CLIENT UPDATE Luxury Tax – Effective September 1, 2022
The 2021 budget introduced the Luxury Tax and the new tax received Royal Assent on June 23, 2022. The Luxury Tax will apply to new cars and aircraft with a retail sales price over $100,000 and to vessels over $250,000. The tax is the lesser of 20% of the value above the threshold and 10% of the full value of the item subjected to tax.
There are several exceptions for this tax including emergency vehicles, those with large passenger capacities, or RVs.
The tax will apply to subject vehicles, subject vessels and subject aircraft delivered by way of sale or lease, or imported on or after September 1, 2022. Also exempt are vehicles that have previously been subject to the Luxury Tax.
Manufacturers, wholesalers, retailers, lessors and importers will have to register, collect and remit this tax much like other sales taxes.
For a more detailed discussion, please read the following.
As previously noted, the Luxury Tax will apply to new cars and aircraft with a retail sales price over $100,000 and to vessels over $250,000.
All three types of vehicles are not subject to the tax if registered with a government before September 2022, provided that possession was also transferred to the user of the vehicle before this date. A second grandfathering provision exempts vehicles where the vendor and the purchaser entered into a bona fide agreement in writing for the sale of the subject item prior to January 1, 2022.
A “subject vehicle” means a motor vehicle with a date of manufacture after 2018 that meets all of the following conditions:
- Its primary purpose is a passenger vehicle on highways and streets;
- it has a seating capacity of not more than 10 individuals;
- it has a gross vehicle weight rating that is 3,856 kg or less; and
- it is designed to travel with four or more wheels in contact with the ground.
Excluded vehicles are motor vehicles that are:
- A motor vehicle that is clearly marked for policing activities;
- a motor vehicle that is clearly marked and equipped for emergency medical or fire response activities;
- an ambulance;
- a hearse; or
- a recreational vehicle equipped adapted or designed to provide temporary residential accommodations and equipped with at least four certain features like meal facilities, bathrooms and climate control.
A subject aircraft means an aircraft that is an airplane, glider or helicopter with a date of manufacture after 2018 that meets any of the following conditions:
- It is equipped only with one or more pilot seats and cannot have any other seating configuration,
- it is equipped only with one or more pilot seats, or is not equipped with any seats, and cannot have a seating configuration of 40 seats or greater (excluding pilot seats), or
- it is equipped with one or more pilot seats and one or more passenger seats and has a seating configuration of 39 seats or fewer (excluding pilot seats).
An aircraft that is designed and equipped for military activities and an aircraft that is equipped solely for carrying goods are excluded.
A subject vessel means a vessel with a date of manufacture after 2018 that is designed or adapted for leisure, recreation or sport activities.
Generally, a floating home, a commercial fishing vessel, a ferry and a cruise ship are excluded.
WHEN THE TAX APPLIES
The Luxury Tax will be payable at the time the sale is completed, subject to certain exceptions. Generally, a sale is considered completed when possession of the subject vehicle is transferred to the purchaser or when ownership of the subject vehicle is transferred to the purchaser, whichever is earlier.
In most cases, the vendor of the subject vehicle will be liable for the Luxury Tax on the sale of a subject vehicle. However, the purchaser will be liable for the Luxury Tax where the vendor is any of the following:
- The government of Canada or a province;
- an Indigenous governing body; or
- a foreign representative who is entitled to relief of the GST/HST in respect of the sale.
Leased vehicles may also be subject to the tax. A lessor that leases, but does not sell, is not required to register and the Luxury Tax would, instead, apply when the lessor purchases a subject item. The cash flow effect of this tax should be considered when determining upfront charges and periodic lease payments charged by the lessor to the lessee. Registered vendors that lease and sell subject items would be required to self-assess the tax when moving the subject item from inventory to lease.
Registered vendors of subject vehicles will not have to pay the Luxury Tax on the purchase or importation of affected vehicles. Effectively, registered vendors of subject vehicles will be able to import and hold tax-free inventory of subject vehicles valued above the price threshold and defer the application of the Luxury Tax until the subject vehicles are sold to persons that are not registered, such as consumers.
However, a registered vendor will have to pay the Luxury Tax if it registers the subject vehicle with the Government of Canada or a province. This could occur, for example, to use the vehicle as a demo or loaner vehicle. A vendor that cancels their registration will also be required to pay the Luxury Tax on any remaining subject vehicles.
The Luxury Tax will also apply to improvements of at least $5,000 made within one year of possession.
