The two methods the CRA describes
Under the first method, you value your entire inventory at fair market value, meaning what it would cost to replace each item or what you would receive if you sold it. Under the second, you value individual items at either cost or fair market value, whichever is lower. Cost includes the price paid plus expenses to bring the item to your location and ready it for use. When items are hard to tell apart, they can be valued as a group.
In your first year of reporting business income you may choose either. After that you continue with the same method, and the opening value of a year must equal the prior year’s closing value. The CRA notes that businesses carried on as an adventure or concern in the nature of trade must value inventory at cost.
An illustrative example
A shop holds one product line that cost $8,000. Because of a price drop, it would now cost $6,500 to replace. Under the lower of cost and fair market value, closing inventory is $6,500 and cost of goods sold rises by $1,500, so profit falls by the same amount. Had replacement cost risen to $9,000 instead, the same method would keep the stock at its $8,000 cost. The figures are illustrative only.
This shows why valuation is not a technicality. The closing figure flows directly into cost of goods sold and gross profit, so a different value means a different profit for the year.
Common mistakes
Switching methods to improve a result, leaving damaged goods at full value, and valuing from an estimate rather than a count are frequent problems. So is mixing business stock with goods taken for personal use. Keep count sheets, supplier invoices and notes explaining any markdown.
Your accounting records may use a cost-flow assumption, such as first-in, first-out or an average cost, to assign cost to units. Those choices can differ from the tax methods above, so confirm with your accountant how they fit together.
What to discuss with your accountant
Ask which method you have been using and whether it suits your products. Ask how slow-moving or obsolete items should be valued and when a write-down is appropriate. If you change systems or software, ask how to preserve a consistent method and a clean opening balance.
Bring the year-end count, the prior year’s closing figure and any adjustments. The inventory entry explains what the stock itself includes, and the cost of goods sold entry shows how the closing figure enters profit.
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.
- Self-employed Business, Professional, Commission, Farming, and Fishing Income (T4002): Chapter 2 – IncomeCanada Revenue Agency
- What is inventory?BDC
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.