Selecting a Business Year end

I am often asked by clients who are starting up a new business what year-end they should choose.
Most businesses generally have a business year than operates on a natural 12 month cycle, with peaks and valleys of business activity occurring within this time frame.  For instance, retailers will build up inventory levels leading into the Christmas season.  Once Christmas is over, sales will take place in January and February to clear out merchandise, inventory levels will drop and trade suppliers will be paid.  The ideal time for a business year end is when the activities of a company have reached the lowest point in their annual cycle.
Advantages to having a year-end at the lowest point in the annual cycle include:
  • Financial statements will reflect the outcome of a complete business cycle. If any other year end is chosen, financial statements show the results partly of one business season and partly of another.
  • Financial statements prepared at the low point in the operating cycle show the ability of management to bring the affairs of the business into a liquid financial position.
  • As the normal activities of a business enterprise have substantially decreased, the inventory may be counted with less interference in day to day operations than at a busy time of year.
  • Inventory levels are greatly reduced and may be counted with greater ease an in less time than at a busy time of year.
  • Staff have more free time to assist in counting inventory
  • The risk of inventory counting errors is reduced with less inventory on hand
  • Costing the year-end inventory will take less time with reduced inventory levels
As can be seen, choosing a year end is an important first step in setting up your business.  Some thought should be given to what year-end best suits the nature of your business in order to save you time and money.

Canada Small Business Financing Program

The Canada Small Business Financing Program offered by the Government of Canada makes it easier for small businesses to get loans from financial institutions by sharing the risk with the lenders.  The program was designed to help new businesses get started and help established companies make improvements and expand as well as improve access to loans that would otherwise not be available to small businesses.
The program is available to small businesses or start-ups operating in the for profit sector in Canada with gross annual revenues of $5,000,000 or less.
Loans of up to a maximum of $500,000 for any one borrower are available and can be used for the purchase of land, buildings, new and used equipment and leasehold improvements.  Specific examples include commercial vehicles, hotel or restaurant equipment, computer equipment and software, and manufacturing equipment.
The loan cannot be used to finance goodwill, working capital, inventories, franchise fees and R&D.

Depreciating Rental Properties

If you own rental property, you can claim depreciation for tax purposes (known as CCA) to reduce your net rental profit and therefore reduce the amount of income tax you pay.  However, you cannot use  CCA to (i) create a rental loss or (ii) increase an existing rental loss. 
If you own more than one rental building, you must determine the net rental income after all expenses on a “combined” basis prior to claiming CCA.  You can then claim CCA to bring your combined profit down, subject to the limitations noted above.
Since real estate generally appreciates in value of over time, it is likely that you will ultimately sell it for a profit.  Part of the profit will be taxed as a capital gain and part will be taxed as a recapture of the CCA you have been claiming over time.  This recapture often comes as a surprise to many of my clients.  They don’t realize that all those taxes they saved over the years by depreciating their rental properties all gets taxed when they sell.   
Tax Tip:
If you own more than one rental property and you are restricted as to how much CCA you can claim because of the limitations noted above, you can choose which property to claim CCA on.  If you are likely to sell one property before the other, you can defer tax by claiming CCA on the property you know you are going to keep for the long run and not on the one you are going to sell.   When it comes time to sell the first property, there will be no CCA to recapture because none has been claimed along the way.