What you need to know: Canada’s Luxury Goods Tax

On June 23, 2022, Canada's luxury tax received royal assent and was officially enacted, marking a significant change in the taxation landscape for high-end goods. This tax targets new cars and aircraft with retail sales prices exceeding $100,000, and boats with price tags surpassing $250,000. As Canadians navigate this new tax environment, it is essential to understand the intricacies and implications of the luxury goods tax and how it may impact the purchasing decisions for luxury items in Canada.

What is a Luxury Good

This new act officially called ‘The Select Luxury items tax Act, introduces the term “Subject item” which at this time includes subject variables, subject aircraft, as well as subject vessels.

Vehicles

This includes passenger vehicles that have been manufactured after 2018 that are typically suitable for personal use. This includes:

• Sedans, Station wagons, sports cars, passenger vans, station wagons, Trucks, minivans that have no more than 10 passengers, as well as SUVs are all considered to be subject vehicles.  

It must be noted that certain vehicles such as motorcycles, off-road vehicles and racing vehicles that are non-street legal and whose sole purpose is to race are not subjected to the new luxury tax due to them being not within the scope of what is a subject vehicle.

Aircraft

The tax is applicable to aircraft that were manufactured after 2018, this includes:

• Any airplane helicopter, or glider that has a minimum carrying capacity of less than 40 passengers- this also includes corporate aircraft, all these listed types of aircraft are subject.

Aircraft that are used within a commercial activity, such as those that are meant for carrying either passengers or air cargo will be excluded from the tax and therefore not subject.

Vessels

Vessels that have a manufacture date after 2018 and that were designed for recreation leisure or sport, activities., these vessels include:

• Houseboats, Yachts, sailboats, or any motorboat that has sleeping amenities. These are all considered to be subject vessels.

Commercial vessels, Ferries, Cruise ships, and floating homes are excluded and therefore not subject.

Who must pay this new tax?

This new tax is payable by the registered vendors on the sale of subject items that are delivered within Canada that have exceeded the price tag of $100,000 for vehicles as well as aircraft, and $250,00 for vessels.

• The sale of subjected items to wholesalers, retailers, and manufacturers that are registered for the new luxury tax will be able to qualify for the exemption.

• Non-registered importers will also have to pay this tax for the importation of subject items.

How is it calculated?

The tax is calculated at the lesser value of

• 20% of the retail value that is above the relevant price threshold of $100,000 for vehicles or aircraft, $250,00 for vessels, or

• 10% of the retail sale price of aircraft or vessels or aircraft that are subject.

This tax will become payable at the point of purchase if the final sale price is greater than the stated thresholds. This includes applicable duties charges other than GST/HST or provincial sales taxes.

Modifications that are made to the vehicle within the following 12 months of the purchase may also be subjected to self-assessment of the tax where certain conditions are met, it should be noted that accessibility modifications are generally excluded. Let’s look at how this calculation works.  

Example

• Person A purchases a luxury car with a retail price of $120,000.

• Person B purchases a car with a retail price of $95,000.

Person A:

• The car purchased by Person A falls within the "subject vehicles" category and exceeds the $100,000 threshold.

• The tax payable is calculated as the lesser of:

• 20% of the amount above the threshold (20% of $20,000 = $4,000), or

• 10% of the retail sale price (10% of $120,000 = $12,000).

• In this case, the lesser amount is $4,000, which is the luxury goods tax payable by Person A

Person A's total cost, excluding GST/HST or provincial sales taxes, would be $120,000 (car price) + $4,000 (luxury goods tax) = $124,000.

Person B:

• The car purchased by Person B falls within the "subject vehicles" category but does not exceed the $100,000 threshold.

• As the car's retail price is below the threshold, Person B does not have to pay the luxury goods tax.

• Person B's total cost, excluding GST/HST or provincial sales taxes, would be $95,000 (car price).

The example above illustrates the potential financial implications of the luxury goods tax on buyers and how it might influence their purchasing decisions for luxury items in Canada. By being aware of these details, potential buyers can make informed decisions when purchasing luxury items and consider the financial impact of the tax on their budget. When making large Purchases as such it is always advisable to speak to your financial advisor, Click here to schedule your free 30-minute consultation.

References

https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/luxury-tax/technical-information.html

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ltn2/subject-vehicles-under-select-luxury-items-tax-act.html

- Mitchell Cathcart, Marketing Assistant, Kondwelani Kalinda, Licensed Assistant & Financial Planning Associate and Grant White, Portfolio Manager at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together, Endeavour Wealth Management provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Mitchell Cathcart Marketing Assistant, Kondwelani Kalinda, Licensed Assistant& Financial Planning Associate and Grant White, Portfolio Manager for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.  

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

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