The basic calculation
Start with the inventory you had at the beginning of the period, add what you bought or made during it, and subtract the inventory still on hand at the end. What remains is the cost of the goods that left the business as sales. Purchases are counted net of returns and discounts, and freight and delivery costs of bringing goods in are generally part of cost.
The idea is matching. A cost belongs in the period in which the related sale happens, not the period in which you paid the supplier.
A worked example
For illustration, a shop starts the year with $20,000 of inventory, buys $90,000 of stock during the year, and counts $30,000 on the shelves at year end. Cost of goods sold is $20,000 plus $90,000 minus $30,000, or $80,000.
Notice that the shop spent $90,000 but only $80,000 reaches the income statement. The extra $10,000 is stock still waiting to be sold. If the year-end count were wrongly recorded as $25,000, cost of goods sold would be overstated by $5,000 and profit understated by the same amount. The numbers are round and illustrative only.
Why inventory counts matter
Closing inventory is the hardest figure to get right, because it depends on a physical count and a valuation method. For income tax, the CRA describes two options: value the whole inventory at fair market value, or value items at the lower of cost and fair market value. Once you choose a method you generally need to use it consistently.
The opening inventory for a year must match the closing inventory of the prior year. Count your stock at the end of each fiscal period unless you run a perpetual inventory system with periodic counts and written records, and keep those records with your other books.
Reporting it on Form T2125
Self-employed people with a business that buys or makes goods for sale complete the cost of goods sold section of Form T2125. It asks for opening inventory, purchases net of discounts, direct wage costs, subcontracts and closing inventory. Only the business part of costs belongs there. Goods taken for personal use are subtracted from purchases. The result feeds gross profit.
Do not include your own pay or owner withdrawals as direct wages. Ask your accountant which labour and overhead belong in cost of goods sold, how you value stock, and whether a year-end count is planned. Service-only businesses may have no cost of goods sold at all.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- What is the cost of goods sold (COGS)?BDC
- Self-employed Business, Professional, Commission, Farming, and Fishing Income (T4002): Chapter 2 – IncomeCanada Revenue Agency
- Accounting for your earningsCanada Revenue Agency
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.