If your fiscal year-end no longer meets your business needs, you may be able to change it. However, the process depends on how your business is structured and whether the Canada Revenue Agency needs to approve the change.
In Part 1, we explained how fiscal year-end rules differ for sole proprietorships, partnerships, professional corporations, and corporations. In Part 2, we look at practical tips to help you understand when approval may be required, what information to prepare, and why the CRA may review a fiscal year-end change carefully.
Do You Need Permission to Change Your Fiscal Year-End?
It depends on your business structure.
For corporations, CRA approval is generally required before changing the corporation’s tax year-end. Unless the corporation has received approval to change its tax year-end, the corporation’s fiscal period generally stays the same from year to year. To request a change, the corporation must write a letter to its tax services office asking for approval and include the reasons for the change and the effective date. If those details are missing, CRA says processing may be delayed.
For sole proprietors and eligible partnerships, the process is different. Individuals and partnerships where all partners are individuals may be able to use the alternative method to have a fiscal period that does not end on December 31. If your business year-end is not December 31, you generally need to file Form T1139, Reconciliation of Business Income for Tax Purposes, with your income tax return.
Not every partnership can use this alternative method. CRA says the alternative method is not available in certain situations, including where a partnership is a partner in another partnership, where an individual is a member of a partnership that includes a professional corporation as a partner, where the business expenditures are primarily the cost or capital cost of tax shelter investments, or where the taxpayer previously elected to use the alternative method and later cancelled it.
Other partnerships may have different rules. If an established partnership needs to change its fiscal period and the Form T1139 alternative method does not apply, the partnership may need to write to its tax services office to request approval and explain the reasons for the change.
Is CRA Approval Always Required?
No. CRA approval is not always required, but the exceptions are specific.
For corporations, CRA says approval is not required in certain situations, including when:
- the corporation is dissolved and you are filing its final return with an abbreviated fiscal period;
- the corporation has to end its tax year at a specific time because it is emigrating to another country, becoming exempt from tax, or ceasing to be exempt from tax;
- a person or group of persons acquired control of the corporation under subsection 249(4) of the Income Tax Act; or
- the corporation becomes or ceases to be a Canadian-controlled private corporation.
A corporation that becomes bankrupt must still get CRA approval to change its fiscal period.
For sole proprietors, a fiscal year-end may effectively change in certain situations, such as when the business ends or the taxpayer dies. However, the tax reporting rules can be complex, especially where there is business income between the end of the fiscal period and the date of death. In those cases, CRA has specific rules for the final return and, in some cases, optional returns.
What Is Needed to Change Your Fiscal Year-End?
For corporations, the request should be made in writing to the corporation’s tax services office. The letter should clearly explain:
- the current fiscal year-end;
- the proposed new fiscal year-end;
- the effective date of the change;
- the business reason for the change; and
- any relevant supporting information.
CRA does not automatically approve every request. The reason should be practical and business-related, not simply a way to defer tax.
For sole proprietors and eligible partnerships using a non-calendar fiscal period, Form T1139 is used to reconcile business income for tax purposes. CRA notes that if Form T1139 was filed with the previous year’s income tax return, it generally has to be filed again for the following year.
Why Are Fiscal Year-End Changes Not Automatically Approved?
Fiscal year-end changes can affect when income is reported and when tax is payable. Because of this, CRA may review a request to ensure the change is being made for a valid business reason and not mainly to defer tax or create an inappropriate tax advantage.
Valid business reasons may include:
- aligning the year-end with a parent company, purchaser, or corporate group;
- matching the year-end to the natural business cycle or a seasonal slow period;
- simplifying inventory counts, bookkeeping, and financial reporting;
- meeting lender, investor, or stakeholder reporting needs; or
- improving administrative efficiency.
For example, a seasonal business may prefer a year-end after its busiest season, when inventory, receivables, and bookkeeping are easier to manage. A subsidiary may want its year-end to align with its parent company for consolidated reporting.
Tip 1: Confirm Your Business Structure First
Before trying to change your fiscal year-end, confirm whether your business is a sole proprietorship, partnership, professional corporation, or corporation. The correct process depends on the structure.
This is especially important for professionals. CRA says a professional corporation that is a member of a partnership and carries on business in Canada generally has to use a December 31 tax year-end.
Tip 2: Check Whether the Alternative Method Applies
If you are a sole proprietor or in a partnership where all partners are individuals, you may be able to use the alternative method to have a fiscal period that does not end on December 31. However, this election has limitations and ongoing filing requirements.
If you later change back to a December 31 year-end after using the alternative method, CRA audit guidance indicates that you are not allowed to change back to an off-calendar fiscal year-end.
Tip 3: Consider GST/HST and Other Filing Deadlines
Changing a fiscal year-end can affect more than income tax. If you are a GST/HST registrant, the fiscal period-end chosen for income tax purposes may affect your GST/HST reporting periods, filing deadlines, and remittance due dates.
A fiscal year-end change may also affect corporate filing deadlines, tax instalments, financial statements, payroll reconciliations, bookkeeping workflows, and cash-flow planning.
Tip 4: Do Not File Before the Change Is Properly Addressed
If your corporation needs CRA approval, do not assume the change is accepted simply because you prepared financial statements with a new year-end. Confirm the process first and make sure the request includes the business reason and effective date.
A corporation’s tax year is its fiscal period, and a fiscal period cannot be longer than 53 weeks, or 371 days. A new corporation can choose any tax year-end as long as its first tax year is not more than 53 weeks from the date of incorporation or amalgamation. After that, the fiscal period generally stays the same unless an approved or automatic change applies.
Speak with a Professional Before Making the Change
Changing your fiscal year-end can affect tax reporting, instalments, GST/HST, bookkeeping, financial statements, financing, and cash flow. The rules are different for sole proprietorships, partnerships, corporations, and professional corporations.
Before filing Form T1139, writing to the CRA, or preparing financial statements with a new year-end, speak with a qualified accountant. Professional advice can help ensure the change is valid, properly documented, and handled in the correct tax year.
Want to more about how to change the fiscal year-end of a Canadian business? Read more in part 1 of our series on how to change the fiscal year end of a Canadian business:
How to Change the Fiscal Year-End of a Canadian Business – Part 1
E&E Professional Accountants has years of experience in assisting businesses with their accounting needs. We are founded and managed by an experienced corporate auditor and a former CRA tax auditor. Feel free to contact us for assistance with all your accounting and bookkeeping needs.