The Luxury Tax, originally proposed in the 2021 budget, received Royal Assent on June 23, 2022. The tax will apply to new cars and aircraft with a retail sales price over $100,000cad and to vessels over $250,000cad. It will be calculated at the lesser of 20% of the value above a set threshold ($100,000cad for cars and personal aircraft, and $250,000cad for vessels) and 10% of the full value of the item subjected to tax.
The tax will apply to subject vehicles, subject vessels and subject aircraft delivered or imported on or after September 1, 2022.
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, at this time, includes subject vehicles, subject aircraft, and subject vessels:
- Vehicles -The luxury tax will apply to vehicles that meet the definition of subject vehicle under the Act and are priced or valued above the $100,000cad price threshold, unless an exception applies. 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 will be subject 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 certain motor homes are not subject vehicles and are not in the scope of Luxury Tax. Similarly, ambulances, hearses, vehicles clearly marked for policing activities or marked and equipped for emergency medical, and fire response will also fall outside the scope of the tax.
- Aircraft – Aircraft, with date of manufacture after 2018, including any airplane, helicopter, or glider with a maximum carrying capacity of less than 40 seats (including corporate aircraft) will be subject aircraft. Aircraft typically used in commercial activities, such as those equipped for the carriage of passengers or designed exclusively for cargo flights, will be excluded.
- Vessels – Vessels, with a date of manufacture after 2018, and designed for leisure, recreation, or sport activities—such as a yacht, a houseboat, or any sailboat or motorboat with sleeping amenities— will be subject vessels. Floating homes, commercial fishing vessels, ferries, and cruise ships will be excluded.
Who is required to pay the Luxury Tax?
The Luxury Tax will be payable by registered owners/importers on the sale of subject items delivered in Canada that exceed the price threshold of $100,000cad for vehicles and aircraft and $250,000cad for vessels. Sales of subject items to manufacturers, wholesalers, and retailers that are registered for the Luxury Tax will qualify for exemption. Non-registered importers will also pay the Luxury Tax on the importation of subject items.
How is the Luxury Tax calculated?
The tax will be calculated as the lesser of:
- 20% of the retail sale price above the relevant price threshold ($100,000 for vehicles and aircraft; $250,000 for vessels); or
- 10% of the retail sale price of the subject vehicle, aircraft, or vessel.
The tax will apply at the point of purchase if the final sale price paid (including applicable duties, charges, and taxes other than GST/HST or provincial sales tax) is above the price 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.
Will the Luxury Tax apply to leases?
A lease of a subject item is not considered to be a sale under the Luxury Tax regime. Lessors that carry on a 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 would be required to self-assess the tax when moving the subject item from inventory to lease. This reporting requirement will need to be closely tracked by registered dealerships that also lease subject items.
When does the Luxury Tax come into effect?
The tax will apply to subject vehicles, subject vessels, and subject aircraft delivered or imported on or after September 1, 2022.
The tax will not apply where the vendor of the subject item and the non-registered purchaser entered into a bona fide agreement in writing for the sale of the subject item prior to January 1, 2022. Registration will be required before the first importation or delivery of a luxury good is made.