In its 2021 Budget, the federal government proposed a new “luxury tax” on certain luxury goods such as passenger vehicles, aircraft, and personal boats. The re-elected Liberal party promised that it will move ahead with implementing this new tax which is slated to come into force on Jan. 1, 2022.
The tax will apply to new cars and aircraft priced over $100,000, and new boats for personal use priced over $250,000.
As we await the enactment of the final legislation, here is what we know so far based on the Department of Finance’s technical paper released on Aug. 10, 2021:
What is considered a luxury good for purposes of the new tax?
A new term “Select Luxury Goods” is being introduced, It’s likely that this term will eventually subject additional goods to the luxury tax. For the time being, Select Luxury Goods include the following:
- Luxury vehicles - All new (manufactured after 2018) passenger vehicles typically suitable for personal use including coupes, sedans, station wagons, sports cars, passenger vans, and minivans equipped to accommodate less than 10 passengers, SUVs, and passenger pick-up trucks would be considered luxury vehicles for purposes of the new tax. Motorcycles and certain off-road vehicles, such as all-terrain vehicles and snowmobiles, racing cars (i.e., vehicles that are not street legal and are owned solely for on-track or off-road racing), and motor homes are not considered to be caught by the scope of the luxury tax. Similarly, ambulances, construction, and farm vehicles would also fall outside the scope of the tax.
- Aircraft - All new (manufactured after 2018) aircraft including any airplane, helicopter, or glider with a maximum carrying capacity of less than 40 seats (this includes corporate aircraft) will be subject to the tax. Aircraft typically used in commercial activities, such as those equipped for the carriage of passengers or designed exclusively for cargo flights, would be excluded.
- Boats - All new (manufactured after 2018) boats designed for leisure, recreation, or sport such as a yacht, a houseboat, or any sailboat or motorboat that has a cabin with sleeping amenities are considered luxury boats for purposes of the new tax. Floating homes, commercial fishing vessels, ferries, and cruise ships would be excluded.
Who is required to pay the luxury tax?
The luxury tax is payable by registered vendors on the sale of luxury goods delivered in Canada. Sales to registered manufacturers, wholesalers, and retailers will be exempt. Non-registered importers will also pay the luxury tax on the importation of a luxury good.
How do I calculate the luxury tax?
The tax is calculated as the lesser of:
- 20% of the retail sale price above threshold (threshold being $100,000 for cars and aircraft; $250,000 for boats); or
- 10% of the retail sale price of the luxury car, boat, or aircraft.
The tax would apply at the point of purchase if the final sale price paid (including applicable duties, charges, and taxes other than the GST/HST or provincial sales tax) is above the threshold.
Modifications made within 12 months of purchase may also be subject to self-assessment of the tax where certain conditions are met. Accessibility modifications are generally excluded.
Does the luxury tax apply to leases?
Leases of luxury goods would not be considered a sale under the luxury tax regime . Lessors that carry on the business of leasing, but not selling, cannot register and therefore the luxury tax would, instead, apply when the lessor purchases a luxury good. The tax would then likely be built into the periodic lease payments charged by the lessor to the lessee. Lessors that also sell vehicles and therefore become registered for the luxury tax would be required to self-assess the tax when moving the luxury good out of inventory to lease; a reporting requirement that will need to be closely tracked by dealerships and leasing companies. Again, it is expected that the lessor will pass the cost of the tax along to the lessee in the lease payments.
When is the new tax coming into effect?
If the legislation passes into law, the tax will apply to luxury goods delivered or imported on or after Jan. 1, 2022. However, the tax will not apply to luxury goods if the vendor of the luxury good and the non-registered person entered into a bona fide agreement in writing for the sale of the luxury good prior to April 20, 2021. Registration will be required before the first importation or delivery of a luxury good is made.
The Department of Finance consultation process on the proposed luxury tax concluded on Sept. 30, 2021. As we wait for final legislation and the registration process to be established, consider how this new luxury tax might impact you and your organization. If you need additional information about this new tax, contact your BDO advisor.
The information in this publication is current as of Oct. 15, 2021.
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.