As the end of 2012 draws closer, a number of incorporated companies are getting ready for their year-ends. Choosing your year-end date strategically can have both operational and tax advantages.
If you have just incorporated your business, you have to decide on a year-end date within the first 12 months of incorporating. It doesn’t have to coincide with the anniversary of your incorporation date, nor does it need to coincide with the end of the calendar year. Your ideal year-end really has more to do with your business cycles, which vary from business to business.
Typically, your fiscal year-end will correspond with the end of a calendar month, although it’s not required to. Technically, you could choose your year-end to be any fixed date in the year, or even a floating year-end such as the closest Sunday to a given annual date, as long as your fiscal year doesn’t last more than 53 weeks.
For more on this, I contacted Michael Machon, a chartered accountant with BDO Canada LLP. He said: “Sometimes, a retail store may benefit from counting inventory on a Sunday when they are normally closed for business, thereby benefiting from a floating tax year-end”.
Another little-known fact is that you can have a different accounting year-end from your year-end for tax purposes. But that just sounds like twice the work to me, and is typically avoided.
Businesses that manage a lot of inventory may consider choosing a year-end that corresponds with the end of the busy season and presumably, a time when inventory is at its lowest. This means less inventory has to be counted, which decreases costs and increases accuracy. Furthermore, a quiet time of year makes it easier to close the books as there are fewer transactions in process and more time available from support staff, if needed.
Another consideration is the availability of an accounting firm. All things being equal, aligning year-end with your accounting firm’s slow period may offer rewards such as slightly better pricing, more attention and a quicker turnaround on their work. After all, no firm has unlimited capacity nor the ability to ramp up or down quickly, especially if they want to provide consistent results, quality of work and familiar staff to an account. Avoiding their busy season might be something you can accommodate.
Income taxes are another big consideration for many businesses. Having a year-end in the second half of the calendar year may allow your corporation to expense a management bonus (on a deferred basis) in one corporate year, then actually pay it out in the following calendar year, allowing you to postpone claiming it personally, and avoid paying personal taxes on it until the year after that. While this may not seem tricky, Mr. Machon says there are number of important tax and legal documents which must be prepared, such as Directors’ Resolutions, to properly implement this tax strategy to satisfy the taxation authorities.
For example: Your company declares a $10,000 bonus to you on July 31, 2013, and pays it out on January 15, 2014. If year-end is July 31, the company will save corporate taxes immediately and you do not need to file this on your personal income statement until April 2015. This may give you a 15-month tax deferral of income tax, depending on your circumstances.
If you are starting an unincorporated business such as a sole proprietorship, then you may choose an off-calendar tax year-end; however, this will introduce more tax reporting complexities, says Mr. Machon. “The Canada Revenue Agency will require you to report your income on a ‘notional’ calendar year basis by estimating your income from your year-end to December 31. Because of the added complexities of an off-calendar year-end, many sole proprietors choose to select December 31 as their tax year.
These are just a few considerations. Contact your accountant for more details specific to your situation. But as you can see, it’s a decision that deserves some thought and planning to make your year-end as easy as possible to execute, as cost-effective as possible for your business and as tax advantageous as possible to both you and your business.
Next week, we’ll look at how to change your year-end, if you feel your current year-end date has you missing out on the advantages above.
Special to The Globe and Mail
Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and sold seven businesses.
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