Inventory and Cost of Goods Sold for Online Sellers in Canada

Prepared by Toronto Tax & Accounting Solutions Inc. and reviewed by Behroz Rizvi, owner. This article provides general information and may not apply to every tax situation.

If you sell products online, you do not deduct everything you buy. You deduct the cost of the goods you actually sold. That figure, the cost of goods sold, comes from your opening inventory, your purchases during the year and your closing inventory, and it goes on Form T2125 with your personal return.

The CRA’s annual inventory rule

The CRA says you need to do an annual inventory, usually a list of goods held for sale, and that inventory is used to calculate the cost of goods sold and net income on Form T2125 (see inventory and cost of goods sold). In your first year of operating a business you will not have an opening inventory at the start of your fiscal period (accounting methods).

The cost of goods sold formula

Opening inventory, plus purchases during the year, minus closing inventory, equals cost of goods sold. On Form T2125 this is Part 3D, which includes closing inventory (line 8500) and cost of goods sold (line 8518).

A worked example

An online reseller starts the year with no stock, buys $6,000 of goods during the year and has $1,500 of unsold items on December 31. Cost of goods sold is $0 plus $6,000 minus $1,500, which is $4,500. If the reseller sold those goods for $9,000, gross profit is $4,500 before other expenses such as platform fees, shipping and advertising.

What counts as purchases

• Goods you buy to resell
• Materials you use to make products you sell
• Direct costs of getting the goods ready to sell, as they apply to your business

Platform fees, shipping you pay to ship orders, advertising and software are usually operating expenses, not part of the cost of goods sold. We help you sort which is which.

How to count and value your year-end stock

Count what is unsold at year-end, including items in storage and in transit that you own, and value it consistently from one year to the next. Keep the stock list with your records. The closing inventory at the end of this year becomes the opening inventory next year.

Inventory records online sellers should keep

• Supplier invoices and receipts for every purchase
• A year-end stock list showing quantities and costs
• Platform sales reports that show what sold
• Records of returns and damaged or unsellable goods
• A running purchase and sales log, or bookkeeping software

GST/HST on inventory

If you are registered for GST/HST, you may be able to claim input tax credits on the GST/HST you pay on inventory and business purchases. If you are not registered, the tax you pay on purchases generally forms part of your cost. See GST/HST on online sales.

Inventory questions for online sellers

Do I deduct inventory when I buy it or when I sell it?

You deduct the cost of the goods you sold, calculated from your opening inventory, purchases and closing inventory, rather than deducting every purchase in the year you buy it.

Do I need a stock count every year?

Yes. The CRA says you need to do an annual inventory.

What about stock I could not sell?

Keep records of damaged, returned or unsellable goods and tell us about them. How they are treated depends on the facts.

How we can help

Toronto Tax & Accounting Solutions Inc. keeps the books and prepares the returns for online sellers who hold inventory, from our Scarborough office or entirely online. Monthly bookkeeping starts from $99 and a self-employed return from $149.99, both before HST. Inventory, several platforms and incomplete records can increase the fee. See our page for online sellers and content creators or visit torontax.ca.

Related guides

• Tax and bookkeeping for online sellers and content creators
• Amazon seller taxes in Canada
• Etsy taxes in Canada
• eBay taxes in Canada
• GST/HST on online sales
• Hobby or business?
• YouTube taxes in Canada

Official sources

• CRA: Inventory and cost of goods sold
• CRA: Accounting methods
• CRA: Business expenses
• CRA: When to register for and start charging the GST/HST

Last reviewed: November 8, 2026. This article is general information, not advice for a specific situation. Platform help pages are linked for platform-specific statements.