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Good inventory management in a Canadian small business means counting what you have, knowing what each unit cost you, and buying only what will sell. The count matters twice: it sets your reorder plan, and it goes on your tax return. Opening stock plus purchases minus closing stock gives your cost of goods sold, so a $5,000 counting error is a $5,000 error in your taxable profit.
How does inventory reach your tax return?
Through cost of goods sold. Take the value of stock at the start of the year, add what you bought, subtract what’s left at year end. The rest is what you sold, and it’s the number that comes off your sales before profit.
Say you started the year with $40,000 of stock, bought $60,000 more and ended with $35,000. Cost of goods sold is $65,000. Count the closing stock wrong by $5,000 and your profit moves by $5,000 the other way. Undercount and you pay less tax now, but you’ll pay it back next year, when that stock becomes your opening figure.
What are the ways to value stock?
The CRA allows two for an ordinary business. You can value the whole inventory at fair market value, which is the price you’d pay to replace it or sell it for. Or you can value each item, or each class of items, at cost or fair market value, whichever is lower. The CRA’s bulletin on inventory valuation (IT-473R, now archived) sets out both options and adds that the method has to be followed consistently from year to year.
| Method | How it works |
|---|---|
| Fair market value, whole inventory | Everything is valued at replacement or selling price |
| Lower of cost or fair market value | Each item or class takes the smaller of the two |
| Cost | Purchase price plus what it took to get the item to your location and ready to sell |
| Changing method | Once you pick one, use it in later years |
If you sell goods, you’re generally on the accrual method, which means inventory has to be valued every year. Switching from cash to accrual takes the CRA’s written permission before you file. Don’t switch on a whim.
Here’s what “lower of cost or fair market value” looks like on a shelf. Say Priya runs a small outdoor-gear shop in Kelowna and still has 100 winter jackets that cost her $40 each. A rival is clearing the same jacket for $28, so the market value of hers has dropped to $28. At cost the jackets sit on the books at $4,000. At the lower figure they sit at $2,800. That’s $1,200 less closing stock, so $1,200 more cost of goods sold and $1,200 less profit this year. It’s a real cost, and you can’t pretend the shelf is worth what you paid for it.
How much stock should you hold?
Less than you think. Stock is cash sitting on a shelf. With $35,000 of closing stock and a line of credit at 9%, the line of credit calculator would show about $262.50 of interest a month just to carry it, if you’d borrowed to buy it. That’s before rent, insurance and anything that spoils or goes out of style.
A quick test is stock turns. Divide the $65,000 of cost of goods sold by the average stock of $37,500, and you get about 1.7 turns a year. That means stock sits for around 210 days. Is that fine? For furniture, maybe. For food, it’s a disaster. Compare yourself with your own past years, since no reliable industry norm is published for this page.
Which habits keep a count reliable?
Count on a schedule, and don’t wait for year end. Some businesses count a section each week so that the whole shelf is checked every quarter. Fast movers get counted more often. Record the count where you record purchases, so the two can be compared.
Set a reorder point for your best sellers: the quantity at which you order again, based on how long the supplier takes and how fast you sell. Write it on the shelf tag. Then check for dead stock every quarter, because the items that haven’t moved in months are the ones that will end up marked down. Track shrinkage too, meaning what’s missing from the count. A small number is normal, but a growing one is a problem.
Keep supplier invoices and count sheets with your other records. The CRA generally expects records for six years from the end of the last tax year they relate to.
What does a markdown do to your margin?
More than it looks. A $30 item that cost $18 has a 40.0% margin in the profit margin calculator. Put it on sale at 30% off and the price is $21. The discount calculator shows the price with Ontario HST at $23.73. The margin at $21 is 14.3%, and the profit falls from $12 to $3. You’d need to sell four units to earn what one sale earned before.
That’s why old stock is expensive twice. It ties up cash, and clearing it costs profit. Order smaller and more often when a supplier lets you.
What goes wrong most often?
Valuing stock at selling price when you meant cost. Forgetting freight and other costs to bring goods in when you use cost. Skipping the year-end count, then estimating. Changing methods between years. And leaving damaged or stale goods on the books at full value, which overstates your profit and your tax.
Check the sales tax side as well: the GST/HST calculator shows how much of a shelf price is tax, which matters when you compare supplier quotes with and without it. A ballpark count is fine for a weekly check, but the year-end figure should be a proper count with sheets you can show someone.
Where we got these figures
The valuation methods, the consistency rule, the accounting method rules and the six-year record period come from Canada Revenue Agency pages on inventory and cost of goods sold, accounting methods and record keeping, read in September 2026. The examples use this site’s calculators and simple arithmetic on the figures shown. No government body has reviewed or endorsed what you read here.
Frequently asked questions
How does inventory affect my taxes?
Opening stock plus purchases minus closing stock is your cost of goods sold, which comes off sales before profit.
Which inventory valuation methods does the CRA accept?
You can value the whole inventory at fair market value, or each item or class at the lower of cost and fair market value.
Can I change my valuation method?
Once you choose a method you use it in later years. Check the CRA's guidance before you change.
How often should I count stock?
At least once a year for tax. Many businesses count a section each week or month so errors show up sooner.
What are stock turns?
Cost of goods sold divided by average inventory. A lower number means stock sits longer and ties up more cash.
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