Note to readers: Although the new luxury tax was originally proposed to take effect January 1, 2022, the government recently announced that it would release draft legislation for the new tax, including details on when it will apply, in early 2022.
If you’ve been eyeing a new luxury car, or thinking about leaving the hassle of the airport behind in your own plane, or dreaming of a new boat to get away from it all, now may be the time to make that purchase or you could end up paying more tax. In the April 2021 federal budget, the government proposed a new luxury-goods tax on cars, boats and personal aircraft that would come into effect on Jan. 1, 2022.
The concept of a luxury-goods tax was originally included in the Liberal Party’s 2019 election platform. At the time, it was conceived as a 10-per-cent added excise tax on luxury cars, boats and personal aircraft that sell for more than $100,000. Although legislation has yet to be introduced in Parliament, the budget outlined a more detailed plan with some refinements to the original concept.
More recently, the Department of Finance announced a consultation with stakeholders on the design and details of the proposed tax, which will conclude on Sept. 30.
Here’s how the proposed luxury tax will generally apply. New, personal-use vehicles costing $100,000 or more will be subject to a new tax. This includes coupes, sedans, sports cars, passenger vans, minivans, SUVs and pickup trucks. But you won’t have to pay the tax on motorcycles, ATVs, snowmobiles, motor homes and commercial vehicles, or if you buy a racing car for on-track or off-road racing and it’s not street legal.
You’ll have to pay the tax if you buy a new personal-use airplane, helicopter or glider that costs more than $100,000 or if your new recreational motorboat, yacht or sailboat sets you back more than $250,000. Commercial aircraft and boats, floating homes and smaller personal watercraft such as jet skis won’t be subject to the new tax.
Here’s how the calculations would work. The proposed amount of tax for vehicles and aircraft priced at more than $100,000 is the lesser of 10 per cent of the full value of the vehicle or aircraft, or 20 per cent of the value above $100,000. For boats that cost more than $250,000, the proposed tax amount is the lesser of 10 per cent of the full value or 20 per cent of the value above $250,000.
If, for example, you buy a $5 million plane, 10 per cent of the total value would be $500,000, and 20 per cent of the value above $100,000 would be $980,000, so you’d be required to pay $500,000, which is the lesser of the two.
If you buy a $400,000 boat, 10 per cent of the total value would be $40,000, and 20 per cent of the value above $250,000 would be $30,000, so you’d be required to pay $30,000, which is the lesser of the two.
In general, how the luxury tax applies can be summarized based on certain thresholds. Essentially, for vehicles or personal aircraft that cost less than $200,000, you would be required to pay a 20-per-cent luxury tax on the value above $100,000. For vehicles or aircraft that cost $200,000 or more, you’d pay the 10 per cent luxury tax rate on the full value. Similarly, for a boat that costs less than $500,000, the luxury tax will apply at the 20-per-cent rate on the value above $250,000, and if the boat costs $500,000 or more, the 10 per cent tax rate will apply on the entire value.
The luxury tax will be determined on the sale price before GST or HST, so there would be no luxury tax on a $99,000 car, even though it would cost $103,950 after GST is added. However, GST or HST will be calculated inclusive of the luxury tax, so if you buy a $120,000 car on which you pay 20 per cent of the value over $100,000, or $4,000, in luxury tax, the GST or HST will be calculated on the after-tax cost of $124,000.
The seller will be responsible for collecting the new tax at the time of sale and paying it to the Canada Revenue Agency. The buyer will owe the full amount at the time of sale whether leasing, financing or buying outright.
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Special rules will apply for imports of goods subject to the new luxury tax. Bear in mind that if you buy or import a luxury car this summer, you need to have it in your possession before Jan. 1, 2022, otherwise you may have to pay the new tax.
This proposed tax has the potential to add a substantial cost to the purchase of new luxury cars, boats and airplanes. If you’re thinking of making a big purchase, you may want to consider doing it sooner rather than later.
Dino Infanti is Partner, National Leader, Enterprise Tax for KPMG LLP in Canada. He is also a member of the Family Office leadership team at KPMG.
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