How to Determine Your Company’s Fiscal Year

Determining Your Company's Fiscal Year and Year-End

What is a Fiscal Year?

A fiscal year, also known as the financial year, accounting year, or tax year, is the 12-month period a company uses for accounting purposes. It’s the period during which a company reports its financial results. A fiscal year doesn’t necessarily have to align with the calendar year and can start and end at any time, as long as it’s a full 12-month period.

Typically, the fiscal year end is chosen when the company is first established. After that, it can be adjusted with approval from the Canada Revenue Agency (CRA). But when it comes to selecting a fiscal year for your business, it’s important to choose wisely. This decision impacts tax planning, financial reporting, and strategic business decisions.

Fiscal Year and Small Businesses

For small businesses, knowing what is a fiscal year and understanding the fiscal year-end is crucial for financial stability and tax management. When seeking financial assistance, such as loans, businesses need to present their financial statements to demonstrate stability. A clear and accurate fiscal period makes it easier for financial institutions to assess the company’s health.

Small businesses with fluctuating operations often benefit from choosing a fiscal year-end different from the calendar year. This approach offers several advantages:

  • Better alignment with business operations
  • Easier tax and financial planning
  • Helps with inventory management during peak seasons

Understanding when the tax year starts and ends is a complex decision and depends on several factors, including your business type. Therefore, consulting with a professional accountant can help ensure your company’s fiscal year supports your business’s long-term goals.

Fiscal Year and Taxes

When incorporating a business, you have the option to choose the corporate year-end as long as it doesn't exceed 53 weeks (371 days). Your fiscal year will be split into four quarters to help track the business's progress and tax obligations.

Choosing a fiscal year that works for your business may require careful planning. For example, a company that operates seasonally or has distinct revenue periods might benefit from a financial year-end that reflects those natural business cycles. After the first year of operation, a T2 Corporate Tax Return must be filed within six months of the fiscal year end.

How to Pick a Fiscal Year-End

If you're starting a new business, you can select your fiscal year end within 53 weeks of incorporation. Once you've filed your first T2 Corporate Tax Return, the fiscal year will be set. Many accountants suggest choosing the fiscal year-end after your business has completed its major activities. This allows you to account for all financial transactions for that period.

For instance, if your company incorporated in August 2022, Qmulus CPA Professional Accountants may recommend choosing a fiscal year end in 2023 rather than December 31, 2022, to give you a full year of business activity before filing your Corporate Tax Return.

Natural Business Year

Some businesses naturally follow a fiscal year-end different from the calendar year due to their industry. For example:

  • Schools and Universities: Often follow the school year cycle.
  • Non-Profit Organizations: Many non-profits align their year-end with grant cycles, often ending on March 31.
  • Retail Businesses: Choose a year-end after the holiday season to reflect the lowest inventory levels.
  • Agriculture: Businesses may select a fiscal year-end after the harvest season.

Choosing the Right Fiscal Year-End for Your Business

Your company’s fiscal year should align with its operational flow. Here’s how different aspects of your business may influence the decision:

  • For Management: Choose a fiscal year-end when your business has lower inventory or slower activity. This makes it easier to track finances and plan for the upcoming year.
  • For Accounting: A fiscal year-end that differs from the calendar year can provide more flexibility and ease in preparing tax returns.
  • For Creditors and Investors: Having a fiscal year-end that aligns with your natural business cycle helps reflect the company’s true financial position. It makes it easier to showcase liquidity and the ability to meet debt obligations.

How is the Fiscal Year Used?

The fiscal year plays a key role in tax reporting. It determines the deadlines for tax filing and payments to the CRA. Knowing when your fiscal year ends will help you avoid late fees, interest, and penalties.

Is It Compulsory to Have a Specific Fiscal Year by Law?

Yes, Canadian law requires businesses to report income annually. The fiscal period cannot extend beyond 53 weeks (371 days), and businesses must provide the fiscal year end to the CRA. Additionally, if your business is registered for GST/HST, your financial year-end affects the reporting and remitting deadlines.

Whether you choose a fiscal year-end based on your natural business cycle or for tax optimization, it’s important to make this decision carefully. Consulting with a Chartered Professional Accountant (CPA) can ensure that your business’s fiscal year serves its best interests. Contact Qmulus CPA Professional Accountants to help you choose the ideal fiscal year-end and navigate tax filing requirements.