December Sales Paid in January: Which Year on Your T2125?

Which year does a December sale paid in January belong to?

Most sole proprietors must report income in the year it is earned (the accrual method), so a December sale paid in January is December income, even though the deposit lands in the next year. Only farmers, fishers and self-employed commission agents may choose the cash method, where the January year would count. The CRA's self-employment guide says accrual income is reported in the fiscal period you earn it, no matter when you receive it. The bank date, the platform's payout date and the date on a T4A do not set the year.

The Income Tax Act points the same way: an amount receivable for property sold or services rendered in the year is business income of that year, even if it is not due until a later year, unless a permitted cash method applies. For services, an amount is treated as receivable on the earlier of the day you rendered the account and the day you would have rendered it without undue delay, so billing late does not move services income into a later year.

A case is not simple when:

• earlier years were reported on deposit dates.
• a T4A overlaps a year you have already filed.
• a large December sits in the wrong year.
• the sale date is unclear: work that spans year-end or goods shipped near December 31. Which date counts is a judgment on your facts, and this guide does not decide it.

Gather dated invoices, payout reports that show sale dates, December and January bank statements, last year's return and any T4A slips.

What accounting method does a sole proprietor have to use?

Accrual, unless the income is farming, fishing or self-employed commission income. The CRA guide lets farmers, fishers and self-employed commission agents choose cash or accrual, and requires accrual for all other self-employment income.

Under accrual, expenses generally follow the same idea: a cost belongs to the period it was incurred, whether or not it was paid then, so a December bill paid in January is usually a December expense.

A return built from bank deposit dates follows the cash method. The CRA requires the accrual method for self-employment income other than farming, fishing and self-employed commission income, so check which applies to you. Who qualifies for cash, and how to switch, is in cash or accrual accounting.

What is my fiscal period, and can it end on a date other than December 31?

Self-employed individuals generally have to use a December 31 year-end. The fiscal period is the time between the day your business year starts and the day it ends. For an existing business it is usually 12 months and never longer than 12 months. It can be shorter when a business starts or stops (CRA guide).

An eligible individual may use another reporting method that allows a year-end other than December 31. The Income Tax Act makes this an election on Form T1139, filed with the return for the year that includes the first day of the business's first fiscal period that began after 1994, on or before that return's filing-due date (normally June 15 of the following year for an individual carrying on a business). A business that cancels the election cannot make it again. Any change in when a fiscal period ends needs the CRA's concurrence, so a business already reporting on December 31 should not assume it can switch. Income is then reconciled each year on the same form.

With a different year-end, "December" in this guide means the last days of your fiscal period. The same earned-date rule applies to that end date.

Do marketplace payouts follow the sale date or the payout date?

The sale date, for a seller on the accrual method. The payout is only when the cash arrives. A sale made in December and paid out in January is December income. The payout can be smaller than the sale after fees, refunds or held funds; those are in US-dollar sales and marketplace payouts.

A platform that reports to the CRA states, by calendar quarter, the total consideration paid or credited to you (CRA). The CRA page does not say whether a sale counts when it is made or when it is paid out, so the totals can differ from your sales by sale date. Reconcile the difference instead of copying the platform's total. What platforms report is in CRA digital platform reporting.

My T4A includes work I already reported last year: do I report it again?

Not if you already reported it on the accrual method in the earlier year. The CRA guide says not to claim again in the current year the income on a T4A slip that you accrued and reported in a previous year. Instead, write a letter showing the amount and the year you reported it. Paper filers may include the letter with the return; electronic filers keep it in case the CRA asks.

The overlap happens because a payer reports on a T4A for the year it paid the amount, regardless of when the work was earned (CRA T4A guide). A December job paid in January appears on the January year's slip but belongs to the December year. Timing alone can therefore make a year's slip total differ from that year's sales.

1. Line up each slip with your invoices by date. The slip leaves out GST/HST, so compare it with invoice amounts before tax.
2. Mark the amounts you already reported in the earlier year.
3. If you report on the accrual method, report on this year's statement only the income earned in this year. An amount earned last year that you did not report then is a wrong-year error, covered below.
4. Write the letter for the amounts already reported.

A slip that is missing, wrong, or does not match your invoices for other reasons is in fees for services slips.

What about clients who pay me before I do the work?

Money received before the work is done is generally business income in the year you receive it, not the year you finish. The Income Tax Act lists an amount received for services not yet rendered or goods not yet delivered among business income inclusions. Whether any of it can wait is covered in customer prepayments and unearned revenue.

Do professionals have a different rule for work not yet billed?

Yes. A professional's income normally includes the value of work in progress: services or goods not yet finished at the end of the fiscal period. The CRA guide puts professional fees on Part 3B of the T2125, apart from business income, and builds the year's fees this way:

The CRA guide does not list which occupations count as professional. Whether your work does, and what value to put on unfinished work, are points to settle with a professional before you file.

When is GST/HST due on a December invoice paid in January?

