Accounting for your earnings
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Generally, you have to report business income using the accrual method of accounting. Farmers, fishers, and self-employed commission agents can use the cash method or the accrual method to report income, but not a combination of both.
Under the accrual method, you have to report income in the fiscal period you earn it, no matter when you receive it.
You can deduct allowable expenses in the fiscal period you incur them, whether or not you pay for them in that period. Incur usually means you paid or will have to pay the expense.
If you use the cash method, you report income in the fiscal period you receive it whether it is in cash, property, or services. You deduct allowable expenses in the fiscal period you pay them, except prepaid expenses. If you are a farmer, fisher, or self-employed commissioned sales agent, you can use the cash method.
For more information about the cash method, see Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
If you are a farmer, fisher or self-employed commission sales agent, you can decide to change from one accounting method to the other. To change from either:
- the accrual method to the cash method, you must file your return using the cash method and attach a statement that shows the adjustments made in income and expenses as a result of the change in method
- the cash method to the accrual method, you must submit a written request to the director of the taxpayer's tax services office before the due date of the tax return
You should keep a day-to-day record of your receipts and expenses. Keep this record with your duplicate deposit slips, bank statements, cancelled cheques and receipts. This will support your sales income and expense claims.
You can generally deduct business expenses only if you incur them to earn income. If you claim expenses, you have to be able to back up the claim. You do this by keeping all your business-related vouchers and receipts, and record your expenses in a journal, a computerized file or a software accounting program.
You have to report your business income on an annual basis.
For sole proprietorships, professional corporations that are members of a partnership, and partnerships in which at least one member is an individual, professional corporation or another affected partnership, your business income is generally reported on a calendar-year basis.
If you are a sole proprietor or if you are in a partnership in which all the members are individuals, you can elect to have a non-calendar-year fiscal period. To make this change, complete Form T1139, Reconciliation of Business Income for Tax Purposes.
A corporation's tax year is its fiscal period. A fiscal period cannot be longer than 53 weeks (371 days). A new corporation can choose any tax year-end as long as its first tax year is not more than 53 weeks from the date the corporation was incorporated or formed as a result of an amalgamation. The corporation has to file its income tax return within six months of the end of its fiscal period. When the fiscal year ends on the last day of the month, the return is due on or before the last day of the sixth month after the end of the tax year. When the fiscal year ends on a day other than the last day of the month, the return is due on or before the same day of the sixth month after the end of the tax year.
It is a good idea to become familiar with the rules of fiscal periods when planning your business. For more information, see Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
Fiscal period-end for GST/HST registrants
If you are a GST/HST registrant, how you set up your fiscal period-end for income tax purposes may affect your GST/HST reporting periods, as well as your filing and remitting due dates. For more information, see Guide RC4022, General Information for GST/HST Registrants.
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