Inventory Tracking for Canadian Resellers: T2125 Part 4 Explained
If you buy goods and resell them -- thrifted items on eBay, wholesale products on Amazon, anything you source and sell for a profit -- inventory is not a simple expense you write off when you buy it. CRA uses Part 4 of the T2125 to calculate your actual Cost of Goods Sold, which is what actually reduces your taxable income. Here is how it works.
Quick Answer
Inventory purchases are not immediately deductible. Only the cost of goods you actually sold during the year reduces your income. T2125 Part 4 calculates this: opening inventory + purchases + direct costs -- closing inventory = Cost of Goods Sold.
Why Inventory Is Not a Simple Expense
When you buy $2,000 worth of goods in November and sell $800 of it before December 31, you cannot deduct the full $2,000 from this year's income. The $1,200 that is still sitting in your storage room is an asset, not an expense yet. CRA wants to match your deductions to the income they generated -- you deduct the cost when you sell the goods, not when you buy them.
This matching principle is what Part 4 of the T2125 is built around. It calculates your Cost of Goods Sold (COGS) for the year by tracking what you started with, what you acquired, and what you still have at year-end.
T2125 Part 4: Line by Line
Here is how each line in Part 4 works and what to put there:
| Line | What it is | What to put here |
|---|---|---|
| 8300 | Opening inventory | The value of your closing inventory from the previous year's T2125 (must match exactly) |
| 8320 | Purchases during the year | Total cost of all goods purchased for resale (not office supplies or other business costs) |
| 8340 | Direct wages | Wages paid to employees directly involved in handling or producing goods (rare for sole props) |
| 8360 | Subcontracts | Amounts paid to contractors directly involved in producing or preparing goods for sale |
| 8450 | Other costs | Freight-in, import duties, storage costs directly tied to inventory -- not general overhead |
| 8500 | Closing inventory | The cost value of unsold goods at December 31 (from your physical count) |
The formula CRA uses: COGS = 8300 + 8320 + 8340 + 8360 + 8450 - 8500. This is the amount that reduces your gross sales to get to gross profit. Your operating expenses (line 8810 and below) come off after that.
Your Year-End Inventory Count
Line 8500 requires a physical count of everything you have not sold by December 31. Count every item and record what you paid for it -- not what you could sell it for. This is the cost basis.
A simple spreadsheet works: item description, quantity, cost per unit, total cost. Total that up and put it on line 8500. Keep the spreadsheet with your tax records for at least six years.
One important rule: if any inventory has declined in value below what you paid (it is damaged, obsolete, or the market price dropped below cost), CRA requires you to value it at the lower of cost or net realizable value. Net realizable value is the price you could reasonably sell it for, minus any costs to complete or sell it.
Choosing an Inventory Valuation Method
When you buy the same item at different prices throughout the year, you need a method to determine which cost applies to what you sold. CRA accepts any of these methods, but you must use the same one every year:
- FIFO (First In, First Out): The first items you bought are the first ones sold. Your closing inventory reflects the most recent purchase prices.
- Average Cost: You average the cost of all units together and apply that average to both COGS and closing inventory. Simpler for high-volume sellers with many similar items.
- Specific Identification: You track the exact cost of each individual item. Practical only for low-volume, high-value items (collectibles, electronics).
CRA does not accept LIFO (Last In, First Out) for Canadian businesses. Do not use it.
Common Mistakes Resellers Make on T2125
- Deducting all purchases as an expense:If you are on a cash-basis spreadsheet and log every inventory purchase as "cost of goods," you are deducting unsold inventory in the year of purchase. That overstates your expenses.
- Not doing a year-end count: Without a physical count, your line 8500 is a guess. CRA can challenge it.
- Mismatched opening inventory:Line 8300 must exactly match last year's line 8500. If they do not match, your return has an inconsistency CRA may flag.
- Putting shipping costs in the wrong place: Inbound shipping to receive inventory goes on line 8450. Outbound shipping to customers is a selling expense on line 8340 or a general expense -- not part of COGS.
GST/HST for Resellers
If your total taxable sales (across all businesses and platforms) exceed $30,000 in any 12-month period, you must register for GST/HST. Once registered, you charge GST/HST on sales and claim input tax credits (ITCs) on your purchases, including inventory purchases. You track COGS and GST/HST separately -- the GST you paid on inventory does not go on line 8320, it goes through your GST/HST return as an ITC.
Common Questions
Can I deduct inventory purchases as an expense when I buy them?
No. Purchases go on line 8320, and only the portion that was sold during the year becomes a deductible cost. Unsold inventory stays on your books as an asset until you sell it.
What if I sell both resold goods and services?
Report them together on T2125. Use Part 4 for the goods portion and the regular expense lines for service-related costs. If your business is mostly services with occasional product sales, Part 4 is still required whenever you have inventory.
What inventory valuation method should I use?
Average cost is the simplest choice for most resellers with multiple units of similar items. FIFO works well if you have clear purchase records and distinct batches. Just pick one and stick with it every year.
NorthOS categorizes your inventory purchases automatically
Tag transactions as inventory purchases and NorthOS tracks your running COGS throughout the year. No more scrambling for your year-end count total at tax time.
Disclaimer: This article is for informational purposes only and does not constitute tax advice. CRA rules can change -- always verify with the CRA or a qualified tax professional.