How to report Consignment revenue when filing with CRA

[hockey_cards_by_dh]

Hi All,

This will be my first year filing my eBay revenues with the CRA. I found a template on this discussion board on how to breakdown all your revenues, inventory and expenses but I have a couple questions that I am hoping someone can help me with.

1. Half of my sales are from consignment items; do I report only on the commissions that I made on these items or do I report the total amount sold and add it to what I sold from my own inventory?
2. For inventory that I have remaining for sale on eBay.  let's say I have $10,000.00 of inventory left currently for sale, that remaining inventory will not sell at face value; I accept best offer so in reality that $10,000.00 worth of inventory I may only get 50% of the asking price.  So when reporting my remaining inventory value to the CRA do I report it at face value or should I depreciate that value to a more realistic figure of what it's actually worth?
3. My business is registered as a sole proprietorship, do I just report my revenues with my personal income tax filings or is there a separate filing required just for my eBay business.

Thanks in advance for your help.

Cheers,

DH

[pierrelebel]

"Half of my sales are from consignment items; do I report only on the commissions that I made on these items or do I report the total amount sold and add it to what I sold from my own inventory?"

On those consignment sales, only the net commission received needs to be added to your business income for income tax purposes (GST/HST is another question).

"So when reporting my remaining inventory value to the CRA do I report it at face value or should I depreciate that value to a more realistic figure of what it's actually worth?"

Sorry, it does not worth that way.  To determine your gross profit, you need to add your purchases (at cost) during the year to your opening inventory and deduct your inventory on hand (at cost) at year end to determine your "cost of goods sold".  Deducting your "cost of goods sold" from your revenue will then determine your "gross profit" before tax.

Follow this example: http://pierrelebel.com/lists/P&L-sample.htm

"Do I just report my revenues with my personal income tax filings or is there a separate filing required just for my eBay business."

Your business income (net profit) must be reported on line 135 of your annual income tax return unless the business is incorporated. That would be your "net profit" after expenses and would include the commission you have earned on your consignment sales.

As always, I most strongly suggest you consult a competent accountant familiar with your personal circumstances to help and guide you.  Based on the amounts involved, you may also be required to register with GST/HST.  If not, it may be beneficial to do so in any case. Once again, consult a competent accountant, preferably one with experience in worldwide mail order.

[hockey_cards_by_dh]

Thanks for the reply Pierre.

I found some good info on the CRA website that suggests I can value my inventory at Fair Market value rather then what I have each item selling at...maybe I'm interpreting this wrong?

http://http://www.cra-arc.gc.ca/vdgllry/bsnss/srs-rprtngncmxpns6-eng.html

Subject matter expert: To properly match expenses with income, you need to prepare an annual inventory. This is usually a list of goods held for sale. Inventory is used in the calculation of the cost of goods sold, which allows the calculation of net income on Form T2125 Statement of Business or Professional Activities.

Host: How does a business owner figure out the value of their inventory?

Subject matter expert: The value you place on the items in your year-end inventory is important in determining your income.

For income tax purposes, in most cases, either of the following two methods of valuing inventory is available:

• valuation of each item in the inventory at the cost at which it was acquired or its fair market value at the end of the year, whichever is lower; or
• valuation of the entire inventory at its fair market value at the end of the year.

Other methods of valuing inventory may be available or required depending on the type of business. For example, property described in the inventory of a business that is an adventure or concern in the nature of trade must be valued at the cost at which the taxpayer acquired the property.

Host: Is there a simple way to determine which method to choose?

Subject matter expert: Well, let's look at two examples.

In the first example there's a small business owner who operates an art gallery. Since he has a small inventory and the price of each item may be substantially different, he would probably opt to value each item in his inventory separately.

An example of a business that would choose a value for the entire inventory is a dollar store. The inventory they have is similar in value or replacement cost and they could choose to state the entire value of their inventory based only on the number of items on hand and at a value of one dollar each.

Business owners should also be aware that once they choose a method of inventory valuation, they must continue to use this method for the years that follow.

Host: Now that we know how to value the inventory, how does a small business owner calculate their cost of goods sold?

Subject matter expert: Once the final inventory valuation has been made, the calculation of the cost of goods sold is a relatively simple calculation.

You begin with the opening inventory, which is either the ending inventory from the previous fiscal period, or for a new business, the opening figure would be zero.

To that, you add any inventory purchases made throughout the fiscal period, deduct the final closing inventory and the final figure will be the cost of goods sold.

[pierrelebel]

".maybe I'm interpreting this wrong?"

Yes.

That "fair market value" is used when a company needs to write down inventory because the market value has been reduced substantially from original cost.  For example, let's say you imported Automobile Clutch Release Bearing back in the 1970's and 1980's (I did);  it would be appropriate now to write down the inventory to "fair market value" which would approximate nil.

"fair market value" in the context of writing down inventory represent the value at which you are willing to liquidate your inventory.

We often see small businesses playing with their tax liability by reducing the value of their inventory to a low "fair market value".  Unfortunately, it often comes back to bite them. Reducing "cost of goods" to lower than actual cost will result in higher profits and higher income tax payable when those goods are eventually sold since the cost base will be lower and gross margin larger.