In computing a taxpayer's income from a business for a taxation year, property described in the inventory of the business must be valued at the end of the year. Subject to the exceptions described in s4 to 6 below, subsection10(1) of the Act and section1801 of the Regulations provide for the following methods of valuing inventory:

• 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.
• Valuation of the entire inventory at its fair market value at the end of the year.

In comparing "cost" and "fair market value" in order to determine which is the lower, the comparison should be made separately and individually in respect of each item (or each usual class of items if specific items are not readily distinguishable) in the inventory. The lower figure for each such item, or each such class of items, should be extended and carried forward in arriving at the total value of the inventory. As an exception to this procedure, however, total costs and total fair market values should be the basis of comparison in cases where, although separate fair market values for individual items may be known, only an average cost figure is available. For information pertaining to "cost" see s10 to 17 below, and for information pertaining to "fair market value" see s18 to 21 below.

Adventure in the nature of trade

4. If the business is an adventure or concern in the nature of trade, subsection10(1.01) requires that the property described in the inventory of the business be valued at the cost at which the taxpayer acquired the property. Subsection10(1.01) applies to all taxation years (fiscal periods in the case of a partnership) other than those ending before December21,1995 for which the inventory of the business was valued, under former subsection10(1), at an amount that is less than the cost at which the property was acquired and such valuation is reflected in an income tax return, a notice of objection or a notice of appeal filed before December21,1995. In addition, this subsection does not apply to a taxation year or a fiscal period that ends before December21,1995, if the filing due date in respect of that year is after December20,1995.

As mentioned above, for taxation years (fiscal periods in the case of a partnership) ending before December21,l995, property described in the inventory of a business that is an adventure or concern in the nature of trade may have been valued using a method provided for under former subsection10(1). By virtue of subsection10(9), if, for the last taxation year (fiscal period in the case of partnership) that the property was valued under former subsection10(1), the property was valued at an amount less than the cost at which the taxpayer acquired the property, the cost of such property to the taxpayer after that time is deemed to be that lower amount.

For a discussion of an adventure or concern in the nature of trade, see the current version of IT-459, Adventure or Concern in the Nature of Trade.

5. Under subsection10(10), if the taxpayer is a corporation and there is an acquisition of control of the corporation, the property described in the inventory of the corporation's business that is an adventure or concern in the nature of trade must be valued, at the end of the taxation year that ends immediately before the acquisition of control, at the cost at which the corporation acquired the property or its fair market value at the end of the year, whichever is lower. After that time, the cost at which the corporation acquired the property is deemed to be that lower amount. The application date for subsection10(10) is the same as the application date for subsection10(1.01) (see 4 above). For a discussion on "acquisition of control," see the current version of IT-302, Losses of a Corporation--The Effect that Acquisitions of Control, Amalgamations, and Windings-up have on Their Deductibility--After January15,1987.

Artistic endeavour

6. In computing the income of an individual (other than a trust) from a business that is the individual's artistic endeavour, the individual may, under subsection10(6), elect to value the inventory of that business at nil. A "business that is an individual's artistic endeavour" is defined in subsection10(8) to mean the business of creating paintings, prints, etchings, drawings, sculptures or similar works of art, where such works of art are created by the individual, but does not include a business of reproducing works of art. For more information, see the current version of IT-504, Visual Artists and Writers.