Sole Proprietor and Inventory

Tax Topics
1

I have a small clothing manufacturer, sole proprietor, who is finally showing a profit. Client kept track of everything except inventory. I don’t have a beginning inventory and suggested a year end inventory at cost. 2019 and prior were break even and loss years.

Any suggestions would be greatly appreciated.

Happy Holidays and stay safe.

2
  1. Calculate the value of the inventory at year end closing
  2. If entered in the cost of good sold, it will increase profits by the same amount.
  3. If the amount is important you could make adjustments for previous years
    or if there accumulated non capital losses, the inventory correction would not
    be so painful.
  4. The customer could choose to declare a smaller inventory, increasing it each year as tax auditors would not be inclined to rebuild inventory (Tax payors choice and risk). being careful to explain and make no recommendations.
3

Thank you for your insight and thoughts Benoit. No non capital losses to carry forward but some charitable donations which will help.

4

"clothing manufacturer, sole proprietor, who is finally showing a profit"

Technically, without determining inventory, it is impossible to know that…

“2019 and prior were break even and loss years.”

Technically, without determining inventory, it is impossible to know that…

This person technically is in breach of Section 230 (Failing to keep proper books and records sufficient to determine income for tax purposes).
Technically, this person could go to jail for that (S238(1)), but CRA would be much more likely to go for the money instead in trivial cases…

Bottom line - you need to document that you have advised this client of their problems in writing, and assist them in rectifying it, one way or another… (or be guided by their refusal, if that is the case…)