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[1]
- 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.
[1]
However, the CRA has stated in Information Circular 88-2 General Anti-Avoidance Rule – Section 245 of the Income Tax Act
(paragraph 21), that it considers an amalgamation conducted under subsection
87(1) solely for the purposes of creating a year end under paragraph 87(2)(a)
to be subject to the GAAR.