FISCAL PERIOD AND ADDITIONAL BUSINESS INCOME

A sole proprietor's business income is normally reported for a fiscal period that matches the calendar year. The Income Tax Act allows an individual to choose a different year-end, but only if they also report an estimate of the income earned between that year-end and December 31. This page explains when a non-calendar year-end can be chosen, how the "additional business income" calculation works, and what happens in the first and last years of a business.

THE DEFAULT: A CALENDAR YEAR-END

• General rule: the fiscal period of a business carried on by an individual must end on December 31.

• Why: before 1995, choosing a year-end early in the calendar year let proprietors defer tax on almost a full year of income. The calendar-year rule and the additional business income calculation were introduced to remove that deferral.

• First year: a business that starts partway through the year has a short first fiscal period, ending December 31. Capital cost allowance for a short period is prorated.

ELECTING A NON-CALENDAR YEAR-END

• The election: an individual can elect an off-calendar year-end by filing Form T1139, Reconciliation of Business Income for Tax Purposes, with the return for the first year of the business, by the June 15 filing deadline.

• Why choose it: a year-end that follows the business cycle can make year-end accounting easier, for example ending a retail business's year on January 31 after the holiday season and returns period.

• Not available: the election cannot be made for a business that is a tax shelter investment.

• Revoking: the election can be revoked, after which the business must use a calendar year-end. Once revoked, it cannot be made again for that business.

• Annual filing: Form T1139 must be filed every year that the non-calendar year-end is used, to calculate additional business income.

HOW ADDITIONAL BUSINESS INCOME WORKS

• Income for the fiscal period: the net business income for the fiscal period ending in the calendar year is reported in full.

• Add an estimate (additional business income): the net income for that fiscal period, multiplied by the number of days from the end of the fiscal period to December 31, divided by the number of days in the fiscal period.

• Subtract last year's estimate: the additional business income added in the prior year is deducted, because the real income for that stub period is now included in the fiscal period being reported.

• Result: over time, the proprietor is taxed on roughly a calendar year's income, with the estimate correcting itself each year.

• CPP: additional business income is part of net self-employment earnings, so it also affects CPP contributions.

WORKED EXAMPLE

A retailer has a fiscal period from February 1, 2025 to January 31, 2026 (365 days), with net income of $60,000. The additional business income included in 2025 was $50,000.

• Income for the fiscal period ending in 2026: $60,000.

• Additional business income for 2026: $60,000 × 334 days (February 1 to December 31, 2026) ÷ 365 days = $54,904.

• Less 2025 additional business income: $50,000.

• Business income reported for 2026: $60,000 + $54,904 − $50,000 = $64,904.

THE FIRST YEAR WITH A NON-CALENDAR YEAR-END

• Business starts in the year: where the first fiscal period ends before December 31, an estimate of income for the rest of the calendar year is added, based on the income of that first period and the number of days the business was carried on.

WHEN THE BUSINESS ENDS

• No new estimate: in the year the business ceases, no new additional business income is added.

• Deduct last year's estimate: the prior year's additional business income is still deducted, because the actual income for that period is included in the final fiscal period.

• Death: similar rules apply on the final return of a deceased proprietor, and an optional separate return for business income may be available.

OTHER REPORTING PERIODS ARE SEPARATE

• GST/HST: the business's GST/HST fiscal year normally follows its income tax fiscal period, but the reporting period (monthly, quarterly or annual) is set separately.

• Payroll: source deductions and T4 slips always follow the calendar year, whatever the business year-end.

KEY POINTS

• Calendar year by default: December 31 is the year-end unless an election is made on Form T1139.

• No deferral: a non-calendar year-end only changes the accounting cycle; additional business income keeps the tax roughly on a calendar-year basis.

• Self-correcting estimate: each year adds a new estimate and deducts the last one.

• One-way revocation: once revoked, the election cannot be made again for that business.

SOURCES

• Income Tax Act: sections 34.1 and 249.1.

• Canada Revenue Agency: Form T1139, Reconciliation of Business Income for Tax Purposes, and its guide RC4015.

• Canada Revenue Agency: Guide T4002, Chapter 1, Fiscal period.