The Fiscal Period of a Corporation - Changing the Fiscal Period of a Corporation
The Canadian income tax system is built around determining what a taxpayer's income is for a particular taxation year and then applying the applicable tax rates. The taxation year of a Canadian resident corporation is its fiscal period. A newly incorporated corporation can select a fiscal period of its choice so long as it does not exceed 53 weeks in length. A corporation's income tax filing deadline is normally 6 months after the end of its fiscal period.
Corporations are required to make monthly income tax installment payments throughout their fiscal periods. Some Canadian controlled private corporations are allowed to choose quarterly installment payments instead. Notwithstanding the filing deadline, corporations are required to pay their remaining income tax owing not covered by the installment payments, if any, for a fiscal period within two months of the end of that fiscal period. Canadian controlled private corporations which claim the small business deduction and do not exceed their business limits typically have one additional month to pay their final income tax balance.
Once a corporation has selected its fiscal period, it cannot be changed without the consent of the Canada Revenue Agency ("CRA") or if certain events occur which allow a new fiscal period to be chosen as of right.
Deemed Change of Fiscal Period - Changing the Fiscal Period of a Corporation
The circumstances in which a new fiscal period can be selected for a corporation without CRA's permission include:
- An unrelated person or a group of persons acquired control of the corporation,
- The corporation has wound-up and is filing its final return with an abbreviated fiscal period,
- The corporation emigrated to another country,
- The corporation amalgamated with another Canadian
- The corporation became or ceased to be exempt from Canadian income tax, and
- The corporation became or ceased to be a Canadian controlled private corporation.
Many of the above events can involve the application of complicated provisions of the Income Tax Act that require advice from an expert Toronto tax lawyer to navigate. These events typically also result in a deemed end to the fiscal period when the relevant event occurs which can result in a need to file and pay tax sooner than expected. Acquisition transactions can involve multiple deemed year ends for different reasons in a short period of time (e.g. a transaction includes an amalgamation, an acquisition of control, and one or more corporation's losing Canadian controlled private corporation status).
It should also be noted that the Canada Revenue Agency's position is that creating a shell corporation to amalgamate it with an operating corporation for the sole purpose of changing the operating corporation's fiscal period to obtain a tax benefit violates the Income Tax Act's general anti-avoidance rule.
Discretionary Change of Fiscal Period - Changing the Fiscal Period of a Corporation
If no event has occurred which would allow a corporation to change its fiscal period as of right, it must obtain consent to use a new fiscal period from the CRA. This consent is obtained by submitting a written request for a new fiscal period to the corporation's tax center which outlines the reasons for the requested change.
At present, there is very little guidance available regarding under what circumstances the Canada Revenue Agency will allow a change of a corporation's fiscal period. The Income Tax Act gives the CRA discretion over this decision and does not outline any specific factors to be taken into consideration.
As of the date of this article, the Canada Revenue Agency has not made available any substantial written guidance on when it will allow a corporation to change its fiscal period. The CRA previously provided some guidance with it's interpretation bulletin IT-179R, but that publication has been cancelled with no replacement. There are also a small number of published CRA technical interpretations, all of which pre-date the cancellation of IT-179R and so are of uncertain value.
While it was in effect, IT-179R emphasized that the Canada Revenue Agency would look favorably on requests to change the fiscal period of a corporation based solely on "Sound business reasons" but will reject requests attempting to obtain a reduction or deferral of income taxes. The CRA also indicated it would generally not accept requests for a corporation's fiscal period to be changed retroactively. The IT-179R included the following as examples of sound business reasons for a corporation to change its fiscal period:
- A corporation changing its fiscal period to end on the same date as an associated corporation,
- A subsidiary corporation changing its fiscal period to end on the same date as its parent corporation, and
- A corporation changing its fiscal period to end when its inventory for its business is at a seasonal low or during a seasonal period of diminished operations.
Pro Tax Tips - Changing the Fiscal Period of a Corporation
It is important to know your corporation's fiscal period. If a corporation files an income tax return that uses the wrong year end it is likely that the Canada Revenue Agency will not issue an assessment based on that return. If this happens, it is likely the corporation will incur additional unnecessary accounting fees and may also be subject to late filing penalties if the corporation's filing deadline is missed as a result. If the CRA's published view is that if an assessment is nonetheless issued based on an incorrect fiscal period, that assessment is invalid and the limitation period for the Canada Revenue Agency to reassess does not begin to run. Consult with an experienced Canadian tax lawyer if you have any issues with CRA regarding your corporate year-end.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.