Yorkwest Plumbing – Tax Court of Canada finds that difficulties in allocating costs between Years 1 and 2 could not be solved by deducting them in Year 3

In the course of its 2012 taxation year (a “year”), the taxpayer discovered that, as an indirect result of switching over to a new system for accounting for inventory at the beginning of its 2010 year, it had failed to deduct in that and the 2011 year, the $1.3M cost of inventory that it had acquired shortly before its 2010 year. Rather than attempting to allocate this cost to the sales of such goods made in its 2010 and 2011 years (which it considered to have been impracticable to do on an accurate basis), it simply deducted the full cost in its 2012 year.

In confirming the Minister’s denial of the full amount of this deduction, Spiro J stated:

[A]n unintentional understatement of the cost of goods sold in its 2010 and 2011 taxation years cannot be remedied by an intentional overstatement of the costs of goods sold in its 2012 taxation year. The cost of inventory is recognized in the taxation year in which it is sold… . In tax law, timing matters.

Neal Armstrong. Summary of Yorkwest Plumbing Supply Inc. v. The Queen, 2020 TCC 122 under s. 10(1).