Inventory Obsolescence and Write-Downs: Reducing Taxable Income with Unsold Stock — CPA Firm Near You, Montreal

Introduction

E-commerce stores, retailers, wholesalers, and even manufacturers in Quebec often end up with slow-moving, damaged, expired, or unsellable inventory. This creates unnecessary taxable income because inventory is valued at cost unless written down properly. CRA and Revenu Québec allow inventory write-downs — but only under strict conditions. This guide explains how inventory obsolescence works, when write-downs are allowed, how they reduce taxable income, and how a CPA firm near you in Montreal can help ensure the write-downs are fully compliant.

Legal and Regulatory Framework

Under the Income Tax Act and the Taxation Act of Quebec, businesses must value inventory at the lower of cost or fair market value (FMV). Inventory that is damaged, expired, obsolete, or unsellable may be written down to FMV if proper documentation exists. CRA requires:
• Evidence that inventory cannot be sold at normal prices
• Aging reports showing slow-moving items
• Records of markdowns, clearance sales, or liquidation attempts
• Proof of damage, expiry, or loss

Inventory write-downs reduce cost of goods sold (COGS) and lower taxable income for the year. Businesses may also deduct losses for stolen, damaged, or spoiled goods if supported by documentation such as police reports, insurance claims, or internal incident logs.

Key Court Decisions

Courts have ruled that inventory cannot be written down based on “owner judgment” alone. Cases deny write-downs where businesses lacked proof of obsolete or unsellable stock. Judges have accepted write-downs only when backed by aging schedules, sales history, market value analysis, or evidence of destruction. Several rulings confirm that inventory must be valued item-by-item — not with blanket percentages — unless a consistent and justifiable method is used.

Why CRA and Revenu Québec Target Inventory Write-Downs

Inventory write-downs reduce taxable income, so CRA scrutinizes them closely. Red flags include:
• No inventory aging report
• No evidence of damage or obsolescence
• Large end-of-year write-downs without documentation
• “Estimated” write-downs not supported by data
• Write-downs used to offset unusually high income
• Missing proof of destruction or disposal

Auditors often request supplier invoices, sales records, warehouse logs, and write-down calculations.

Mackisen Strategy

At Mackisen CPA Montreal, we help businesses document and justify every inventory write-down properly. We prepare itemized inventory aging reports, evaluate FMV based on current market prices, and categorize damaged, expired, or obsolete items. We create formal write-down memos compliant with CRA rules and integrate them into year-end financial statements. Our team also reviews warehouse procedures, improves stock rotation practices, and ensures your COGS calculations withstand auditor scrutiny.

Real Client Experience

A Montreal retailer attempted to write down more than $60,000 in slow-moving stock but had no aging report. CRA denied the deduction. We reconstructed the aging schedule from sales records, confirmed obsolete SKUs, and negotiated the acceptance of most write-downs. Another business dealing in food products had spoilage but lacked documentation; we implemented new procedures that allowed future spoilage losses to be fully deducted.

Common Questions

Can I write down all unpopular inventory?

No. You need proof showing it is obsolete, damaged, unsellable, or worth less than cost.

Does a write-down reduce my taxable income?

Yes. Inventory valued at a lower amount reduces taxable profit.

Do I need to destroy obsolete inventory?

Not always — but you must show it cannot be sold at normal value.

What documentation is required?

Aging reports, discount records, FMV analysis, photos, damage logs, supply-chain records.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses manage inventory tax rules properly while reducing taxable income. Whether you operate a retail store, e-commerce business, or warehouse operation, our expert team ensures accurate valuation, compliance, and audit protection.