Highlights of the new luxury goods tax
The luxury tax, originally proposed in Canada’s 2021 budget, received Royal Assent on 23 June 2022. The tax will apply to new cars and aircraft with a retail sales price over CAD 100,000 and to vessels over CAD 250,000, calculated at the lesser of 20% of the value above the relevant threshold and 10% of the full value of the item. The luxury tax will come into effect on 1 September 2022 for vehicles and vessels, but the entry into force date for aircraft may be deferred.
What is considered a luxury good for purposes of the new tax?
The new act—called the Select Luxury Items Tax Act—introduces the term “subject item,” which currently includes the following vehicles, aircraft and vessels:
- Vehicles - Passenger vehicles with a date of manufacture after 2018 typically suitable for personal use, including coupes, sedans, station wagons, sports cars, passenger vans and minivans with seating capacity of not more than 10 passengers, SUVs and passenger pick-up trucks. 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 certain motor homes do not fall within the scope of the luxury tax. Similarly, ambulances, hearses, vehicles clearly marked for policing activities or marked and equipped for emergency medical and fire response also fall outside the scope of the tax.
- Aircraft - Aircraft with date of manufacture after 2018, including an airplane, helicopter or glider with a maximum carrying capacity of less than 40 seats (including corporate aircraft). Aircraft typically used in commercial activities, such as those equipped for the carriage of passengers or designed exclusively for cargo flights, are excluded.
- Vessels - Vessels with a date of manufacture after 2018 and designed for leisure, recreation or sport activities, such as a yacht, houseboat or sailboat or motorboat with sleeping amenities. Floating homes, commercial fishing vessels, ferries and cruise ships are outside the scope of the tax.
Who will be required to pay the luxury tax?
The luxury tax will be payable by registered vendors on the sale of subject items delivered in Canada that exceed the relevant price threshold. Sales of these items to manufacturers, wholesalers and retailers that are registered for the luxury tax will qualify for an exemption. Nonregistered importers will also pay the luxury tax on the importation of subject items.
How will the luxury tax be calculated?
The luxury tax will be calculated as the lesser of:
- 20% of the retail sale price above the relevant price threshold (CAD 100,000 for vehicles and aircraft and CAD 250,000 for vessels); or
- 10% of the retail sale price of the vehicle, aircraft or vessel.
The tax will apply at the point of purchase if the final sale price paid (including any applicable duties, charges and taxes other than GST/HST or provincial sales tax) exceeds the price threshold.
Modifications made within 12 months of purchase may be subject to self-assessment of the luxury tax if certain conditions are fulfilled. Accessibility modifications are generally excluded.
Will the luxury tax apply to leases?
A lease of a subject item is not considered a sale under the luxury tax regime. Lessors that carry on the business of leasing, but not selling, are not required to register and the luxury tax would, instead, apply when the lessor purchases a subject item. The cash flow effect of this tax should be considered when determining upfront charges and periodic lease payments charged by the lessor to the lessee. Registered vendors that lease subject items will be required to self-assess the tax when moving the item from inventory to lease, a reporting requirement that will need to be closely tracked by registered dealerships that also lease subject items.
When does the luxury tax come into effect?
The luxury tax will apply to subject vehicles and vessels delivered or imported on or after 1 September 2022. However, based on recent amendments, the tax on aircraft may be deferred to a day or days to be fixed by order of the Governor in Council.
The tax will not apply where the vendor of the item and a nonregistered purchaser entered into a bona fide written agreement for the sale of the item before 1 January 2022. Registration will be required before the first importation or delivery of a luxury good is made.
With the legislation now enacted, taxpayers should consider which actions should be taken to ensure compliance with the new luxury tax.