Does the timing of a sale within my fiscal year affect my tax?

Canadian income tax is worked out one taxation year at a time, so the date a sale closes decides which year reports the result. For a small business seller the question can be a few days either side of a year-end. The date does not change what the business sold for, but it can change when the tax is due and which year’s rules and limits apply.

Whose tax year is it

Under subsection 249(1) of the Income Tax Act, a corporation’s taxation year is a fiscal period, while an individual’s is a calendar year. Section 249.1 provides that a corporation’s fiscal period may not end more than 53 weeks after it began and that, unless the alternative-method election in subsection 249.1(4) applies or the business is not carried on in Canada, an individual’s business fiscal period may not end after the end of the calendar year in which it began. An individual who sells a company’s shares reports the gain for a calendar year, while the company keeps its own fiscal year.

What the closing date decides in an asset sale

Under subsection 13(1), recaptured capital cost allowance is worked out at the end of the taxation year for each prescribed class of depreciable property, so the capital cost of other property in the same class is part of the same calculation as the proceeds of the equipment sold. The CRA also describes replacement-property rules that can postpone a gain or recapture. If part of the price is paid later, a capital gains reserve can spread the gain, and the CRA says that, generally, the maximum period for most reserves is four years, so the gain is included over five.

Limits that change from year to year

The CRA publishes the lifetime capital gains deduction limit year by year and says it is indexed to inflation, so a December closing and a January closing can meet different limits. For a reserve brought into income later on a disposition of qualified small business corporation shares or qualified farm or fishing property, it says the capital gains deduction available is based on the year the property was disposed of.

A share sale ends the company’s year

When a person or group of persons acquires control of a corporation, subsection 251.2(2) treats the corporation as subject to a loss restriction event, and, subject to the exceptions in subsection 249(4), that subsection deems its taxation year to end immediately before that time. The company then has a shorter year to report, and the CRA says that, apart from the exceptions it lists, resident corporations have to file a T2 return every tax year. Whoever prepares the company’s filings should hear about the closing date early.