fbpx

Ottawa’s new luxury tax on high-price cars, planes and boats has come into effect. This is despite warnings from some critics that the Select Luxury Items Tax Act will hurt the economy. We provide an overview and some of the pros and cons of Canada’s new Luxury Tax for individuals and businesses.

Overview of the Select Luxury Items Tax Act

As of September 1st, luxury cars and personal aircraft with sale prices of over $100,000 and boats for personal use over $250,000 will be hit with a 10-20% tax. The measure received final approval this past June and has expectations to raise $163 million in new revenue per year. The tax will only apply to new vehicles purchased by consumers for personal use. It will apply retrospectively to most sales made after January 1, 2022.

What is the purpose of the Select Luxury Items Tax Act?

The tax was originally proposed in the 2021 budget. Deputy Prime Minister and Finance Minister, Chrystia Freeland, defends the tax. She states, “I think it is entirely reasonable to say to someone who has $100,000 to spend on a car or a plane, or $250,000 to spend on a boat, ‘You need to pay a 10% tax to help everybody else.'” Freeland also adds, “I think it is great for Canadians to be successful. It is great for Canadians to be prosperous. I also think that people who are doing really, really well should feel comfortable supporting everybody else.” Canada’s luxury tax, at its core, purports to make things  fairer for tax payers. Its aim is to ensure that “those Canadians who can afford to buy luxury goods are contributing a little more”, according to a statement on the Government of Canada’s website.

Pros of the Luxury Tax 

1. Financial gains 

Introduced to the house as part of the Liberal government’s 2021 budget, legislation to impose a luxury tax on the sale of new cars, boats and aircraft will — over a five-year period — create around $779 million in new tax revenue, according to a costing note by the Parliamentary Budget Officer (PBO). Canada’s Parliamentary Budget Officer (PBO) estimates that introduction of a luxury goods sales tax will generate CA$163 million of revenue in 2023-2024.

2. Environmental Benefits of the Select Luxury Items Tax Act

The Select Luxury Items Tax is a part of the broader Bill C-19, which passed into law on June 23, 2022. The Bill also includes tax breaks for companies producing zero-emissions technologies. Supporters of the LT also suggest that it can deter wealthy citizens from purchasing luxury cars, yachts and private jets – resulting in positive effects for the environment. As the tax is part of Canada’s 2022 Budget, which promotes various green initiatives, the tax will include making zero-emission vehicles more affordable, supporting clean electricity projects, and providing investment tax credits for net zero technologies, battery storage solutions and clean hydrogen. Ideally, the new luxury tax will have an impact on the environment, discouraging the super rich from buying expensive, fuel-consuming and polluting vehicles. 

Cons of the Luxury Tax 

The introduction of the Luxury Tax has been met with a fair amount of criticism, as well. Critics of the levy say it could hurt the economy while not providing much benefit. Conservative finance critic, Dan Albas, accuses the government of introducing a “job-killing” tax that will “devastate Canada’s car manufacturing sector, boating sector and aerospace sector.” Albas believes as the Canadian economy emerges from the pandemic and businesses struggle to recover from the downturn, new taxes on businesses that create and maintain good manufacturing jobs is not the right path forward. Many that oppose the LT argue that unlike conventional sales tax, (i.e. the GST or PST), retailers are the targets of the new tax. Costs observers say they expect this will pass on to the customer.

Sectors that will feel the impact of the luxury tax

Aviation industry

Experts predict the tax may impact future sales of the subject goods, costing the economy about $2.8 billion, especially hitting Canada’s COVID-crippled aviation industry hard. In a column last week in the Financial Post, International Association of Machinists and Aerospace Workers (IAMAW) VP David Chartrand wrote that while the tax seems a logical step on the surface, it serves to harm Canadian business far more than it will help with income redistribution. “The tax actually targets manufacturers who produce the cars and planes, not those who purchase them,” he wrote.

Anthony Norejko, President and CEO of the Canadian Business Aviation Association, criticizes the legislation. He says the new “luxury tax” is of great concern for Canada’s struggling aviation sector and its employees. “It will have serious implications for business aviation in particular, at a time when the drivers of our economic recovery and growth are facing challenges that are without precedent in a generation,” he wrote in a statement. Norejko also contends, “The economic impact of the luxury tax will be significant and [has] not been studied with a comprehensive understanding of our industry.”

Boating industry

In a recent article by cbc.ca, similar sentiments were echoed in regards to the impact of the LT on the boating industry. Mark Delaney, Director of Sales and Marketing at a B.C. company that manufactures boats retailing at over $500,000, says the tax will undermine a boom in boat sales that began when people were stuck at home during the COVID-19 lockdowns. Delaney says the tax is coming at a time when inflation is driving up the cost of parts for boats. He warns that the measure will harm tourism businesses and can make purchasers think twice about buying.

This concern over the LT was echoed by Pat Sturgeon, who’s company sells sailboats costing up to $700,000 in Mississauga. Sturgeon believes it’s unfair that other pricey items — such as RVs — are not being hit with the tax. “A lot of my clients are not necessarily wealthy clients. In fact, most of them are just regular people trying to fulfill a dream,” says Sturgeon.

The Canadian Taxpayers Federation is also concerned about job losses. Franco Terrazzano, National Director of the group, remarked that the “luxury tax will raise [government] revenue on the backs of working Canadians who lose their job.” Those hurt won’t be those who can afford luxury goods, but rather those who build, service and repair them.

Auto industry

While supporters of the Luxury Tax contend it will have a positive effect on the environment, opposers feel differently. The new tax will impact some electric and hybrid vehicles, including Tesla and BMW models. Senior tax lawyer and partner at Osler, Hoskin & Harcourt LLP, Helena Gagne, asserts that the middle-class are also affected by the new tax. “It seems to be assumed that it is only the wealthiest who will be impacted by the luxury tax, but it is not necessarily the case,” says Gagne. “It can also indirectly impact taxpayers who may not consider themselves as being among the wealthiest, but who may decide to purchase an electric vehicle over the $100,000 threshold.”

Opposition to the tax say that the federal government has been encouraging Canadians to invest in clean technology, which can carry a higher price tag than cars that run on fossil fuels. They may now have to pay a ‘penalty’ for going green.

Avoiding the Select Luxury Items Tax Act

Don Drummond, a former Federal Assistant Deputy Minister of Fiscal Policy and Former Chief Economist for TD Bank, says the tax can spawn “cottage industries” around people trying to circumvent it. “Whatever you define as the threshold for a boat or whatever luxury good it is, somebody will do something to get around it,” Drummond says. “That’s a waste of the consumers’ time. And it’s a waste of the tax officials’ time.”

The Select Luxury Items Tax Act is a levy that is put on luxury items, not necessities. Many Canadians may never have to worry about paying this tax. However, if you are considering a zero-emissions vehicle, plane or a boat to sail away into retirement after years of hard work, this tax may impact your decision-making. To learn more about the Luxury Tax and if it’ll affect any future purchases or insurance policies, contact isure today.

Related Articles