Nothing was missing from the warehouse and nothing was mispriced. The distortion existed only because two accounting bases met in the middle of one year.
Short answer
Yes — if a business changes how it costs its closing inventory (for example, beginning to absorb a share of production overhead into finished-goods and work-in-progress cost) in the same year it is being sold, the entire one-time uplift lands in that single year’s gross margin and cost of sales, and it will not repeat, even though nothing about the underlying business actually changed.
Income Tax Act s.10(2), “Continuation of valuation,” provides: “Notwithstanding subsection 10(1), for the purpose of computing income for a taxation year from a business, the inventory at the commencement of the year shall be valued at the same amount as the amount at which it was valued at the end of the preceding taxation year for the purpose of computing income for that preceding year.” That freezes OPENING inventory at last year’s closing value — it does not stop a company changing its CLOSING valuation basis mid-year, which is exactly the gap that lets a single year absorb the whole swing.
Section 10(2.1), “Methods of valuation to be the same,” requires that a valuation method used at the end of one year continue into the following year “unless the taxpayer, with the concurrence of the Minister and on any terms and conditions that are specified by the Minister, adopts another method permitted under this section” — concurrence that a mid-diligence change of method will not have sought. Which accounting framework permits the change for financial-reporting purposes in the first place is a separate question, governed by the accounting standard the statements are prepared under, not by the Income Tax Act.
See it decided in the inventory-method-changed case file, the two-frameworks-two-EBITDAs file and the seven-years-of-non-recurring add-back file.
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Canadian small-business transaction data is not published anywhere, so most valuations in this country quote an American benchmark. The Deavo–Treadstone Acquisition Index is a daily record of Canadian listings built to replace that: asking-price distributions by province and city are published now, and days on market, departure rates and asking-to-sale spreads follow as the series lengthens. Leave an email and we will tell you as each measure lands.
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