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To track inventory for an online store in Canada, you need two things the CRA asks for: a count of the goods you hold for sale at each year end, and one valuation method that you keep using. Everything else, the barcodes and stock apps included, is there to make those two jobs easy.
Plenty of small shops skip this until tax time, then guess. That guess feeds straight into your profit, so a bad count moves your tax bill.
How do you track inventory for the CRA?
The CRA’s page on inventory and cost of goods sold says you need to do an annual inventory, usually a list of goods held for sale. It doesn’t prescribe software. A spreadsheet is fine if it holds up.
A workable record lists each product, the units on hand, what each unit cost you, and the date of the count. Keep supplier invoices with it, since they prove cost. If stock sits in more than one place (your garage, a third-party warehouse), add the locations together. My advice is to count anything you still own, wherever it’s stored. I didn’t find a CRA page that settles the warehouse question, so ask the CRA if your setup is unusual.
A full physical count once a year is the minimum. Many sellers add a spot check each quarter on their fastest movers, which is how you catch shrinkage before it gets big.
Picture Marcus, who sells phone cases from a spare room in Winnipeg. On December 31 he closes up shop for an hour, counts every box, writes the numbers beside each unit cost on a sheet, and saves a photo of the shelves too. Dull work. But that one sheet is what turns a pile of invoices into a defensible year-end figure.
How do you value stock at year end?
The CRA lists two acceptable methods. You can value the whole inventory at fair market value, which means either what it would cost you to replace it or what you’d get selling it. Or you can value each item, or each class of items, at cost or fair market value, whichever is lower. After you pick, you use the same method in later years.
| Method | How it works | Watch for |
|---|---|---|
| Whole inventory at fair market value | Replacement cost or selling price for everything | One method for the whole stock |
| Item by item, lower of cost or fair market value | Compare each item’s cost with its market value, take the smaller | Needs a record per item or class |
| Same method next year | The CRA says to continue with your choice | No switching to suit the result |
Here’s the second method with numbers. You hold 200 units that cost $20 each, so $4,000 at cost. Their market value has slipped to $15, so they’re valued at $3,000. The $1,000 difference reduces your closing inventory, which raises cost of goods sold by $1,000 and lowers taxable profit by the same amount.
The CRA’s old bulletin on inventory valuation, now archived, puts the second method this way: value each item at the cost at which it was acquired or its fair market value at the end of the year, whichever is lower, and follow the method consistently from year to year. Since the bulletin is archived, treat it as background and check the CRA’s current business pages too.
How do you work out cost of goods sold?
The formula is opening inventory plus purchases minus closing inventory. Say you started the year with $12,000 of stock, bought $48,000 more, and finished with $15,000. Cost of goods sold is $45,000. With sales of $80,000, gross profit is $35,000, which is 43.75% of sales.
That 43.75% is the number to watch. Plug your own figures into the profit margin calculator and compare it with last year. A sudden drop usually means unrecorded losses, a mis-keyed count or prices that didn’t keep up with costs.
Profit then feeds your tax. On $80,000 of net business income in Ontario, this site’s self-employed tax calculator shows $22,126 of income tax plus CPP. Overstate closing stock by $10,000 and your profit is overstated by the same amount, so you’d pay on money you never made. The calculator leaves out GST/HST, EI and business expenses, so it shows only part of the picture.
What should you do between counts?
You don’t need a full recount every month, but a little rhythm helps. Update your sheet whenever a delivery arrives, so the cost is fresh and matches the invoice. Mark sales off at least weekly. Once a quarter, pick your five fastest sellers and count them by hand. If the sheet says 40 and the shelf says 36, you’ve found four units that walked off, got damaged, or shipped without being recorded. Better to learn that in April than in December.
What mistakes cause the most trouble?
Forgetting returns is one. A customer sends an item back and it’s sellable, so it belongs in stock again. If it’s damaged, it may be worth less than cost, and the lower-of-cost rule applies.
Another is treating all stock as equal. Five items that haven’t sold in a year don’t hold the value of five fast sellers. If you clear slow lines with a markdown, the discount calculator shows the price and what’s left after the cut. Test the result against the ROI calculator before you buy the next batch.
Then there’s mixing up purchases. Shipping in, duty and the like may belong in the cost of an item, but I didn’t confirm the rules for which costs you can add, so check the CRA’s Guide T4002 before you fold them in. And don’t count samples you gave away as stock.
Who needs a pro? If your stock is large, made up of many product types or partly built from parts you assemble, an accountant should design the count with you. For a small shop with simple lines, a good spreadsheet does the job.
The sources behind this page
The annual inventory requirement and the two valuation methods come from the CRA page on inventory and cost of goods sold, and the page points to Guide T4002 and interpretation bulletin IT-473R for more detail. The stock figures, unit prices and $80,000 sales are examples I chose. Check your own year-end count against your invoices before you file. This site isn’t part of the CRA or any government.
Frequently asked questions
Do I have to count inventory every year?
Yes. The CRA says you need an annual inventory, usually a list of goods held for sale.
How does the CRA want inventory valued?
Either the whole inventory at fair market value, or each item or class at the lower of cost and fair market value. Keep using the method you pick.
What is cost of goods sold?
Opening inventory plus purchases minus closing inventory. It's the cost of what you actually sold in the year.
Can I use a spreadsheet?
The CRA pages we read don't require software. Whatever you use has to show units, costs and the count date.
What if my stock is worth less than I paid?
Under the item-by-item method, you use the lower of cost and fair market value, so the write-down reduces closing inventory.
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