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The luxury tax, which was first announced in Canada in the 2021 Budget, took effect on September 1, 2022. It will impact individuals who purchase high-value cars, airplanes, and boats, as well as manufacturers and vendors that produce, wholesale, or retail these goods.
In addition, a person who makes certain improvements or modifications to a vehicle, aircraft, or boat that is subject to luxury tax could also be required to self-assess and remit luxury tax on the improvement or modification.
What is the Luxury Goods Tax?
A new luxury tax has been imposed on certain subject vehicles, aircraft, and vessels that are purchased or imported into Canada and exceed price thresholds.
Subject vehicles, for example, include passenger vehicles typically for personal use. Subject aircraft and vessels include private aircraft recreational boats and yachts.
Many aviation professionals and others are concerned that the luxury goods tax will only serve to negatively impact the industry. They argue that it was hastily implemented without proper study and will only further hamper the economic growth of Canadian businesses.
What are the Thresholds?
Canada has implemented a luxury goods tax targeting select aircraft and passenger vehicles valued at over $100,000 and certain vessels valued at over $250,000.
Entities involved in the sale or importation of these vehicles, aircraft, and vessels must register as vendors, including manufacturers, wholesalers, retailers, and importers. Vendors bear the responsibility of collecting and remitting the tax in most cases. Of course, there are instances where others have to self access in the event of a major modification or improvement.
The tax is applied at the time of sale in Canada or the border during import, especially when no subsequent sale is planned. This measure aims to address economic challenges brought about by the pandemic and ensures that luxury items contribute to national recovery efforts.
Who is Required to Pay the Luxury Tax?
Generally, the Canadian luxury tax does not apply until the subject item is sold to those who are NOT registered, such as consumers.
In most cases, the payment of the luxury tax is imposed on the registered person who provides the subject item to a non-registered person.
What are the Exemptions?
Several exemptions are available under the new luxury goods tax. The taxes apply to subject vehicles, aircraft, and boats sold or imported into Canada.
According to the Select Luxury Items Tax Act (“Luxury Act”), subject vehicles include:
(a) a motor vehicle that
- (i) is designed or adapted primarily to carry individuals on highways and streets,
- (ii) has a seating capacity of not more than 10 individuals,
- (iii) has a gross vehicle weight rating … that is less than or equal to 3,856 kg,
- (iv) has a date of manufacture after 2018, and
- (v) is designed to travel with four or more wheels in contact with the ground …
According to the Luxury Act, a subject aircraft includes:
(a) An aeroplane, glider, or helicopter … that has a date of manufacture after 2018 if the aircraft
- (i) is equipped only with one or more pilot seats and cannot have any other seating configuration,
- (ii) is equipped only with one or more pilot seats, or is not equipped with any seats, and cannot have a seating configuration, excluding pilot seats, of 40 or greater, or
- (iii) is equipped with one or more pilot seats and one or more passenger seats and has a seating configuration, excluding pilot seats, of 39 or fewer …
According to the Luxury Act, a subject vessel includes:
(a) a vessel that
- (i) is designed or adapted for leisure, recreation, or sports activities, and
- (ii) has a date of manufacture after 2018 …
Manufacturers, wholesalers, retailers, and importers that manufacture or sell subject vehicles, aircraft, or boats within the scope of the luxury goods tax and priced above the relevant price thresholds are required to register with CRA as vendors. Those vendors are then able to sell their subject items without paying the luxury tax to other registered purchasers
How Does the Tax Work?
The tax is levied as a percentage of the purchase price of the item. In Canada, the rate is 20%. The Government of Canada explains in a news release that the tax is intended to ensure that wealthy Canadians “contribute to the economic recovery.”
If an item is subject to luxury taxes, a vendor must register with the CRA. Then he needs to report and remit the applicable tax on all sales, importations, and leases of the subject items. In practice, most vendors will pass the cost of this additional tax on to their customers.
Adapting to a New Era of Luxury Taxation
As we stand in 2024, Canada’s luxury goods tax introduces a paradigm shift that will reverberate across the consumer and the business sphere. The increased tax rates, adjustments in the digital marketplace, and changing consumer behaviour all contribute to a narrative of adaptation and evolution.
To thrive in this new era of luxury taxation, consumers and businesses alike must remain agile and well-informed. While challenges undoubtedly lie ahead, the potential benefits in terms of government revenue and a more conscientious approach to luxury consumption make this taxation update a noteworthy chapter in Canada’s fiscal history.