Part 4 - Cost of goods sold and gross profit

On this page, you will find information on the following:

• Line 8300 - Opening inventory and line 8500 - Closing inventory
• Line 8320 - Purchases during the year
• Line 8340 - Direct wage costs
• Line 8360 - Subcontracts
• Line 8519 - Gross profit

Complete this part if you have a business and your business buys goods for resale or makes goods for sale. Claim the cost of the goods you buy or make for sale in the fiscal period in which you sell them. Enter only the business part of the costs on Form T2125, Statement of Business or Professional Activities.

To calculate your cost of goods sold, you need to know the following:

• the value of your inventory at the start of your fiscal period;
• the value of your inventory at the end of your fiscal period; and
• the cost of your purchases (net of discounts) for the fiscal period.

Line 8300 - Opening inventory and Line 8500 - Closing inventory

Enter your opening and closing inventory on the appropriate lines. These amounts must include raw materials, goods in process, and finished goods. The way you value your inventory is important when you determine your income. For income tax purposes, we accept the following two methods:

• Value your entire inventory at its FMV. Use either the price you would pay to replace an item or the amount you would get if you sold an item; or
• Value individual items in your inventory at either their fair market value or their cost, whichever is less. Cost is the price you incur for an item. Cost also includes any expenses you incur to bring the item to the business location and to put it in a condition so that you can use it in the business. When you cannot easily tell one item from another, you can value the items as a group.

Once you have chosen a method for valuing your inventory, you have to use that method consistently.

If this is your first year of reporting business income, you can choose either method to value your inventory. In your first year of business, you will not have an amount to enter on line 8300. If this is not your first year of business, continue to use the same method you used in past years.

The value of your inventory at the start of a fiscal period has to be the same as the value of your inventory at the end of the preceding fiscal period.

Do an actual stock count at the end of each fiscal period, unless you use a perpetual inventory system. Under this system, you do periodic stock counts and keep a written record of each count. Remember to keep your inventory records with your other records.

Businesses that are adventures or concerns in the nature of trade must value their inventory at the cost to the taxpayer.

For more information about valuing inventory, see Interpretation Bulletin IT-473, Inventory Valuation .

Inventory value of an artistic endeavour

An artistic endeavour occurs when you are in the business of creating paintings, murals, original prints, etchings, drawings, sculptures, or similar works of art. An artistic endeavour does not include reproducing works of art.

When you calculate your income from an artistic endeavour, you can choose to value your closing inventory at nil. To do this, show your closing inventory as "nil" on line 8500. Your choice stays in effect for each following year, unless you request a change from Canada Revenue Agency and we allow the change. You cannot use this option if you did not create the work of art or if you are in the business of reproducing works of art. For more information, see Interpretation Bulletin IT-504R2-CONSOLID, Visual Artists and Writers .

Gifts of inventory by an artist

If you donate a work of art you created, you may not have to report a profit on your donation for income tax purposes. To benefit from this tax treatment, your gift must fall under the definition of gifts of certified cultural property. For more information, see Pamphlet P113, Gifts and Income Tax .

Line 8320 - Purchases during the year (net of returns, allowances, and discounts)

The cost of goods you buy to resell or use in manufacturing other goods includes costs such as delivery, freight, and express charges. Enter the amount of your net purchases during the year (your total purchases minus any discounts you received).

Sometimes you might use goods you bought for the business for personal use. When this happens, you have to subtract the cost of these goods from your total purchases for the year. Do this before you enter the amount of the purchases.

Line 8340 - Direct wage costs

Include the remuneration you paid to employees who work directly in the manufacture of your goods. Do not include:

• indirect wages (see line 9060, Salaries, wages and benefits (including employer's contributions));
• a salary paid to yourself or a partner; and
• withdrawals you may have made from the business.

Line 8360 - Subcontracts

Enter all the costs of hiring outside help to perform tasks related to the goods you sell.

Line 8519 - Gross profit

Enter your gross profit, which is your gross business income (line 8299, Gross business or professional income in Part 3 of Form T2125) minus your cost of goods sold (line 8518).

Forms and publications

• Guide T4002, Business and Professional Income
• Pamphlet P113, Gifts and Income Tax
• Form T2125, Statement of Business or Professional Activities
• Interpretation Bulletin IT-473, Inventory Valuation
• Interpretation Bulletin IT-504-CONSOLID, Visual Artists and Writers

Related topics

• Details of equity section of Form T2125

Date modified:

2016-03-18