Treatment of Closing Inventory & Deemed Sales on Final T2125/HST Returns

Tax Topics
1

Finalizing 2025 wind-up for taxpayer who closed two sole proprietorships.

FACTS

  • Business A (Service/Retail): Closing inventory cost approx $2800. All gifted to a non-charitable third party. FMV (taxpayer provided) - $900 due to the items being dated/incomplete.

  • Business B (MLM/Cosmetics): Closing inventory cost approx $7,300. Most destroyed/discarded due to expiration and resale restrictions. Taxpayer kept 75 items (Cost ~$1,500) for personal use. FMV (taxpayer provided) for 75 units is $262.50 ($3.50/unit based on market rates).

  • HST Status: Registrant in 15% province.

APPROACH

1. Income Tax (T2125)

Ending Inventory: $0 for both businesses to ensure full cost of goods is captured on final return.

Revenue: Add FMV of gifted/kept items to Other Income Line 8230.

  • Business A: $900.00

  • Business B: $262.50

2. GST/HST Final Return

  • Line 101: Include FMV $1,162.50 ($900 + $262.50) in addition to regular year-to-date sales.

  • Line 103: 15% HST on FMV amount = $174.38 (add to HST collected).

  • Logic: Taxpayer is ceasing to be a registrant, they are deemed to have made a taxable supply of remaining inventory @ FMV immediately before closing.

Sources:

  • Income Tax Act, Section 10(1) & 69(1)
  • Excise Tax Act, Section 171(3)

Is this how others would handle this?

2

Business A donated the inventory so there is no revenue to declare. The FMV is for the books of the non-charitable third party only.

Business B kept product that cost “~1500” and therefore has $1500 revenue. She can’t just write it down to a random number, unless she can provide proof that that is in fact the FMV (current catalogue)

GST/HST Final Return

Line 101 $1,500 (unless she proves the FMV)

Line 103 $225 ($1,500 x .15)

Be ready for a GST/HST audit - CRA has been auditing my small business clients that are closing for many different reasons (retire, pandemic, and failure to flourish are the main targets I’ve noticed) They seem to be looking into the “expectation of profit” again, even though they lost that battle years ago. Paper that FMV well.

3

I appreciate the reply - thank you!