HOW THE TAX IS CALCULATED
The Luxury Tax on the sale, importation, registration or lease of a subject vehicle priced or valued above the price threshold, or on subject vehicles valued above the price threshold held by a person ceasing to be a registered vendor of subject vehicles is calculated as the lesser of:
- the taxable amount multiplied by 10%, and
- the amount that results from subtracting $100,000 from the taxable amount and multiplying the difference by 20%.
Determining the taxable amount of a subject vehicle for calculating the Luxury Tax payable depends on the circumstance that triggered the Luxury Tax on the subject vehicle.
Generally, the taxable amount in respect of the sale of a subject vehicle is the sum of:
- the value of the consideration for the sale of the subject vehicle, and
- the value of the consideration for any improvements made by the vendor to the subject vehicle in connection with the sale that is not included in the above.
The taxable amount in respect of the importation of a subject vehicle is the sum of the following:
- the value of the subject vehicle as determined under the Customs Act, and
- the total amount of any duties and taxes (other than the GST/HST) that is payable on the subject vehicle under the Customs Tariff, the Excise Tax Act, the Special Import Measures Act and any other law relating to customs.
Leases and Self Assessments
Where a registered vendor has to self-assess the Luxury Tax when they begin to use a vehicle or lease it, the taxable amount is the greater of the following:
- the retail value of the subject vehicle at the time at which it is registered with the Government of Canada or a province, or
- the retail value of the subject vehicle at the time at which the registered vendor first uses the subject vehicle.
The retail value of a subject vehicle at any time is the sum of the following:
- The fair market value (FMV) of the subject vehicle;
- any transportation or freight fees that are not already included in the FMV;
- the total amount of any duties, taxes and fees (other than the GST/HST) that is not already included in the FMV.
The tax on the improvements is calculated as if the total cost included the improvements, less any Luxury Tax previously paid for that vehicle on the original acquisition.
Tax on Improvements is calculated as: A-B
A = lessor of:
– the total taxable amount x 10%
– amount that results from subtracting $100,000 from the taxable amount x 20%
B = lessor of:
– the unimproved taxable amount x 10%
– amount that results from subtracting $100,000 from the unimproved taxable amount x 20%
HOW TO REGISTER, COLLECT AND REMIT
Generally, you are required to register with the Canada Revenue Agency (CRA) if you are a:
- retailer, or
and in the course of your business activities, you sell or import certain vehicles and aircraft priced over $100,000 and certain vessels priced over $250,000.
Being registered also means that you do not need to pay the Luxury Tax on an acquisition or import of inventory.
When to Register
You are required to apply to register with the CRA by the earlier of:
- the day of the first sale of a vehicle, aircraft, or vessel above the respective threshold
- the day of the first importation of a vehicle, aircraft, or vessel above the respective threshold
You may register ahead of time to ensure you are registered when the tax comes into effect on September 1, 2022.
How to Register
Businesses can register in one of three ways. More information can be found HERE.
- Business Registration Online – Can be used if you don’t have a CRA Business Number or have not registered for My Business Account (online)
- My Business Account (MyBA) – Complete L500 Luxury Tax Registration Application and upload it to CRA using the Submit Documents function, or
- By postal mail – Send L500 Luxury Tax Registration Application to the appropriate address listed on the last page of the form.
Registered vendors report their Luxury Tax payable Form B500, Luxury Tax and Information Return for Registrants every reporting period even if they do not have Luxury Tax payable. If a registered vendor has different branches or divisions, they can apply to have these branches or divisions file separately by filling out L500-2, Application or Revocation of the Authorization to File Separate Luxury Tax Returns for Branches and Divisions.
Persons that are not registered and not required to be registered report their luxury tax payable for each reporting period on Form B501, Luxury Tax and Information Return for Non-Registrants for each reporting period where they have Luxury Tax payable.
For all taxpayers, the reporting period of a person is a calendar quarter. The return must be filed by the end of the month that follows the end of a reporting period, and any amount owing for the reporting period is also due at that time.
For 2022, there is only one reporting period: September 1, 2022 to December 31, 2022. The filing/payment deadline is January 31, 2023.
If a return is filed late, the penalty will be the sum of 1% of the tax and 25% of that amount multiplied by the number of months, not exceeding 12 months, from the day on which the return was required to be filed.
If you have any questions concerning the above, do not hesitate to contact your trusted advisor at Wilkinson & Company LLP.