There is a new Luxury Tax in Canada targeting posh vehicles, including cars, boats, and private planes. The Select Luxury Items Tax Act was revealed as part of the Canadian government’s 2022 budget measures. The new tax is part of the Government of Canada’s commitment to a fairer tax system. Effective as of September 1st, it will apply to consumers purchasing new vehicles above $100,000 for personal use. Let’s breakdown what the new luxury tax in Canada is, what vehicles it applies to, as well as exemptions.
Select Luxury Items Tax Act
As part of the 2021 Federal highlights, the Government of Canada proposed the introduction of a new tax on the sale of certain new luxury cars, aircraft and boats. The Select Luxury Items Tax Act (“Luxury Tax”) was enacted on June 23, 2022, and applies to deliveries and imports into Canada on or after September 1, 2022. Exceptions will apply to such deliveries or imports of ‘Subject Items’ under a bona fide agreement in writing prior to 2022.
Who will have to pay the Luxury Tax in Canada?
Canada’s luxury tax aims to make things fairer for taxpayers, ensuring 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. MNP.ca says the Luxury Tax in Canada will apply to:
- New cars and aircrafts with a retail sales price of over $100,000, before GST/HST.
- Boats or vessels with a retail sales price of over $250,000, before GST/HST.
- The Luxury Tax will be the lesser of: 10% of the total price or 20% of the total price exceeding the price threshold.
- The tax will apply to subject vehicles, vessels and aircraft delivered or imported on or after September 1, 2022.
- All other improvements (excluding accessibility modifications), additions, taxes, duties, charges, fees and amounts paid in respect of the delivery or importation, will be a part of the total price.
- The resulting Luxury Tax is then added to the cost of the ‘Subject Item’ for the purposes of calculating the GST/HST. This results in GST/HST being calculated on the Luxury Tax.
- The tax will also apply to improvements or aftermarket modifications made at the time of sale — and will be added to the final sale price for the purposes of calculating GST and applicable provincial sales taxes.
For a list of improvement exclusions from the Luxury Tax, click here.
Important: Although the Luxury Tax in Canada is set to take effect in September of 2022, the measure also applies retroactively to sales agreements written after January 1, 2022.
Breakdown of Subject Items in each category
The following items are subject to the Luxury Tax where the price thresholds are exceeded:
Vehicles
Passenger motor vehicles, including sedans, coupes, hatchbacks, convertibles, sport utility vehicles and light‑duty pickup trucks:
- Manufacture date after 2018
- That are equipped to accommodate 10 or fewer passengers
- That have a gross vehicle weight rating of 3,856 kilograms or less
- Ones that are designed to travel with four or more wheels in contact with the ground
Leased Vehicles
For those businesses that lease high-end vehicles, you’re in luck. A lease of a subject vehicle (e.g. Porsche) is not considered to be a sale under the new Luxury Tax rule. If your business leases, but does not sell subject vehicles, you are not required to register. Instead, the Luxury Tax would apply when, as the lessor, you purchases a subject item.
Aircrafts
Subject aircrafts with a maximum carrying capacity of fewer than 40 seats will include:
- Airplanes
- Helicopters
- Gliders
- Corporate aircrafts
Please note that seat capacity is excluding the pilot cockpit area. Additionally, the above will have to have a manufacture date after 2018 to be considered subject aircrafts.
Boats
‘Subject vessels’ below (with a manufacture date after 2018,) such as:
- Yachts
- Houseboats
- Any sailboats or motorboats with sleeping amenities used for leisure, recreation or sporting activities
Who must register under the Select Luxury Items Tax Act?
According to Canada.ca, you are required to register with the Canada Revenue Agency (CRA) under the Select Luxury Items Tax Act if you are a:
- Manufacturer
- Wholesaler
- Retailer
- Importer
Exemptions to the Luxury Tax in Canada
The Select Luxury Items Tax Act, subsection 2(1), excludes certain vehicles from the definition of ‘Subject Vehicle’ and will not be subject to the luxury tax. Some exemptions include:
- Ambulances, hearses, and vehicles clearly marked for policing activities or marked and equipped for emergency medical and fire response.
- 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).
- Certain motor aircraft, typically used in commercial activities. This includes those equipped for the carriage of passengers or designed exclusively for cargo flights.
- Certain types of boats, including boats equipped for commercial use, floating homes, commercial fishing vessels, ferries, and cruise ships.
- Aircraft designed for military activities and other qualifying uses (e.g., emergency services).
For further information on any exemptions to subject vehicles, vessels or aircrafts, please click here.
Example of Luxury Tax in action
To better understand how the Luxury Tax in Canada works, let’s look at an example. Purchasing a new Lexus RX may be on the bucket list for some. Had you arranged to purchase the vehicle last Christmas, the ticket price for you would be $150,000. Instead, you signed your contract with the dealership after January 1, 2022. Therefore, you will be subject to the new Luxury Tax in Canada.
The Luxury Tax on your vehicle can be either $15,000 (10% of the price) or $10,000 (20% of the $50,000 that exceeds the $100,000 threshold). As the rule allows for the lesser of the totals to be applied, your paperwork will list $10,000 as the taxation amount to be paid.
If you want to add ‘improvements’ to the vehicle, which can include a stereo system or remote starter, the value of those items will be added to the purchase price. In other words, if you add $6,000 in detailing to your new Lexus RX, that amount will be on top of the purchase price and the tax calculation accordingly. There is a cap of $5,000 for taxing improvements. However, according to the government website, the improvement period stretches out for an entire year after the vehicle purchase.
Last thoughts on the Luxury Tax in Canada
Overall, the Luxury Tax in Canada is a tax that imposes on certain purchases over a specific price that aren’t necessities in life. As the name suggests, these items are known as ‘luxury items.’ You may never have to pay this tax because you always have the option of not buying an item that may be subject to it. However, if you are thinking of your retirement and ways to spend your later years, this tax may impact your decision-making. To find out more about the Luxury Tax and if it will affect any future auto insurance policies, contact isure today.
