6.4 What is the purpose of the short-fiscal period rule?

ITA 249(2) (a)- A “Fiscal Period” is the time when a new taxation year is beginning and the current taxation year is ending (See ITA 249.1(1) for further explanation).

A fiscal period is the time between a start of a business and its year-end which is usually the calendar year. A fiscal period cannot be more than 12 months; however, it can be shorter than 12 months also known as a “short-fiscal period”. For example, if Gary opens a business on June 1^st and his fiscal periods ends on December 31^st then his fiscal period would consist of 214 days instead of 365 days. This would be known as a “short-fiscal period” for Gary’s business. A business reports its income based on the fiscal period. A business that goes bankrupt prior to its fiscal year-end would also have a  “short-fiscal period”.

How the short-fiscal period relates to capital cost allowance

CCA rates are based on a full year. Therefore, an adjustment is made to the CCA of a business that was in operation for less than a year.

If one has a short-fiscal period that consists of less than 365 days, they take into consideration the days the business was operating. For example, Tim shuts down his tire company on September 1^st and his CCA would have been $4,000 for the full year.  Because Tim had a short-fiscal period of 243 days, his actual CCA would be calculated as $2,663 ($4,000 x (243/365)). Therefore, the CCA has to be prorated, as the CCA claim is based on the days in your fiscal period.

References and Resources

• Income Tax Act, RSC 1985, c1, (5th Supp.) s 249(2) (a)
  
• Article- “Fiscal Period – Government of Canada” (Author: Government of Canada)
• Chartered Professional Accountants. (2022). The Chartered Professional Accountant Competency Map. Part 1: The CPA Competency Map: 6.3.2