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Self-Employed Individuals - Choosing a Year-end When Starting Your Business
You can choose a year-end after December 31, so that you can defer tax on your first fiscal year until the calendar year in which the first year-end occurs. However, you will still have to pay tax based on a December 31 year-end once your first fiscal year is completed. Thus, you would be paying tax on more than 12 months of income when you first pay tax on your self-employment income.
For example, if you choose a June 30 year-end for your self-employment business which started on July 1, 2021, you would not have to report income from this business on your 2021 tax return. You would have to elect on form T1139 (link below) to have a June 30 year-end. On your 2022 tax return you would report the income for your fiscal year ending June 30, 2022. Then you would have to add an amount for estimated earnings for July 1 to December 31, 2022. You would thus be paying tax on 18 months of income, which may put you in a much higher tax bracket.
You can later convert to a December 31 year-end, so you could then eliminate the calculation of the estimated amount, and use your actual earnings instead. This is done by cancelling your prior election, again on form T1139. You would complete Part 5 of the form, to change back to a fiscal period ending on December 31. Once you have cancelled the election, you cannot change your fiscal year-end again.
If you will have a loss from self-employment for the first 6 months in the example above, it would be better to use a December 31st year-end in order to offset the loss against other income in that year.
Canada Revenue Agency (CRA) Resources
Form T1139 Reconciliation of Business Income For Tax Purposes
T4002 Self-employed Business, Professional, Commission, Farming and Fishing Income
T4002 - How to report your self-employment income - fiscal period
Revised: January 16, 2023
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