You need to do an annual inventory. This is usually a list of goods held for sale. If you are a manufacturer, this includes raw materials as well as packaging material and supplies, work-in-progress (goods and services that you have not yet completed at the end of your fiscal period), and finished goods that you have on hand. Inventory is used to calculate the cost of goods sold and net income on Form T2125, Statement of Business or Professional Activities.

If you have a professional practice and you are an accountant, dentist, lawyer, medical doctor, notary, veterinarian, or chiropractor, you can elect to exclude your work-in-progress (WIP) when you determine inventory.

If you have a tax year that begins after March 21, 2017, you can no longer elect to exclude amounts for WIP. If you elected to use billed-basis accounting for the last tax year that started before March 22, 2017, the transitional rules allow you to include your WIP into income progressively.

Generally, for the first tax year that starts after March 21, 2017, you must include 20% of the lesser of the cost and the fair market value of WIP. The inclusion rate increases to 40% in the second tax year that starts after March 21, 2017, 60% in the third year, 80% in the fourth year, and 100% in the fifth and all subsequent tax years.

For more information, see Guide T4002 Self-employed Business, Professional, Commission, Farming, and Fishing Income.

How to value your inventory

The value you place on the items in your year-end inventory is important in determining your income.

For income tax purposes, the two acceptable methods of valuing your inventory are by determining either:

• the fair market value of your entire inventory (use either the price you would pay to replace an item or the amount you would get if you sold an item)
• the value of individual items (or classes of items, if specific items are not easy to distinguish) in the inventory, at their cost or their fair market value, whichever is lower

Other methods of valuing inventory may be available or required depending on the type of business. For example, businesses that are adventures or concerns in the nature of trade must value their inventory at cost.

If you have property that is a swap agreement, a forward purchase or sale agreement, a forward rate agreement, a futures agreement, an option agreement, or any similar agreement, different rules may apply to you.

After you choose a method of inventory valuation, you have to continue to use the same method in later years. For more information, see interpretation bulletin IT-473R, Inventory Valuation.