If your business buys goods to resell, or makes goods to sell, the goods themselves are not an ordinary expense. They sit in inventory until they are sold, and their cost comes off your income in the fiscal period you sell them — not the period you bought them.
Part 3D of Form T2125 is where that is worked out. The shape of it is simple: what you started the period with, plus what you bought and what it cost you to make the goods, minus what you still had at the end.
Who fills in Part 3D
Fill in this part if you have a business and your business buys goods for resale or makes goods for sale. Enter only the business part of the costs.
A service business with no inventory has nothing to put here. For that business, Part 3D is simply not applicable.
The pieces of the calculation
Opening inventory (line 8300) and closing inventory (line 8500). These amounts must include raw materials, goods in process, and finished goods. In your first year of business you will not have an opening inventory amount.
Purchases during the year (line 8320). Enter your net purchases — your total purchases minus any returns, allowances, and discounts you received. The cost of goods you buy to resell or to use in manufacturing other goods includes costs such as delivery, freight, and express charges. If you bought goods for the business and then put them to personal use, subtract their cost from your total purchases for the year.
Direct wage costs (line 8340). The pay you gave employees who work directly in the manufacture of your goods. Do not include indirect wages, a salary paid to yourself or a partner, or withdrawals you made from the business — those belong in Part 9, Details of equity.
Subcontracts (line 8360). All the costs to hire outside help to perform tasks related to the goods you sell.
Gross profit (line 8519). Your gross business income minus your cost of goods sold.
A cost belongs in one of these boxes or on an operating-expense line, never both. Dossier files a purchase to a single destination, so nothing is counted twice.
Valuing your inventory
How you value inventory changes your income, so the CRA asks you to choose one of two methods and stay with it:
- value your entire inventory at its fair market value (FMV) — the price you would pay to replace the item, or the amount you would get if you sold it
- value individual items at either their FMV or their cost, whichever is less. Cost is the price you incur for an item, including any expenses you incur to bring it to the business location and put it in a condition where you can use it in the business
Where you cannot easily tell one item from another, you can value the items as a group. If this is your first year of reporting business income, you can choose either method. After that, continue with the method you used before.
Two rules follow from the choice. The value of your inventory at the start of a fiscal period has to be the same as the value at the end of the preceding one — your opening figure is last period's closing figure, unchanged. And you do an actual stock count at the end of each fiscal period, unless you use a perpetual inventory system, under which you do periodic stock counts and keep a written record of each one.
Artistic endeavours. An artistic endeavour is the business of creating paintings, murals, original prints, etchings, drawings, sculptures, or similar works of art. It does not include reproducing works of art. If that is your business, you can elect to value your closing inventory at zero. The election stays in effect for each following year unless you request a change and the CRA allows it.
What to keep
Keep your inventory records with your other business records. The count sheet you made at the end of the fiscal period is the document behind both the closing figure for this period and the opening figure for the next, so it is worth more than it looks.
Keep the purchase invoices as well. They support what you entered for purchases, and they are the same receipts that support a claim for input tax credits (ITCs) on GST/HST you paid, so one document does two jobs.
Dossier tags a purchase invoice as it arrives and files it where it belongs, so the year's evidence for cost of goods sold is together when you file. The valuation method, and which costs land in which box, are settled on the return.
Official CRA sources
Source: Canada Revenue Agency (canada.ca). Not tax advice.