--- title: "Year-End Inventory Count in Canada: Valuation and Records" url: https://www.everstonecpa.com/blog/year-end-inventory-count-canada description: "How to run a year-end inventory count, which valuation method the CRA accepts, what records to keep, and the errors found at year end. See the steps." type: guide updated: 2026-10-05 summary: "Canadian businesses generally value inventory at the lower of cost and fair market value for each item, or the whole inventory at fair market value. A physical count at year end is normally expected, and write-downs must reflect conditions that already existed at the year end." faq_count: 6 publisher: EverStone CPA Inc., a Chartered Professional Accountant firm registered with CPA British Columbia and CPA Alberta service_area: British Columbia, Alberta, Ontario and Manitoba language: en-CA contact: info@everstonecpa.com · https://www.everstonecpa.com/book-online --- [Home](https://www.everstonecpa.com/) [Blog](https://www.everstonecpa.com/blog) Year-End Inventory Count in Canada Accounting # The year-end inventory count: *what CRA expects to see* By EverStone CPA · Updated September 2026 · 8 min read **Quick answer:** Canadian businesses generally value inventory at the lower of cost and fair market value for each item, or the whole inventory at fair market value. A physical count at year end is normally expected, and write-downs must reflect conditions that already existed at the year end. Count it, cost it, compare it, then tie it to the books. ## Key takeaways - Value each item at the **lower of cost and fair market value**, or the whole inventory at fair market value. - A **physical count at year end** is the default expectation unless a verified perpetual system is in place. - **Cost means laid-down cost** — invoice plus freight, duty and, where significant, storage. - **LIFO is not accepted** for Canadian income tax purposes. - Write-downs must reflect conditions **at** the year end, not losses expected after it. For a business with stock, closing inventory is among the largest figures on the corporate return: it sets cost of goods sold, and so profit. It is also easy to get wrong and easy to test, because the goods were on the shelf at year-end or they were not. ## The count itself The CRA’s long-standing position is that a physical count should normally be done at year-end. The only exception is a reliable perpetual inventory system that has been periodically verified against actual quantities on hand. A count that will stand up later has a few features: - **It is dated.** The count sheets show the date and, if the count happened a day or two either side of the year end, the roll-forward or roll-back for movements in between. - **It is by two people.** One counts, one records, or a sample is recounted independently. - **It records quantity and description, not value.** Pricing happens afterwards, from purchase records. - **Cut-off is documented.** Note the last receiving slip number and the last shipping document number used before the count so goods are not counted and expensed twice. - **Damaged, obsolete and slow-moving items are flagged during the count**, not identified from a spreadsheet in March. Keep the original count sheets. They are the primary evidence, and the [record retention rules](https://www.everstonecpa.com/blog/cra-record-retention-how-long-to-keep-records) apply to them like any other book of account. **Want these claims documented properly?** Our monthly bookkeeping, from $325 a month, keeps every deduction backed by a receipt and a reconciled account before the CRA asks. See [our bookkeeping](https://www.everstonecpa.com/accounting-services), or [get a bookkeeping quote](https://www.everstonecpa.com/book-online?service=corporate-tax#enquiry-form). [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=corporate-tax#enquiry-form) ## What goes in the count Inventory usually includes all materials to which the business has title, wherever they physically sit. The practical test for the awkward cases is ownership, not location: - **Goods in transit** — include them if title has passed to you at the year-end date; the shipping terms on the purchase order decide this. - **Goods you hold on consignment for someone else** — exclude; you do not own them. - **Your goods held at a customer’s site on consignment** — include; you still own them. - **Goods at a third-party warehouse or fulfilment centre** — include, and get a stock report from the operator as of the year-end date. This one catches out a lot of [online sellers](https://www.everstonecpa.com/accountant-for-ecommerce). ## Putting a value on it Section 10 of the Income Tax Act and section 1801 of