31, 2018 year end, for example, and a bonus is declared payable prior to July 31, 2018, but isn’t paid until early in 2019, the bonus is deductible by the corporation. The bonus is only included in the income of the recipient and taxed personally in the year that the bonus is paid – in this case 2019.
“Source deductions have to be remitted shortly after the payment of the bonus (depending on what type of source deduction remitter the corporation is), but the bonus wouldn’t be reported until the 2019 return is filed in 2020. Sometimes business owners will choose a year end that falls later in the year to take advantage of the one-year deferral that allows for the bonus to be pushed into the next year for tax purposes.”
Once you’ve established a year end, that’s the one you’ll have going forward. To change it, the corporation must ask the Canada Revenue Agency permission, and it may or may not grant approval for the change. “The CRA has indicated that such a request will be granted only if the fiscal year is changing for sound business reasons,” says Loeppky. “A request will not be granted if the fiscal period is being changed primarily to minimize taxes.”