Canada's luxury tax law took effect in September 2022. What luxury items are covered and how much tax should be paid? Find out in this article
High-end cars, yachts, jewelry, and statement bags are just a few of the luxurious items that anyone would want to have. Before you get the chance to own these fancy items, you need to have a high-earning source of income.
In addition to the income, when the value of the items goes up, paperwork suddenly follows along the way to comply with federal law.
In this article, we will be discussing what a luxury tax is, does Canada have a luxury tax, and other matters that fall under it.
What is the Canadian luxury tax?
Before we go into the details of Canada’s luxury tax, let’s discuss what a luxury tax is.
A luxury tax is a sales tax or surcharge that applies to a specific category of products or services that are available only to the extremely wealthy.
The luxury tax is charged through a percentage of the purchase price or as a percentage of the sum over an established limit.
The federal government decided to impose a luxury tax on the sale or importation of luxury cars and aircraft worth over $100,000 and boats worth over $250,000.
Finance Canada released a background paper on the proposed luxury tax's structure for feedback from the public on August 10, 2021. Finance Canada also published draft legislation proposals for stakeholder input on March 11, 2022.
Bill C-19 or the Budget Implementation Act, 2022, No. 1, obtained royal assent on June 23, 2022. Part 4 included the Select Luxury Items Tax Act and took effect on September 01, 2022.
Under the Act, certain vendors must register with the Canada Revenue Agency (CRA). These vendors are those who produce, wholesale, retail, and import vehicles, airplanes, or vessels that fall under the tax regime and have a price over the applicable markups.
Applying for registration
There are two ways to register: complete Form L500 and send it to the CRA or use the Business Registration Online portal.
One Form L500 should be submitted by the person applying to be a registered vendor of numerous categories of subject products, with the statement "Applying to be a Registered Vendor of Multiple Types of Subject Items."
General luxury tax calculation (excluding improvements)
According to section 34, the taxable value of the subject vehicle is typically used to determine the luxury tax. The luxury tax is equal to the lesser of 10% of the subject vehicle's taxable value or 20% of the excess over the price cap.
When a subject vehicle is sold, imported, registered, leased, or valued above the price threshold, or when a subject vehicle is owned by a person who no longer qualifies as a registered vendor of a subject vehicle, the luxury tax is computed as the lesser of:
- 10% of the taxable amount multiplied
- the amount obtained by increasing the difference left after taking $100,000 out of the taxable amount by 20%.
The taxable amount of a subject vehicle for the purpose of computing the luxury tax payable is determined by the scenario that prompted the luxury tax on the subject vehicle.
Calculation of the luxury tax on upgrades or improvements
The formula below is used to determine how much of a luxury tax is applied to upgrades made to subject vehicles:
- less than the total taxable amount multiplied by 10%
- Not greater than the amount obtained by deducting $100,000 from the total amount subject to tax and multiplying the result by 20%
- Is less than the unimproved taxable amount multiplied by 10%
- Not greater than the sum obtained by multiplying the difference between $100,000 and the unimproved taxable amount by 20%.
What is subject to luxury tax in Canada?
If a vehicle, aircraft, or vessel meets the definition of a subject vehicle, subject aircraft, or subject vessel as stated in paragraph 2(1) of the Select Luxury Items Tax Act, it is subject to the luxury tax regime.
These types of vehicles, aircraft, and ships are together referred to as the subject items. Any vehicles, planes, or ships that do not fit these criteria are exempt from the luxury tax.
Subject vehicle
A subject vehicle is one that meets these criteria:
- it is primarily made or adapted to transport people on roads and highways
- it can accommodate no more than 10 people in its seats
- it has a maximum gross vehicle weight rating of 3,856 kg
- it is made capable of moving when at least four of its wheels are in touch with the ground
If ownership was passed to a user of the vehicle before September 2022 and has been registered with a government, it is exempt from this restriction.
Any vehicle that’s marked and equipped for law enforcement does not fall under this definition. Some examples: clearly marked cars or vans used for emergencies such as an ambulance, fire truck, or rapid response vehicle.
Subject aircraft
A subject aircraft is an airplane, glider, or helicopter that was built after 2018 and meets any of these criteria:
- it is built with only pilot seats and cannot have any other seating arrangements
- it is equipped with one or more pilot seats and with a seating capacity of more than 40 seats (excluding pilot seats)
- it is built with one or more pilot seats and has a seating configuration of up to 39 seats (excluding pilot seats)
The following aircraft are exempt from the rules:
- an aircraft that has been owned and registered before September 2022
- a plane built and equipped for transporting cargo
- a plane built and equipped for military use
Subject vessel
A vessel built or modified for leisure, recreation, or sporting activities is called a subject vessel.
These vessels are excluded under Canadian luxury tax law:
- a vessel that has been registered/taken possession before September 2022
- floating residence
- fishing boat used for business
- ferry
- cruise ship
What are luxury tax examples?
Here are a few examples of the Canadian luxury tax:
Registering subject vehicles that belong to a registered seller
A dealership that is a registered vendor of subject vehicles registers a subject vehicle in its inventory with the Ontario Ministry of Transportation to use as a demo vehicle. It is worth over $100,000.
When the subject vehicle is registered with the Ontario government, the dealership is responsible for paying the luxury tax.
