Yes. Section 23 deems inventory sold on a business sale to be sold in the ordinary course — even inside a single global price.
Short answer
Yes. Section 23(1) of the Income Tax Act deems property that was inventory of the business to have been sold in the course of carrying on the business, even when it changes hands as one line item inside a single global price for the whole going-concern sale. The portion of the purchase price allocated to inventory is taxed as ordinary income, not a capital gain, regardless of how the rest of the deal is structured.
A going-concern asset sale is usually priced as one number, but the Income Tax Act does not let that single price convert every underlying asset into the same kind of gain. Section 23(1) is explicit: “the property so sold shall, for the purposes of this Part, be deemed to have been sold by the taxpayer in the course of carrying on the business”. Property that was inventory keeps being taxed as inventory — fully as income — even though the business itself, and the goodwill and equipment sold alongside it, produce capital gains.
Section 23(3) closes an obvious workaround: the same treatment “shall be deemed to include a reference to property that would have been so included if the income from the business had not been computed in accordance with the method authorized by subsection 28(1) or paragraph 34(a)”. A business that used the cash method, or a farming or fishing business using the alternative computation methods those provisions allow, cannot escape section 23(1) just because its own inventory was never formally recorded that way.
The allocation still matters even though the character does not: the purchase agreement’s allocation of price to the inventory line item sets the dollar amount taxed as income, so an unrealistic allocation invites a CRA reassessment on that number specifically, separate from any dispute over the rest of the deal. A share sale sidesteps the issue entirely for the seller, because there is no disposition of the company’s individual assets at all — the shares themselves are what changes hands, and inventory inside the company is untouched.
In the Case Files library, inventory taxed as income on the way out the door is the direct example: a building-supplies retailer’s whole-business asset sale, where the inventory line inside the global price was still taxed as ordinary income. a fleet sold to a company the vendor was affiliated with shows a different asset-sale line item — equipment sold to a related buyer — that also does not get the tax treatment a seller might assume from the size of the overall deal.
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