Understanding the Mechanism Behind Canada's Recent Imposition of a Luxury Tax
This advertisement is still loading, but the information you seek can be found below. To put it simply, the tax is applicable to automobiles and private aircraft that surpass the $100,000 mark and to boats or yachts that exceed $250,000 in value.
Sarah B. Hood • Canadian Family Offices
Originally published on Nov 10, 2022 • Latest update on Nov 14, 2022 • Estimated reading time: 4 minutes
Furthermore, any extra features, accessories, or upgrades installed within a year after the initial purchase will also be subject to the tax. Please note that the image used in this article is courtesy of GETTY IMAGES. It is often said that owning a boat is like having a money pit, and this saying has become even more fitting since the implementation of Canada's new Select Luxury Items Tax Act on September 1, 2022.
This advertisement is still loading, but the information you seek can be found below. The federal government has recently introduced a substantial tax on luxury automobiles, airplanes, and boats with the expectation of generating an additional 4 million in federal revenue over the course of five years. This decision aligns with the government's commitment to ensuring that all individuals and businesses contribute their equitable part to fueling a resilient economic recovery.
The luxury tax is just one of several proposed measures aimed at achieving this goal. These measures include higher corporate taxes, the implementation of a minimum 15% taxation rule for "top-bracket earners," and a crackdown on "aggressive tax planning and avoidance."
But how much tax needs to be paid? To put it simply, the luxury tax is applicable to cars and private aircraft that have a value exceeding $100,000 and to boats or yachts with a value surpassing $250,000. The payable tax amount is either 10% of the total retail cost or 20% of the amount by which the cost exceeds the specified threshold, whichever is lower. For instance, if a car is priced at $120,000, the tax would be 20% of $20,000 ($4,000), rather than 10% of $120,000 ($12,000).
It is important to note that products manufactured in 2018 or earlier are exempt from this tax, as are cars, planes, and boats that are exclusively used for utilitarian purposes, such as floating or mobile homes, ambulances and rescue aircraft, or speedboats utilized by a school for teaching waterskiing, as exemplified by the Finance Department.
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According to Dino Infanti, a partner and national leader for enterprise tax with KPMG in Canada, it is important to note that the luxury tax applies to the vendor, which distinguishes it from the consumer-paid HST or GST.
Vendor responsibilities include registration and filing a luxury tax return, as stated by Infanti. Manufacturers, wholesalers, retailers, and importers involved in the sale of luxury items must complete an application process for registration, which is estimated to take approximately 30 days.
Companies that lease cars but do not typically sell them as part of their core business are not obligated to register or pay the luxury tax. However, companies that both sell and lease cars are required to register.
Non-compliance with the registration requirements can result in penalties, as is the case with many taxes, and these penalties can be significant, warns Infanti.
The luxury tax was introduced through Bill C-19 in April 2022. Several amendments, including the potential implementation of different dates for aircraft and cars or boats, were proposed. However, the government clarified in July 2022 that the Sept. 1 date would apply to all "subject items," including aircraft.
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Registered vendors face further complexity with respect to taxable upgrades. If extra features, accessories, or upgrades are installed within a year of the initial acquisition, they will be subject to the tax. This could potentially push the selling price over the tax-exempt threshold and cause the vehicle to become taxable.
Taxable upgrades for cars may include custom rims, seats, audio systems, or performance exhaust systems. For vessels, upgrades like custom cabinetry, onboard lighting, navigational chart plotters, and satellite voice and data systems could be included. Modifications specifically designed for use by individuals with disabilities are not factored into the tax calculation.
It is worth noting that the luxury tax is considered part of the total price, so GST or HST will be added on top of the tax amount.
Infanti raises the question of whether the price threshold might increase in the future, and whether these thresholds would be adjusted for inflation.
Consumers can take solace in the fact that they will not be responsible for calculating the tax themselves. However, as Infanti points out, those in the luxury goods asset class will ultimately bear the burden of this tax, resulting in higher costs for consumers.
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