the Regulations give two general methods: value each item at the lower of the cost at which it was acquired and its fair market value at the end of the year, or value the entire inventory at fair market value. Almost every small business uses the first. The comparison is made **item by item**, or by usual class of items where individual items are not readily distinguishable, and the lower figure for each is carried into the total. You cannot net a write-down on one product line against unrealized appreciation on another. ### What “cost” means Cost means *laid-down* cost: original cost plus everything reasonably incurred to bring the item to its year-end condition and location. For resale goods or raw materials: invoice cost, customs and excise duties, transportation and other acquisition costs, and significant storage. For work in process and finished goods: materials, direct labour and a share of production overhead. Direct and absorption costing are acceptable; prime costing, with no overhead, is not. ### Which cost-flow method Where specific items can be identified, use their actual laid-down cost; otherwise use specific item, average cost or first in, first out. **LIFO and the base stock method are not accepted** for income tax purposes. Normally use the same method as the financial statements, consistently; a change is accepted only where the new method gives a truer picture of income. Not sure how this applies to you? Every business’s situation is different. Send an enquiry to a CPA and get a straight answer, plus a fixed quote before any work starts. [Send an Enquiry →](https://www.everstonecpa.com/book-online?service=corporate-tax#enquiry-form) [See accounting services](https://www.everstonecpa.com/accounting-services) ## Write-downs: what is allowed and what is not A write-down is the lower-of rule at work: year-end fair market value has fallen below cost. Fair market value here matches “market” in lower of cost or market, and generally means replacement cost or net realizable value. Two refinements. Goods too deteriorated to sell normally may use net realizable value — estimated selling price less predictable preparation and marketing costs — even if the rest uses replacement cost. For advertising or packaging material, parts and supplies, fair market value means replacement cost unless obsolete, damaged or defective. **The line the CRA draws:** a reduction in inventory value to reflect losses **anticipated after** the year end is not acceptable. Neither is booking a loss now to protect a profit margin in the year the goods are eventually sold. The write-down has to be about the state of the goods and the market on the year-end date. So an obsolete part that nobody has ordered in two years can be written down. A seasonal line you expect to discount next spring, in a market that has not yet moved, cannot. ## Tie it back to the books Reconcile the priced count to the ledger and investigate differences instead of posting a plug. Unexplained shrinkage draws questions; the usual cause is a cut-off error, unrecorded returns, or goods issued to a job but never relieved from stock. See [inventory accounting for BC businesses](https://www.everstonecpa.com/blog/inventory-accounting-bc), and add the count to your [year-end checklist](https://www.everstonecpa.com/blog/year-end-tax-checklist-incorporated-owners). Get the count right and the rest of the year-end file is straightforward. Get it wrong and every downstream number — [gross margin](https://www.everstonecpa.com/pricing-and-margin-analysis), taxable income, instalments — is wrong with it. Sources - [CRA Interpretation Bulletin IT-473R — Inventory Valuation (archived)](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it473r/archived-inventory-valuation.html) - [Canada Revenue Agency — Keeping records](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/keeping-records.html) - [Canada Revenue Agency — Corporations](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations.html) About this article **EverStone CPA** Prepared and reviewed by a CPA at EverStone CPA, serving businesses in BC, Alberta, Ontario and Manitoba. [About the firm →](https://www.everstonecpa.com/about) · [Send an enquiry →](https://www.everstonecpa.com/book-online?service=corporate-tax#enquiry-form) This article is general information, not tax advice for your specific situation. Tax rules and CRA administrative positions change — confirm anything that affects a decision with the CRA or with us first. ### Keep reading [Inventory accounting in BC →](https://www.everstonecpa.com/blog/inventory-accounting-bc) [Year-end tax checklist →](https://www.everstonecpa.com/blog/year-end-tax-checklist-incorporated-owners) [How long to keep records →](https://www.everstonecpa.com/blog/cra-record-retention-how-long-to-keep-records)[Equipment Purchase Timing in Mission: CCA and the Year End →](https://www.everstonecpa.com/blog/mission-equipment-purchase-cca-timing)[Surrey Construction Year End: T5018, Holdbacks, WorkSafeBC →](https://www.everstonecpa.com/blog/surrey-construction-t5018-holdbacks-worksafebc-year-end)[Abbotsford Agri-Food Processors: What the Year End Has to Show →](https://www.everstonecpa.com/blog/abbotsford-agri-food-processor-year-end) FAQ ## Frequently asked questions about year-End Inventory Count in Canada **How does the CRA expect inventory to be valued?