Are there any tax issues with selling goods at a fraction of their value?
March 30, 2009
pat asked:
I owned a small business a few years ago and had an inventory of $50,000. The business didn’t do so well and I found a full time job elsewhere.
I owned a small business a few years ago and had an inventory of $50,000. The business didn’t do so well and I found a full time job elsewhere.
I found a buyer willing to buy all the inventory for $5,000. (I’m willing to take the loss because I’m just too busy to bother – plus I’m still paying for storage).
I will still declare my revenue in taxes, but are there any other regulatory issues with selling at a loss ?
I’m in Canada and the buyer is in the US.
Actually, it just so happens that I have a “semi-partnership” with the US business : I know the people there from before and this business has the same name as mine, but we are separate entities.
2 Responses to “Are there any tax issues with selling goods at a fraction of their value?”
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April 1st, 2009 at 11:43 am
Businesses sell at a loss frequently.
Provided that this was an arm’s length transaction, there shouldn’t be any red flags going off at the CRA. Its much more different when the buyer and seller are related (corporations).
April 3rd, 2009 at 4:37 pm
Based on your “additional details”, the US buyer may be considered as a related party and therefore the CRA may quesiton whether the $5000 is the fair market value (FMV) for the inventory (cost $50,000). Section 69 of the Cdn Income Tax Act states that if you sell the inventory as less than the fair market value to a related party, you are deemed to have received the fair market value. In other words, the inventory loss may be less or nil. Meanwhile, the US buyer is stuck with the low cost ($5,000) unless the selling agreemnt provides a price adjustment clause allowing for price adjustment in case the revenue authorities dispute with the selling price.