On Aug. 10, 2021, the Finance Department released a backgrounder and technical paper discussing the details of the luxury tax (LT) that was originally mentioned in the Liberal’s 2018 election campaign and then proposed in the April 2021 Federal Budget.
LT would be applicable to the sale or importation of new vehicles and aircraft with a value in excess of $100,000 and new boats with a value in excess of $250,000 at the time of their sale or importation into Canada. Certain of these sales will be excluded from the LT if it can be shown that they are designed for commercial use. The value of the luxury vehicle, aircraft or boat for the purpose of determining the application of the LT would be calculated including modifications, fees, charges and duties but excluding GST/HST.
Interestingly, GST/HST would be paid on the total value of the vehicle, boat or aircraft including the assessed LT. LT would be assessed as the lesser of 10% of the total value or 20% of the value in excess of the LT threshold ($100,000 for cars and aircrafts and $250,000 for boats).
Vendors registered under the LT regime would be required to collect and remit the luxury tax. Registered vendors would generally include persons who, in the course of their business activities, manufacture, wholesale, retail or import vehicles in the relevant price range. Sales from one registrant to another are generally exempt, subject to appropriate certification by the purchasing registrant. Where a non-registered individual imports for their own use, they would be required to remit the LT to the Canada Border Services Agency. Rules for LT relief on temporary importations, similar to the longstanding GST relief for these types of imports, are included in the announcement.
Finance will also require individuals to self-assess LT on any modifications made to the luxury vehicle, aircraft or boat within 12 months of purchase, excluding modifications made for accessibility, such as a wheelchair ramp. Additionally, where a vehicle, aircraft or boat is leased instead of purchased, the lessor is required to pay the LT because the vehicle, aircraft or boat is deemed to be transferred to the lessor on a taxable basis, meaning LT is applicable on the deemed transfer, for the latter’s own use at the time the lease is entered into.
Penalties for false declarations are proposed at the greater of $1,000 or 50% of the LT.
The details are short on how the new tax will be administered. For example, it is unclear how CRA will register a person under the LT and what reporting systems will be used. There is also no mention as to whether the thresholds will be indexed for inflation.
The new LT would be applicable for deliveries of goods beginning Jan. 1, 2022 unless a bona fide sales arrangement was entered into before April 20, 2021.
Finance is seeking stakeholder feedback by Sept. 30, 2021. Feedback will be considered when drafting the legislation to be introduced through a parliamentary bill later this year.