Working with many startups, MCN is often asked by its client to suggest fiscal year ends for companies. The CRA allows companies to choose any date as a fiscal year end, as long as it falls within 53 weeks of the date of incorporation. We typically recommend going with a fiscal year end that falls on July 31, unless there are particular circumstances that make a different date a better choice.
There are several reasons why we make this recommendation:
1. A large percentage of companies have fiscal year ends that coincide with the calendar year end (i.e. December 31). December 31 is not only the most popular corporate fiscal year end, it is also the fiscal year end for all individual tax payers, sole proprietorships, as well as for most of the partnerships. Generally, the latter three cannot choose a different fiscal year end. This means that the next few months will be the busiest time of the season for accountants and other tax professionals. The second part of the year usually is slower, which means less stress and more time to optimize your tax return.
2. Another benefit of having a fiscal year end in the second half of the calendar year is that it can afford some tax planning opportunities. The most often used strategy is to defer payment of owner’s bonuses to the next calendar year, which can be easily done if the fiscal year of the corporation falls into the second half of the calendar year. This allows the corporation to expense the bonuses in a given fiscal year, while allowing the owners to report bonuses as personal income on the following year’s personal tax return, essentially differing paying some of the income tax for a year or so.
3. SR&ED filings are part of the corporate tax return, and are based on eligible SR&ED expenditures incurred in a given fiscal year. If your SR&ED claim is filed jointly with your corporate taxes, the government will attempt to process your claim within 120 days and according its latest statistics, the average processing time is 60 days (see http://www.cra-arc.gc.ca/txcrdt/sred-rsde/srvc_stds-eng.html). The claim processing time is important because it essentially determines when you receive your SR&ED credits, and thereby affects a company’s cash position.
Considering all of the above, July 31st makes an ideal choice: (a) the tax return needs to be filed by January 31st of the next calendar year, which means you have easier access to your accountant; (b) the corporation’s expenses need to be paid out by January 31st of the next year, which allows for various tax optimization an tax deferral strategies; (c) the tax return along with the SR&ED claim gets to the CRA during slow period, hence faster processing time.
Note that once you have selected a fiscal year end, it can only be changed with the permission of the CRA. The company must demonstrate that it has sound business reasons (other than tax deferral opportunities) such as (i) aligning the fiscal year end with other related companies (ii) setting the fiscal year end to coincide with seasonal low inventory etc. The CRA has provided a bulletin on changing the fiscal year end named, IT-179R and can be found at http://www.cra-arc.gc.ca/formspubs/prioryear/it179r/it179r-e.html.