A Canadian corporation’s first fiscal year can end up to 53 weeks after the date of incorporation. Once the fiscal period has been chosen, it cannot be changed, unless by operation of law, without the permission of the Canada Revenue Agency (“CRA”).
The CRA is concerned about taxpayers changing fiscal periods with the motive of minimizing taxes. As such, the CRA requires that there must be a sound business reason to change a corporation’s fiscal period. Some examples of such business reasons include the following:
- Changing a fiscal period to be in line with a parent or associated company; or
- Changing a fiscal period to end at a time when inventory is seasonally low
Over the last number of years, the CRA has been denying requests for a change in fiscal period where it does not see sufficient merit. The bar has been set higher than in the past, when most reasonable requests were allowed. The presumption should no longer be that a reasonable request will automatically be allowed. You can anticipate having to prove your case to the CRA.
In order to request a change in your corporation’s fiscal period, write a letter to your tax services office and be sure to include details as to why you are requesting a change, as well as relevant supporting documents. The letter should be signed by the taxpayer or an authorized individual. Requests should be submitted well in advance of the desired new fiscal year end, as the request has to be approved before the new fiscal period can be used. Changing a fiscal period retroactively is generally not permitted.
There are certain circumstances in which approval is not required to change a fiscal period – these include the following:
- The corporation undergoes an acquisition of control by an unrelated person or group of persons
- The corporation amalgamates with another Canadian corporation
- The corporation has been wound-up, resulting in a short fiscal period
- The corporation becomes or ceases to be:
- exempt from income tax;
- a resident of Canada; or
- a Canadian-controlled private corporation
The CRA’s very limited information regarding changing a year end can be viewed here. The CRA’s cancelled Interpretation Bulletin IT-179R – Change of Fiscal Period had helpful information but can no longer relied upon.