How is the year-end handled for the year I buy a business?

The year-end that matters in the year you buy depends on the structure of the deal and on who files. This page covers the federal Income Tax Act. If you buy shares and gain control of a corporation, the Act can end that corporation’s tax year at the moment of the purchase. If you buy a business’s assets, that particular rule is about control of a corporation and is not what governs the sale. Ask your accountant which applies to your deal.

The deemed year-end on buying control

Under s.251.2(2)(a) of the Income Tax Act, a taxpayer is subject to a loss restriction event when it is a corporation and control of it is acquired by a person or group of persons. Under s.249(4)(a), and subject to paragraph (b), the taxation year that would have included that time is then deemed to end immediately before it, and a new taxation year is deemed to begin at that time. The same paragraph deems the corporation not to have established a fiscal period before that time.

Exceptions in the Act

Section 249(4) is subject to exceptions. Under paragraph (b), if the corporation’s last taxation year before that time would otherwise have ended within the seven-day period that ended immediately before it, that year is deemed to end immediately before that time instead, provided the corporation so elects in its return for that year, and except if it is subject to a loss restriction event within that period. Paragraph (b) is itself subject to other provisions of the Act that it names. Section 249(4) also does not apply to a foreign affiliate of a taxpayer resident in Canada that did not carry on a business in Canada at any time in its last taxation year that began before that time. Because these carve-outs turn on dates and facts, ask your accountant to confirm whether control is being acquired and whether the deemed year-end applies to the corporation you are buying.

What a fiscal period is

Section 249.1(1) defines a fiscal period of a business as the period for which the accounts of the business are made up for purposes of assessment under the Act, and it limits how long a period may run, depending on the kind of taxpayer. For a corporation, s.249.1(1)(a) says no fiscal period may end more than 53 weeks after the period began. Section 249.1(3) says that when one fiscal period ends, the subsequent fiscal period, if any, is deemed to begin immediately after. The CRA, on its pages for sole proprietorships and partnerships, also says to base a capital cost allowance claim on your fiscal period ending in the current tax year, not the calendar year.

Goodwill is a separate question, covered in the answer on amortizing goodwill after a purchase.