ARCHIVED - Sale of Inventory

From: Canada Revenue Agency

What the "Archived Content" notice means for interpretation bulletins

NO: IT-287R2

DATE: January 30, 1999

Sale of Inventory

REFERENCE: Section 23


This bulletin cancels and replaces Interpretation Bulletin IT-287R dated July 15, 1988.


This bulletin discusses section 23, which provides that where a taxpayer disposes of all or part of the inventory of a business, upon or after disposing of or ceasing to carry on all or part of the business, the taxpayer is deemed to have disposed of the inventory in the course of carrying on the business.

Discussion and Interpretation

¶ 1. The application of subsection 23(1) is dependent upon the taxpayer "disposing of or ceasing to carry on a business or a part of a business" and, at that time or some time thereafter, selling part or all of the inventory of the business. Where inventory is thus sold, subsection 23(1) provides that the inventory is deemed to have been sold in the course of carrying on the business. For a taxpayer on the accrual basis of reporting income for tax purposes, all the consideration received or receivable for the inventory is included in income in the year the inventory is sold and the cost of the inventory is deducted in the same way as if it had been sold in the ordinary course of business to arrive at the profit thereon. For a taxpayer on the cash basis of reporting income, the consideration received for inventory thus sold is included in computing income for the year or years in which it is received and the corresponding costs of that inventory are deductible in the year they are paid.

¶ 2 . Subsection 248(1) defines "inventory" as "a description of property the cost or value of which is relevant in computing a taxpayer's income from a business for a taxation year or would have been so relevant if the income from the business had not been computed in accordance with the cash method and, with respect to a farming business, includes all of the livestock held in the course of carrying on the business." Subsection 23(3) makes it clear that "inventory" for the purposes of section 23 includes the inventory of a farmer or fisherman who computes income in accordance with the cash method under subsection 28(1). It also provides that "inventory" includes the work-in-progress of a professional who has previously elected pursuant to paragraph 34(a) not to take into account the value of the inventories in the annual income determination (see the current version of IT-457, Election by Professionals to Exclude Work in Progress from Income). The Department considers the income resulting from an expropriation of property that was included in inventory to be proceeds from the sale of inventory upon cessation of a business for the purposes of subsection 23(1) if the act of expropriation terminated the carrying on of a business or an adventure or concern in the nature of trade.

¶ 3. Where one person has sold business inventory to another person and the amount of the consideration paid or payable by the purchaser was in part consideration for the inventory so sold and in part consideration for something else, the part of the amount that may reasonably be regarded as consideration for the inventory is deemed by section 68 to be both the proceeds of disposition of that inventory and the amount at which it was acquired by the purchaser. For purposes of section 68, in arm's length transactions (see the current version of IT-419, Meaning of Arm's Length) the Department generally considers an allocation to be reasonable if it is based on the facts and has been agreed to by the parties to the transaction. In the event the vendor and purchaser are not dealing at arm's length and the fair market value of the inventory sold is significantly more or less than the consideration paid therefor, paragraph 69(1)(a) or (b) will apply, requiring the portion of the total proceeds allocated to inventory to be based on fair market value.

Explanation of Changes


The purpose of the Explanation of Changes is to give reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.

Reasons for the Revision

This bulletin is being amended as a result of amendments to the Income Tax Act enacted by S.C. 1994, c. 7, Schedule II (1991, c.49-formerly Bill C-18) and S.C. 1996, c. 21 (formerly Bill C-36). The comments in this bulletin are not affected by any draft legislation released before December 9, 1998.

Legislative and Other Changes

¶ 2 has been revised to reflect the Bill C-18 amendment to the definition of "inventory" in subsection 248(1).

The discussion in former ¶s 4 and 5 pertaining to the elections available under subsections 25(1) and 99(2) has been deleted as a result of the Bill C-36 amendment to the definition of "fiscal period" which is applicable to fiscal periods that begin after 1994. Previously, if a sole proprietor disposed of a business that had an off-calendar year fiscal period, the business could have two fiscal periods ending in the calendar year in which it was disposed of. The election under subsection 25(1) worked to shift the taxation of income for the second fiscal period in the same calendar year to the next calendar year. A similar election under subsection 99(2) applied in the case of a partnership. Because paragraph 249.1(1)(b) now provides that the fiscal period of most businesses carried on by a sole proprietor or partnership must coincide with the calendar year, this issue is generally no longer a concern. While subsection 249.1(4) allows certain individuals to elect to have the provisions of paragraph 249.1(1)(b) not apply in order to maintain a fiscal period that does not coincide with the calendar year, an individual who elects under subsection 249.1(4) is not eligible to elect under subsection 25(1) or 99(2).

Other changes have been made in the bulletin for purposes of clarification.

Notice -- Bulletins do not have the force of law

Interpretation bulletins (ITs) provide Revenue Canada's technical interpretations of income tax law. Due to their technical nature, ITs are used primarily by departmental staff, tax specialists, and other individuals who have an interest in tax matters. For those readers who prefer a less technical explanation of the law, the Department offers other publications, such as tax guides and pamphlets.

While the ITs do not have the force of law, they can generally be relied upon as reflecting the Department's interpretation of the law to be applied on a consistent basis by departmental staff. In cases where an IT has not yet been revised to reflect legislative changes, readers should refer to the amended legislation and its effective date. Similarly, court decisions subsequent to the date of the IT should be considered when determining the relevancy of the comments in the IT.

An interpretation described in an IT applies as of the date the IT is published, unless otherwise specified. When there is a change in a previous interpretation and the change is beneficial to taxpayers, it is usually effective for all future assessments and reassessments. If the change is not favourable to taxpayers, it will normally be effective for the current and subsequent taxation years or for transactions entered into after the date of the IT.

A change in a departmental interpretation may also be announced in the Income Tax Technical News.

If you have any comments regarding matters discussed
in this IT, please send them to:

Director, Business and Publications Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
Revenue Canada
Ottawa ON K1A 0L5

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