Adding modifications and improvements to subject vehicles
A registered vendor sells the subject car to a buyer for over $100,000 on September 22, 2022. The subject vehicle falls under the luxury tax law at the time the sale is finalized.
The buyer has these upgrades done on the subject vehicle between September 22, 2022, and September 22, 2023: performance tires, an infotainment system, and an enhanced exhaust system. The upgrades cost $5,000 in total.
The luxury tax on the vehicle's upgrades is the responsibility of the buyer. Payment of the luxury tax is due on September 23, 2023.
Who pays luxury tax in Canada?
In general, sales or importations of subject vehicles costing or valued at more than $100,000 will be subject to Canadian luxury tax.
Canada is adding a 10% luxury tax on cars over $100,000 pic.twitter.com/VcWoLUG5eO
— Crypto Tea (@CryptoTea_) August 6, 2022
If someone registers, leases out, or has a modification done to a subject vehicle priced or valued above the price threshold, the luxury tax might also be applicable.
In addition, if a person no longer maintains any tax-free inventory of subject vehicles valued at more than the price threshold, they will be liable to the luxury tax.
The following are criteria that could prompt the application of the new Canadian luxury tax:
Selling subject vehicles
When the sale of a subject vehicle exceeds the $100,000 price barrier, the luxury tax applies and is due at that time.
In general, the transfer of ownership of the subject vehicle to the buyer or the transfer of possession of the subject vehicle to the buyer, whichever occurs first, represents the completion of the transaction.
However, under section 18(2), in sales transactions where the vendor is any of the following, the buyer of the subject vehicle shall be responsible for the luxury tax:
- Her Majesty in right of a province or of Canada
- a representative of the province or Her Majesty in right of Canada
- a sovereign Indigenous group
- a foreign representative who qualifies for GST/HST exemption regarding the sale
Here’s a scenario: a vendor is in the business of selling subject vehicles. The vendor and buyer have a written agreement for the sale of the subject vehicle before 2022. In this case, if the subject vehicle costs above the price threshold, the luxury tax does not apply.
Exemption on sales between registered vendors
According to subsection 19(1), sales of subject vehicles between individuals who are registered vendors of subject vehicles that are priced over the threshold are normally exempt from the luxury tax.
The Canadian luxury tax will not apply until the subject vehicles are sold to those who are not registered, like customers.
Registered sellers of subject vehicles will effectively be allowed to buy and store tax-free inventory of subject vehicles priced over the limit.
Importing subject vehicles
Subject to certain exclusions, Section 20(1) states that the Canadian luxury tax will apply to the importation of subject cars priced at more than the Customs Act's price cap of $100,000.
When an importer has a written agreement with a vendor for the sale of a subject vehicle before 2022 during the vendor's business of selling subject vehicles, the luxury tax will not be applied to the importation of a subject vehicle valued over the price threshold.
Leasing out subject vehicles
Subject vehicles that are leased by registered subject vehicle vendors and have a value over the price threshold may be subject to the luxury tax.
According to subsection 24(1), the luxury tax will take effect in this scenario:
A registered vendor of subject vehicles owns a subject vehicle with an estimated value above the price threshold. This subject vehicle has not been registered with the federal or provincial governments.
The registered vendor grants a lessee the right to use a subject vehicle as part of a lease, license, or similar arrangement. When the lessee initially has the right to use the subject vehicle under the agreement, as described in subsection 24(2), the registered vendor will be responsible for paying the luxury tax.
However, the leases of used subject vehicles costing over the price threshold that have already been registered with the federal or provincial governments are exempt from the new Canadian luxury tax act.
Having improvements made to subject vehicles
When enhancements are made to subject vehicles as described in sections 29 to 32, the luxury tax may be applicable. A subject vehicle is improved, in accordance with subsection 8(1), by the provision of either:
- the subject vehicle's installed, mounted, or attached tangible personal property
- a service that is physically conducted on the subject vehicle and alters it
Modifications to the subject vehicles includes installations of radio systems, body kits, engine upgrades, car wraps, and window tinting services.
Typically, the luxury tax on modifications will only be applicable to changes made to vehicles that were already charged the luxury tax. However, if enhancements are made in connection with the sale of a subject vehicle, the cost of the upgrades will be factored into the computation of the luxury tax due on the sale of the subject vehicle.
However, in most situations the payment of the new Canadian luxury tax act will be imposed to a registered individual who provides the chosen item to a non-registered person. Also, the liability to pay and file a periodic luxury tax return is shouldered by the registered person.
Can you avoid Canada luxury tax?
You may be wondering if you can avoid the new Canadian luxury tax act. Unfortunately, there is no way around it. This tax act applies to vehicles and vessels above specific price thresholds. Even hybrid and electric cars over $100,000 might be subject to luxury tax.
In addition, the CRA has a general anti-avoidance rule (GAAR) that inspects any arrangements or transactions made primarily to evade taxes. This rule is quite versatile and can be used in a variety of situations. Because of this, it is improbable that anyone could succeed in avoiding the Canada luxury tax.
To avoid any violation of the Canadian luxury tax act, read and bookmark Wealth Professional to get insights and latest news about taxation, investment, retirement, and other finance matters.
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