What is a Fiscal Year?
A fiscal year, also sometimes known as the financial, tax, or accounting year, is the year that your company follows. A fiscal year can also be a calendar year. It is the term used to designate a period of time financial information is reported on.
You can decide when a new year begins for your company as long as it is a 12-month period. However, it is important to note that this can only be decided when a corporation is created. After that, it can be changed with approval from the Canada Revenue Agency (CRA).
You might wonder how to choose a year-end that is best suited for your business or how choosing a fiscal year can impact your business. Will adopting the calendar year as your fiscal year be more beneficial or not? SRJ Chartered Professional Accountants will help answer your questions here.
Fiscal Year and Small Businesses
Knowing what is a fiscal year is important for businesses to show financial stability. Small businesses are often looking for loans for this purpose; they need their financial statements to prove the financial stability of their business. Due to this reason, they need a financial year-end that helps a third party, like a financial institution, to assess the company.
Businesses that have high and low periods of business during a year often benefit from having a fiscal year other than the calendar year. This benefits them in the following ways:
- It better depicts their business operation
- Tax and financial planning becomes easier
- The business owns a lot of inventory at certain periods of time
Having the end of the financial year different from the calendar year has many benefits for businesses. However, knowing when does the tax year start and end is a complicated decision that depends on a lot of factors and should be left to a chartered professional accountant (CPA). Businesses, on their part, can look into when does the fiscal year end and what fiscal quarters their progress or losses lie in.
Fiscal Year and Taxes
When incorporating, you can decide whether you want to decide on a definitive year-end or a floating year-end, the latter being one that can change on a year-to-year basis based on a certain time of the year, such as the last day of February of each year. This is allowed as long as the fiscal year does not exceed 53 weeks (371 days). Each year is divided into four distinct fiscal quarters.
How to Pick a Year End?
If your business is newly started, you can choose any date within the next 53 weeks from the date of incorporation as the fiscal year-end. It will be officially set once the company has filed its first T2 or Corporate Tax Return. A T2 return needs to be filed within six months after a company’s financial year ends to avoid late fees. It is a good practice to choose the last day of the month, which is closest to the 53-week mark. For example, if you incorporated or started your business in August 2022 rather than choosing December 31st, 2022 as your year-end SRJ Chartered Professional Accountants may recommend you choose a fiscal year-end in 2023 so that you have the full year of business activity before you file your first corporate tax return.
Most professional accountants would suggest choosing a fiscal year when the company has finished the majority of its business, but it may not be true for all businesses. The financial year-end may vary depending on the type of business a company is in. You can book a consultation with one of the accountants at SRJ Chartered Professional Accountants here and choose a fiscal year end that is best suited for your business.
Natural Business Year
The nature of your business plays a decisive role in determining your accounting year-end and fiscal quarters. Your business may have obvious natural business years as they are seasonal, unlike others. Such businesses follow an accounting year-end that is different from a Calendar year. For example:
Schools: Schools, colleges, and universities often begin and end their fiscal years according to the school year.
Non-profits: While some non-profits choose a calendar year as their financial year-end, the majority choose one that falls in line with the deadlines for grants and awards. Most not-for-profit organizations have a March 31 year-end.
Retails: Retail businesses often choose a year-end for their business after the holiday season, when the inventory is lowest, and they are done with the busiest time of the year in regards to sales.
Agriculture: Those involved with agriculture or farming choose a year-end after the biggest harvest of the year.
Which one is more suited to your business?
- For Management Purposes: It is best to decide a time of the year when your business has the lowest inventory or lesser foot traffic if you are in a services business. When the business is slower than usual, it makes it easier to track accounts receivable, cash flow, and other important matters. Choosing this time as the year-end would make it easier to prepare financial statements, file returns as well as make a budget and taxation plans for the next fiscal year
- For Accounting Purposes: Choosing a fiscal year-end that is different from the calendar year can make it easier for your accountant to get things in order to prepare your tax returns.
For Creditors and Investors: A business year-end that coincides with your natural business year can reflect positively on your financial statements, which you prepare for potential investors. At this time of the year, most of your inventory is converted into cash and shows your most liquid state, capable of paying back any debts you owe. It also makes the measurement of your performance
How is the Fiscal Year Used?
A fiscal year is primarily used for tax purposes. It determines when your taxes are payable to the CRA. The deadlines are important to avoid any late payment charges, interest, or demand notices. Knowing when the tax year start and end helps you manage your business so it looks better in the accounting books, and there is no question of its financial stability.
Is it compulsory to have a specific fiscal year by law?
According to the CRA, you are required by law to report your business income on an annual basis. A fiscal period for a business cannot be longer than 53 weeks (371 days). It is mandatory for all businesses to provide their end-of-fiscal year to the CRA.
It is important to note that if you are a GST/HST Registrant, how and when you set up your financial year-end also affects the GST/HST reporting periods, filing, and remitting due dates. SRJ Chartered Professional Accountants can help you file your Corporate Tax Returns at the end of your financial year and help you in filing your GST/HST returns on a monthly, quarterly, or annual basis. Schedule a call here with one of our professional accountants to get a quote on these services.