Yes, the cost of inventory and goods sold is one of the most significant deductions available to small business owners in Canada. When you sell products, the cost of those items is deducted from your gross revenue to calculate your business income. This deduction applies whether you manufacture goods, resell retail products, or operate as a wholesaler. The Canada Revenue Agency (CRA) allows you to deduct the cost of inventory that you've actually sold during the tax year, which is why accurate inventory tracking is essential for your tax return. Inventory deductions are based on a simple principle: if you buy items to sell, and you sell them, that cost reduces your taxable profit. This is different from other business expenses because inventory isn't an operational cost like rent or utilities. Instead, it directly relates to the revenue you generate.
No, you can only deduct the cost of goods you actually sold. Unsold inventory remains on your balance sheet as an asset and becomes next year's opening inventory. Only the cost of goods sold is deducted from your revenue.
You can use FIFO (First-In, First-Out), Average Cost, or Specific Identification. Choose the method that best fits your business operations and stick with it consistently. Changing methods requires CRA approval and may trigger a reassessment.
While not legally required, the CRA expects you to count inventory at least annually to support your year-end valuation. Physical counts help prevent errors and demonstrate good record-keeping practices if audited.
Yes, freight and shipping costs to bring inventory to your location can be capitalized as part of inventory cost. However, shipping costs to customers (sales shipping) are part of COGS and reduce your gross profit, not inventory value.
You must value obsolete or damaged inventory at the lower of cost or market value. If an item is unsellable, you may write it down to zero or a salvage value. Document these adjustments with photos or notes in case the CRA asks.