The sixty-second answer
Count everything the corporation owns at fiscal year end, value it at the lower of cost and fair market value, and report it as closing inventory on GIFI Schedule 125 [2][4][5]. That figure drives cost of sales and becomes next year's opening inventory [2]. Keep the count sheets and valuation workings for at least six years [6].
Why the count matters more than it looks
For a corporation that sells goods, closing inventory is the single number that turns a year of purchases into a cost of sales. Understate it and cost of sales rises, profit falls and tax is understated. Overstate it and you pay tax on profit you did not earn. Either way, the error does not disappear: it flows into next year, because opening inventory must equal the prior year's closing value [2].
The Income Tax Act treats inventory as a record in its own right. Section 230 requires every person carrying on business to keep records and books of account, including an annual inventory kept in prescribed manner, in a form that allows the taxes payable to be determined [1]. The count is not an accounting nicety; it is part of the books the law requires.
Do you really have to count?
In the usual case, yes. The CRA's inventory bulletin says a physical stocktaking should be carried out at year end, and that only where a reliable perpetual inventory system is used, and has been periodically verified against actual quantities on hand, will a physical count at year end not be required [3].
That exception is useful but narrow. A perpetual system means your records update on every receipt, sale and adjustment, so the quantity on hand is always current. "Periodically verified" means you actually go and check: cycle counts through the year, with differences investigated and corrected. A system that has never been checked against the shelves is not the reliable system the bulletin describes.
Planning the count
A good count is decided before anyone picks up a clipboard:
- Pick the date and cut-off. Count at the close of the fiscal year end, or as close as possible with documented adjustments for movements in between.
- Freeze movement. Stop receiving and shipping during the count, or tag anything that moves so it is neither missed nor counted twice.
- Settle ownership. Inventory includes goods you have title to regardless of location, including goods in transit and on consignment [3]. Goods you hold for customers or on consignment from suppliers are excluded; stock you own at another site is included.
- Work by location. Count in shelf order, one location at a time, so every place stock can sit is covered once.
- Count in pairs or double-check. One person counts, another records, and a sample is recounted by someone else.
Count sheets should show the location, item, unit of measure, quantity, the counter's initials and the date. Pre-printed sheets from your inventory records work well if they hide the expected quantity, so counters record what they see rather than confirm what they expect.
From quantities to a value
Once quantities are agreed, each item needs a value. Subsection 10(1) values inventory at the lower of cost and fair market value, unless you use the prescribed alternative of valuing all of it at fair market value [2]. The bulletin says the comparison is made item by item, or by usual class where individual items are not readily distinguishable, and the lower figure for each is carried into the total [3].
Cost here means your consistent costing method, whether weighted average or first in, first out, applied to a cost that includes what it took to get the goods to their location and condition, such as freight and duty [3]. Whatever method you used last year has to be used again unless the Minister has concurred in a change [2].
The fair market value side is where judgment enters. Damaged, obsolete, expired or slow-moving stock may be worth far less than its cost. Walk the count with that in mind, flag anything questionable on the sheet, and record why each write-down was made.
Where the numbers go on the T2
Corporations report financial statement information to the CRA through the General Index of Financial Information. The T2 guide lists the GIFI schedules: Schedule 100 for the balance sheet, Schedule 125 for the income statement, and Schedule 141 for additional information, all completed from the corporation's financial statements [5].
On Schedule 125, the cost of sales section uses item 8300 for opening inventory, 8320 for purchases and cost of materials, 8500 for closing inventory and 8518 for total cost of sales; 8519 then shows gross profit as total sales less cost of sales [4]. On Schedule 100, the same closing inventory appears under item 1120 Inventories, or its sub-items such as 1121 for goods held for sale [4].
Two checks catch most errors. First, this year's 8300 should equal last year's 8500. Second, the 8500 figure on Schedule 125 should equal the inventory balance on Schedule 100. If either check fails, find out why before filing.
Reconciling the count to the books
If you keep perpetual records, compare counted quantities with the system's quantities before you finalise. Small differences are normal; large ones usually point to unrecorded receipts, returns processed twice, or stock sitting in the wrong location. Investigate, correct the records with a documented adjustment, and keep the adjustment log with the count sheets. Shrinkage that cannot be explained is still recorded as shrinkage rather than hidden in the closing number.
Mistakes that show up on review
- Counting at invoice cost. Leaving freight and duty out of unit cost understates closing inventory and overstates cost of sales.
- Including recoverable GST/HST. Tax you claim back as an input tax credit is not part of what the goods cost the corporation.
- Rounding the number. A tidy round closing figure invites the question of how it was counted.
- Forgetting offsite stock. Goods at a second unit, in a vehicle or at a customer on approval are still yours if you hold title.
- Switching methods quietly. A change in costing method needs the Minister's concurrence, not a new spreadsheet.
What to keep, and for how long
Section 230 requires that records be retained together with every account and voucher necessary to verify them [1]. For the year-end inventory that means the signed count sheets, the valuation listing showing quantity, unit cost and extended value by item, the lower of cost and market workings and write-down reasons, and the adjustment log.
The CRA's general rule is to keep required records and supporting documents for six years from the end of the last tax year they relate to, and longer where a return was filed late or an objection or appeal is in progress [6]. Because each year's opening inventory depends on the prior year's closing, it is sensible to keep count records until the year they support is well outside that window.
Making next year's count easier
MapleInventory keeps a running on-hand quantity and weighted-average landed cost per item and location, updated on every receipt and sale. At year end, the resale inventory report by location doubles as a count sheet in shelf order, and the same report by category shows on-hand quantity, landed unit cost and extended value, with a CSV export for your accountant. The closing value you hand over is then tied to counted quantities and documented landed costs, not to a figure reconstructed from purchase invoices in March.