** Under section 10 of the Income Tax Act and section 1801 of the Regulations, you usually value each item at the lower of cost and year-end fair market value, or value all inventory at fair market value. The lower-of comparison is normally item by item, or by usual class. **Do I have to do a physical count at year end?** In the usual case, yes. The CRA position is that a physical stocktaking should be carried out at the end of the year. A year-end count is only unnecessary where a reliable perpetual inventory system is in place and has been periodically verified against actual quantities on hand. **What counts as cost for inventory purposes?** Cost means laid-down cost: the invoice cost plus everything reasonably incurred to bring that item to its condition and location at year end. For purchased goods that includes customs and excise duties, freight and other acquisition costs, and storage costs where significant. For work in process and finished goods it means materials, direct labour, and an applicable share of overhead. **Can I use LIFO to determine inventory cost?** No. The CRA does not accept the last in, first out method or the base stock method for income tax purposes. Commonly accepted approaches are specific item, average cost, and first in, first out. The method used should normally match the one used for financial statement purposes and be applied consistently year to year. **When can I write inventory down?** A write-down reflects year-end fair market value below cost, generally meaning replacement cost or net realizable value. You cannot reduce inventory for losses expected after year end, or record a loss now to protect the margin of a later year. **Does inventory in transit or on consignment get counted?** It depends on title. Inventory usually includes all materials the business owns, wherever they are. Goods in transit or on consignment are included or excluded based on who holds title at the year-end date. ## Want your year-end inventory to hold up under review? We can set up the count procedures, review your valuation method and prepare the year-end file. Send an enquiry. [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=corporate-tax#enquiry-form)[Book a Paid Advice Call](https://www.everstonecpa.com/advice-call) ## Have a question about this? Ask free through [the quick-question form](https://www.everstonecpa.com/quick-question); a CPA replies by email within one business day. A paid 45-minute **Advice Call** with a CPA costs $225 plus GST, booked by email with a secure payment link, and is credited to your first invoice if you become a client within 60 days. Want us to take it on? [Send an enquiry](https://www.everstonecpa.com/book-online?service=corporate-tax#enquiry-form). [Ask a Free Question](https://www.everstonecpa.com/quick-question) [Book a Paid Advice Call](https://www.everstonecpa.com/advice-call) Email info@everstonecpa.com ★★★★★ “…have been completing my bookkeeping, taxes and financials for the last 2 years and they have been amazing. Thank you!” R. H. · Google review **Run your own numbers with the free calculators:** [check your GST/HST math](https://www.everstonecpa.com/gst-hst-calculator) · [run the incorporate-or-not numbers](https://www.everstonecpa.com/incorporation-calculator) · [Payroll deduction calculator](https://www.everstonecpa.com/payroll-deduction-calculator) [← Writing off bad debts: income tax and GST/HST](https://www.everstonecpa.com/blog/writing-off-bad-debts-canada) [Year-end tax checklist for incorporated business owners →](https://www.everstonecpa.com/blog/year-end-tax-checklist-incorporated-owners) More on this subject: [all our corporate tax guides](https://www.everstonecpa.com/corporate-tax-hub). More on this subject: [all year-end topics](https://www.everstonecpa.com/year-end-hub). --- Source: https://www.everstonecpa.com/blog/year-end-inventory-count-canada Prices: https://www.everstonecpa.com/pricing · Contact: info@everstonecpa.com · https://www.everstonecpa.com/book-online