This section applies only if you are registered for GST/HST. The tax on a December invoice is generally December's, reported in the period that includes the invoice date, even if the client has not paid. The CRA's registrant guide says liability arises on the earlier of the day you receive payment and the day payment is due. The CRA usually treats payment as due on the invoice date or the date in an agreement, whichever comes first, and says tax on an invoice goes in the reporting period that includes the invoice date.

The Excise Tax Act sets the same timing: tax is payable on the earlier of the day the consideration is paid and the day it becomes due, and a late invoice does not delay that day (section 168, section 152).

This is a separate rule from income tax. Income follows the earned date; GST/HST generally follows payment and due dates, so the two can differ. For an ordinary sale of goods, tax is payable no later than the last day of the month after the month the buyer takes ownership or possession, even if nothing has been invoiced or paid (section 168(3)). Keep the delivery date, invoice date and payment date for each sale.

Deposits, instalment terms and special cases have their own timing: see GST/HST on deposits and unpaid invoices. Filing and input tax credits are in filing GST/HST and input tax credits.

I reported it in the wrong year: how do I fix it?

A wrong-year error usually touches more than one return: moving an amount raises income in one year and lowers it in another. Fixing only the current year can count an amount twice or leave it out. If you reported on deposit dates, last December's money sits in this year's return, so switching this year to earned dates drops it, and last year's return has to pick it up.

1. Work out the earned year of each amount from your invoices and statements.
2. Recalculate each affected year. If a return is not yet filed, file it with the right figures.
3. For a filed return, wait for your notice of assessment before asking for a change.
4. If the change adds income to a filed year, read unreported income and voluntary disclosure before you send it.
5. Change the return with "Change my return" in your CRA account, with ReFILE in certified tax software, or by mail on Form T1-ADJ, with supporting documents. Send a request to change a previous return separately from your current return (CRA).

A refund cannot be issued for an adjustment request made more than 10 calendar years after the end of the tax year. Income added to a filed year raises that year's tax, and interest runs on the extra tax from that year's balance-due day (Income Tax Act, section 161). Penalties are possible, depending on the facts; see penalties, interest and relief. How far back the CRA can reassess a year is in how far back the CRA can reassess.

Which records show the date a sale was earned?

Income records must show the date, amount and source of the income, supported by original documents such as sales invoices, receipts, fee statements and contracts. The CRA also asks you to keep duplicate deposit slips, bank statements and cancelled cheques. Generally, keep records for at least six years from the end of the last tax year they relate to. If a return was filed late, keep that year's records for at least six years from the date it was filed (Income Tax Act, section 230).

For the earned date, keep:

• the invoice with its date, and any record of when the work was done or the goods were delivered.
• marketplace order and settlement reports that show both the sale date and the payout date.
• December and January bank statements, to tie each deposit to the sale it settles.
• contracts or messages that fix a delivery or payment date.
• T4A slips and any letters about amounts already reported.
• last year's return and statements, to see what was already reported.

Example

Illustrative figures in Canadian dollars, before any GST/HST. Each person reports on the accrual method with a December 31 year-end and is not a farmer, fisher or self-employed commission agent.

An online seller with a January payout

An online seller makes C$8,000 of sales in December. The platform pays them out on January 6. The C$8,000 is income of the year the sales were made, not the payout year. At December 31 the platform has not yet paid out the C$8,000, less any fees it keeps; the sales and the fees both belong to the year the sales were made. The platform's report counts what it paid or credited, so its totals for the two years may not match the seller's sales by date. The seller reconciles the difference.

A consultant with a T4A overlap

A consultant finishes a project in December, bills the client C$12,000 on December 20 and is paid on January 15. The C$12,000 is income of the year the work was done. The client's T4A for the next year shows C$12,000, because the slip follows the year of payment. The consultant does not claim it again in the next year. They write a letter showing the amount and the year it was reported, and send it with the return or keep it.

A tutor who reported on bank deposits

A tutor started in Year 1 and reported what reached the bank each year. January to November sales were C$40,000 every year. December sales were C$3,000, C$4,000 and C$5,000. Each return holds the previous December's money instead of its own.

All three returns change. The three changes add up to the Year 3 December sales, which Year 4 would otherwise have picked up. Each year goes up, so each can owe extra tax, with interest from that year's balance-due day.

Different for you?

• You have used deposit dates for years, a T4A overlaps a filed year, or a large December sits in the wrong year: each case needs the earned date of every amount, a decision on whether filed returns change, and one date rule for the books from now on. See bookkeeping help.
• Your books are behind and a return is due: see catching up on overdue books.
• You left income off a filed return: see unreported income and voluntary disclosure.
• You want to know whether the cash method is open to you, or you run a corporation or partnership: this guide covers a sole proprietor on a T2125; see cash or accrual accounting.
• A December client never paid: see writing off unpaid customer invoices.
• A client paid in advance: see customer prepayments and unearned revenue.
• Your T4A does not match your invoices: see fees for services slips.
• You are paid in US dollars or through a marketplace: see US-dollar sales and marketplace payouts.
• You live in Quebec: this guide covers the federal rule. Quebec residents also file a Quebec return with Revenu Québec, which this guide does not cover.