Starting September 1, 2022, vendors and importers will need to either charge or pay the tax on any vehicles, vessels, and aircraft manufactured after 2018 that have not been previously registered in Canada.
The Luxury Tax is applicable for vehicles, aircraft, and vessels with a retail value as follows:
-subject vehicle over $100,000
-subject aircraft over $100,000
-subject vessel over $250,000
What is exactly subject to the Tax?
Vehicles, aircraft and boats that are subject to the Luxury Tax include:
Autos
Most passenger vehicles manufactured after 2018.
So high end vehicles like a Tesla or Corvettes will have the new tax.
This doesn't include RVs, emergency vehicles, and vehicles with seating capacity for more than 10 individuals. Also, certain vehicles, including ambulances, hearses, emergency response and police vehicles, and some motor homes, are excluded.
Aircraft
Most aircraft acquired for the leisure, recreation, sport or enjoyment of the owner or a guest, manufactured after 2018.
This doesn't include include military aircraft, cargo aircraft, and aircraft where seats are sold to the public.
Boats
Boats re vessels that are designed or adapted for leisure, recreation or sports activities, manufactured after 2018, subject to certain exclusions for larger passenger and commercial vessels. Thus, a person acquiring a vehicle for the purpose of leasing to others is subject to the tax.
Certain vessels, including floating homes, fishing boats, and ferries, are excluded.
No tax applies to vehicles, aircraft, and vessels that are registered with a federal or provincial government as required before September 2022 and where possession was transferred to the user before September 1, 2022.
Calculation of tax
The retail value includes the following:
The Fair Market Value (FMV) before trade-ins, discounts, and down payments
any taxes, duties, fees levied on importation or as assessed by the seller (for example, document fees and environmental levies) excluding the GST/HST.
Also, this tax is to include provincial sales taxes where applicable freight charges, modifications, or improvements equal to or greater than $5,000 made within 12 months of purchase. This is will be difficult to track, but it is the case for this tax.
Example of Tax Calculation
The Luxury Tax is calculated at the lesser of 20 per cent of the amount above the threshold or 10 per cent of the full value of the luxury vehicle, aircraft or vessel.
Here is an example:
Vehicle Price from retailer $135,000
Luxury Tax @ 10% total value $13,500
Luxury Tax @ 20% of value above 100,000 $7,000 (35,000 @20%)
Luxury Tax amount (lesser of a and b) $7,000
Subtotal of sale price $135,000 +$7,000 = $142,000
13% HST In Ontario 18,460
Total $160,460
Please note that the HST is on the Vehicle Purchase Price plus Luxury Tax or tax on a tax!
Vendors of qualifying vehicles must register with the federal government to collect and remit the Luxury Tax.
Rebates
Rebates may be available in specific circumstances where the vehicle, aircraft, or vessel is exported outside of Canada. As proposed, the rebates are only available to registered vendors and applications for rebates may only be made once per quarter.
Administration of the Tax
The registered vendor that delivers a Subject Item to a non-registered end consumer will be responsible for paying any applicable Luxury Tax and completing the related returns. For most registered vendors, Luxury Tax returns must be filed on a quarterly basis.
The first reporting period begins on 1 September 2022 and ends on 31 December 2022. After that initial period, registered vendors will be required to file luxury tax returns on a calendar quarterly basis. The due date for filing a return and remitting the tax is the last day of the month following the reporting period.
In some situations, self-assessment and payment of Luxury Tax will be required. For example:
Where a Subject Item held as inventory is subsequently leased to a third party, the owner must self-assess and remit any applicable Luxury Tax on the Subject Item.
A person that pays for certain improvements exceeding $5,000 total to a previously purchased Subject Item that was subject to the Luxury Tax would be required to self-assess and remit applicable Luxury Tax on the cost of the improvements incurred within a specified period (generally, within a year from when the Subject Item was delivered in or imported into Canada).
A security deposit for Luxury Tax that is payable or may become payable could be required for certain persons importing Subject Items into Canada, as determined by the Minister of National Revenue.
Penalties will apply for non-compliance, including failure to pay Luxury Tax amounts due (interest will also be charged on late payments), failure to file required returns, failure to register as a registered vendor, and making false statements or declarations in applying for certificates, among others.
Section 4 of the regulations provides that luxury tax will not apply on the sale or import of a subject item if a written agreement for the sale of that subject item was entered into before January 1, 2022.
How might this affect your insurance coverage and replacement?
From an insurance perspective, in the event of a total loss and the need to replace your luxury aircraft, vehicle, or boat, the agreed value in your policy will not be enough to cover the purchase. I would recommend to those who may be affected by this tax to review their agreed values for coverage with their insurance broker.
What is Government of Canada Looking to Collect in Taxes?
Parliamentary Budget Office, the Luxury Tax would generate $600 million in revenue over five years. However, no analysis on the loss of jobs and reduced payroll taxes in the sales or manufacturing of high end vehicles or boats or aircraft has been considered from the lost sales and jobs resulting from the implementation of the Luxury tax by the Budget Office.
History of Luxury Taxes
Some say the history of luxury taxes shows that consumers will simply take their discretionary spending elsewhere.
Also, some have stated that the tax is easy for consumers to avoid by imply purchasing and docking their boats outside of Canada. Not sure if GAAR -Generally Anti Avoidance Rules would apply, but this needs to be considered if not paying the Luxury Tax on these out of country purchases and docking by Canadians.
USA History on Luxury Tax in Early 1990s
Attempts by other countries to impose luxury taxes have been met with mixed results.
In 1991, former U.S. President George H.W. Bush signed a luxury tax into law passed by Congress that November.
The American luxury tax placed a 10 per cent levy on furs and jewellery costing more than $10,000, cars over $30,000, boats over $100,000, and aircraft with price tags greater than $250,000.
Despite promising revenue of over $9 billion over five years, America’s luxury tax only lasted two years.
Heavy job losses and lobbying by America’s ship and boat building industry prompted President Bill Clinton to repeal the tax in 1993.
Luxury Tax On Canadian Indian Reserves
After posting this article, I received a question regarding on how the Luxury tax applies to Natives in Canada. So I contacted the CRA luxury tax team at 1-866-330-3304 and they just called back and stated that the Luxury Tax applies to all transactions in Canada either on or off reserve. The CRA officer stated that even dealers on reserve will need to collect the Luxury tax as of September 1, 2022 (updated September 1, 2022).
Conclusion
The Luxury Tax will impact the higher end purchases. Also, no inflation adjustment is currently in the rules. So over time with inflation, this tax over time will naturally expand to more daily driver vehicles. If your buying a high end car or boat then close it before Thursday September 1 when the Luxury Tax starts. This may be difficult as the inventory is low and product is difficult to obtain.
Have a great Labour Day Weekend as summer is coming to a close. If you need any assistance, please contact Peter at 905-898-3355 or email peter@taxhome.net
August 27, 2022 (updated September 1, 2022)
Copyright © 2022 by Peter Wiesner CPA
All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or in any means – by electronic, mechanical, photocopying, recording or otherwise – without prior written permission.
