What is a Fiscal Year and How to Choose the Right One for Your Company?
A fiscal year, also referred to as the financial, tax, or accounting year, is the designated 12-month period that a company follows to report its financial information. This period can either be a calendar year or a customized year.
It’s important to note that the choice of fiscal year can only be made when a corporation is formed, and any subsequent changes require approval from the Canada Revenue Agency (CRA).
Choosing the right fiscal year can have a significant impact on your business, and you may wonder which option would be the most suitable for your company. To help you make an informed decision, SRJ Chartered Professional Accountants is here to provide answers to your questions.
The Importance of Fiscal Year for Small Businesses
Understanding the concept of a fiscal year is crucial for businesses to demonstrate their financial stability. Small businesses, in particular, rely on financial statements to secure loans and prove their financial standing to third-party entities such as financial institutions. Hence, it is essential to have a fiscal year-end that accurately reflects the company’s financial status.
Companies with fluctuating business cycles throughout the year can benefit from having a fiscal year different from the calendar year. This can aid them in the following ways:
- Depicting their business operation more accurately
- Simplifying tax and financial planning
- Managing inventory more efficiently during peak periods
Determining the appropriate start and end dates for the tax year is a complex decision that depends on several factors, and it is best left to a chartered professional accountant (CPA). However, businesses can assess their progress or losses by reviewing their fiscal year-end and fiscal quarters.
Also read: Selling a business to Family Members in Canada
Fiscal Year and Tax Implications for Businesses
When incorporating a business, you have the option to choose a definitive or floating year-end. The latter can change annually based on a specific time, such as the last day of February, as long as the fiscal year doesn’t exceed 53 weeks (371 days). Each fiscal year is divided into four quarters.
Ways to pick a year-end:
Choosing a fiscal year-end for your newly established business involves selecting any date within the next 53 weeks from the incorporation date. Once the company files its first T2 or Corporate Tax Return, the fiscal year-end becomes official. To avoid late fees, a T2 return must be filed within six months after the financial year-end. Selecting the month’s last day closest to the 53-week mark is recommended, as it is a standard practice.
Choosing a fiscal year-end depends on several factors and the type of business. Although most professional accountants suggest selecting a fiscal year-end when the company finishes the majority of its business, it may not apply to all businesses. Therefore, it’s best to consult with an accountant at SRJ Chartered Professional Accountants to select the fiscal year-end that best suits your business needs.
Determining Your Accounting Year-End Based on Your Business Nature
The nature of your business plays a crucial role in deciding the accounting year-end and fiscal quarters that are suitable for your business. Some businesses have a natural business year that is different from the calendar year due to their seasonal nature.
For instance, schools, colleges, and universities often follow a fiscal year-end that aligns with the school year. Non-profit organizations often select a year-end that corresponds with the grant and award deadlines, with many opting for a March 31 year-end. Retail businesses may choose a year-end after the holiday season when inventory is at its lowest, and sales are usually not as high. In contrast, agriculture and farming businesses tend to choose a year-end following the biggest harvest of the year.
By selecting a natural business year-end, businesses can better capture and report their financial performance, which can be crucial in securing loans or funding from investors. If you’re unsure which year-end is suitable for your business, seek guidance from a chartered professional accountant, who can help you determine the best option.
Which option is better suited for your business?
Easier for your creditors and investors since they can compare your financial statements to those of other businesses in the same industry that have the same fiscal year-end.
Determining the most suitable year-end for your business depends on several factors, including the nature of your business, management goals, accounting practices, and the interests of investors and creditors. For management purposes, choosing a time of the year with the lowest inventory or lesser foot traffic can help track accounts receivable, cash flow, and prepare financial statements, budget, and taxation plans. Choosing a fiscal year-end that is different from the calendar year can make it easier for your accountant to prepare tax returns, while aligning your business year-end with your natural business year can reflect positively on your financial statements and help measure your performance for potential investors and creditors. Ultimately, consulting with a professional accountant can help you determine the best fiscal year-end for your business.
Is it mandatory according to the law to have a specific fiscal year for a business?
Businesses are legally required by the CRA to report their annual income, and the fiscal year must not exceed 53 weeks (371 days). The end-of-fiscal year must be provided to the CRA by all businesses. It is worth noting that the way and timing of setting up the financial year-end also impacts GST/HST reporting periods, filing, and remitting due dates, particularly for GST/HST Registrants. SRJ Chartered Professional Accountants can provide assistance in filing Corporate Tax Returns at the end of the fiscal year, as well as filing GST/HST returns on a monthly, quarterly, or annual basis. To receive a quote on these services, you can schedule a call with one of their professional accountants.