Canada's new federal luxury tax will take effect on September 1, 2022. It's crucial for auto dealers to have a clear understanding of what types of vehicles are subject to luxury tax, how it is calculated and reported, and what needs to be done now to prepare for its introduction.
How does luxury tax apply to auto sales?
Auto dealers will be required to pay luxury tax on sales of subject vehicles where the sale price, including improvements, exceeds $100,000. A subject vehicle is a motor vehicle with four or more wheels designed primarily to carry individuals with a seating capacity of not more than 10 individuals and a weight not exceeding 3,856 kilograms.
Luxury tax differs from sales tax and will be a component of the base on which sales tax is calculated. Dealers should ensure they are aware of the impact of luxury tax costs in respect of such sales, and that they are not out of pocket for the tax by building their luxury tax cost into the sale price of subject vehicles.
When does luxury tax take effect?
Luxury tax will apply to sales of subject vehicles on or after September 1, 2022. It can also apply to sales of subject vehicles where written agreements were entered into with customers between January 1, 2022 and August 31, 2022 if the vehicle is delivered to the purchaser on or after September 1, 2022.
Luxury tax will generally not be payable by a registered dealer in respect of the sale of a subject vehicle where ownership and possession are transferred to the purchaser before September 1, 2022.
How will luxury tax be calculated and reported?
Luxury tax will be calculated by an auto dealer at the lesser of 20% of the value of the consideration in excess of the $100,000 threshold and 10% of the full value of the vehicle.
The first return, which will cover the four-month period from implementation to December 31, 2022, will be due on January 31, 2023. After that point, all returns and remittances will be due one month after the end of each calendar quarter.
What should auto dealers do to prepare?
It's important to understand which vehicles are subject to luxury tax and which ones are not. Luxury tax does not apply in the following circumstances:
- Vehicles sold for less than $100,000.
- Vehicles manufactured prior to 2019.
- Previously licensed vehicles.
- Sales of vehicles not designed primarily to carry individuals (e.g. cargo vans).
- Vehicles with fewer than four wheels.
- Passenger vehicles designed to carry more than 10 individuals.
- Ambulances, police cars, fire trucks, hearses, and certain recreational vehicles.
To get ready for the impact of luxury tax, auto dealers should consider the following steps:
- Prepare to register to collect luxury tax if your dealership plans to sell subject vehicles. Dealers will be required to provide a purchase exemption certificate to their suppliers confirming they are registered to pay luxury tax.
- Consider the cost of luxury tax on any subject vehicles that the dealership licenses, such as service vehicles or courtesy cars. Luxury tax will be payable at that time.
- Consider structuring lease arrangements to minimize the effect of the tax on the dealership's cash flow. Registered dealers that also lease vehicles to customers will be required to pay luxury tax on the leased vehicle when possession is transferred to the customer, rather than over the term of the lease.
- Configure sales and accounting systems to properly account for luxury tax as a cost to the dealer and payable to the Canada Revenue Agency. Dealers should also be able to identify the sale of upgrades or improvements to be installed on vehicles in connection with the sale that may trigger luxury tax.
- Review all sales where an agreement was entered into between January 1 and August 31, 2022, but the vehicle will be delivered on or after September 1, 2022. If luxury tax was not factored in when the price was agreed upon, dealers may wish to review the terms and conditions of the sale to consider whether price adjustments can be made to reflect the additional cost.
Our podcast provides additional insight about the impact the new luxury tax will have on the costs and cash flow for auto dealerships and offers tips to help your business plan ahead. If you need more details regarding the application of luxury tax to your auto dealership, please contact your BDO indirect tax advisor.
Check out Brian Morcombe's recent appearance on “The Jas Johal Show” for a discussion on the implications of this new tax.
Bruce Goudy, Director, Indirect Tax
Brian Morcombe, Partner, Indirect Tax National Service Line Leader
The information in this publication is current as of August 2, 2022.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.