Inventory and cost of goods sold
You need to do an annual inventory. This is usually a list of goods held for sale. If you are a manufacturer, this includes raw materials as well as packaging material and supplies, work-in-progress (goods and services that you have not yet completed at the end of your fiscal period), and finished goods that you have on hand. Inventory is used to calculate the cost of goods sold and net income on Form T2125, Statement of Business or Professional Activities.
For more information, see Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
How to value your inventory
The value you place on the items in your year-end inventory is important in determining your income.
For income tax purposes, the two acceptable methods of valuing your inventory are by determining either:
- the fair market value of your entire inventory (use either the price you would pay to replace an item or the amount you would get if you sold an item)
- the value of individual items (or classes of items, if specific items are not easy to distinguish) in the inventory, at their cost or their fair market value, whichever is lower
Other methods of valuing inventory may be available or required depending on the type of business. For example, businesses that are adventures or concerns in the nature of trade must value their inventory at cost.
If you have property that is a swap agreement, a forward purchase or sale agreement, a forward rate agreement, a futures agreement, an option agreement, or any similar agreement, different rules may apply to you.
After you choose a method of inventory valuation, you have to continue to use the same method in later years. For more information, see interpretation bulletin IT-473R, Inventory Valuation.