In April 2022, the 2022-2023 federal budget announced the addition of new rules to implement the tax on certain luxury goods. The new tax takes effect on September 1, 2022. Our team has prepared a summary of the rules surrounding this tax on certain luxury goods.
Tax liability – New tax 2022
The tax on certain luxury goods (hereinafter referred to as the “luxury tax”) will apply to sales and imports into Canada of the following goods.
New passenger motor vehicle
- designed to carry 10 passengers or less;
- with a nominal weight of 3,856 kg or less;
- with a date of manufacture after 2018; and
- over $100,000.
New aircraft
- with a maximum certified capacity of less than 40 seats (i.e. not including cockpit seats);
- with a manufacturing date after 2018;
- not designed for military activities or cargo flights; and
- over $100,000.
New boat
- designed for leisure, recreational or sporting purposes;
- with a date of manufacture after 2018; and
- with a price tag of over $250,000.
This tax is payable by the end user of the selected item. Manufacturers, retailers and wholesalers registered to collect it will not have to pay it on purchases made for resale.
The Canada Border Services Agency will be responsible for collecting the luxury tax on selected goods imported into the country by an unregistered person.
Rental products
In the case of rentals, the luxury tax will be payable by the owner of the selected property, whether or not he or she is registered for this tax, and not by the tenant.
The luxury tax will apply to passenger motor vehicles, which are designed primarily to carry people on roads and streets. As a result, certain vehicles are excluded from the application of this tax, including a hearse, combine, backhoe, motorcycle, snowmobile, motor home, race car or off-road vehicle that is not street legal, as well as a motor vehicle clearly equipped for police, emergency response or military activities if delivered to, or imported by, a competent police, emergency response or military authority.
The luxury tax will be established according to the lesser of the following calculations:
- for vehicles and aircraft costing more than $100,000, the lesser of :
- 10% of the total price; or
- 20% of the amount over $100,000;
- for boats costing more than $250,000, the lesser of :
- 10% of the total price; or
- 20% of the amount over $250,000.
It should also be noted that a property given in exchange will not reduce the amount of luxury tax payable on the acquisition of a new property.
The CRA gives the following example for the application of the luxury tax to the purchase of a boat:
| Retailer’s price | 300 000 $ |
| Additional high-power motors (2 @ $40,000) | 80 000 $ |
| Total price for luxury tax purposes | 380 000 $ |
| (a) Luxury tax @ 10% of total value
(b) Luxury tax @ 20% of value over $250,000 |
38 000 $
26 000 $ |
| Amount of luxury tax (less than (a) and (b)) | 26 000 $ |
| Subtotal | 406 000 $ |
| Exchange valued at $150,000 | (150 000 $) |
| Subtotal | 256 000 $ |
| TPS | 12 800 $ |
| Total |
Determining the price threshold
To determine the total price of the selected item, you’ll need to take into account all costs, other taxes (e.g., excise tax on air conditioners, tax on new tires), duties, fees and amounts paid for delivery or importation, excluding GST/HST or any other applicable provincial taxes (such as QST).
ARC gives the following example:
| Retailer’s price | 90 000 $ |
| Includes integrated excise tax on air conditioners ($100) | 100 $ |
| Automated driving system option | 8 000 $ |
| Upgraded audio system | 4 000 $ |
| Dealer-installed wheel upgrade | 2 000 $ |
| Pre-delivery inspection | 2 000 $ |
| Total price for luxury tax purposes | 106 000 $ |
| (a) Luxury tax @ 10% of total value
(b) Luxury tax @ 20% of value over $100,000 |
10 600 $ 1 200 $ |
| Amount of luxury tax (less than (a) and (b)) | 1 200 $ |
| Subtotal | 107 200 $ |
| TPS | 5 360 $ |
| Total |
If modifications of a cumulative value of $5,000 or more are made to the property in the 12 months following its acquisition, the owner would be required to self-assess the luxury tax on the price paid for these modifications, if the property was initially subject to the luxury tax, or on the price paid for the property plus the modifications made, if these cause the price of the property to exceed the thresholds set out above.
An exception to the latter rule is made for modifications that facilitate the use of the vehicle by wheelchair users or make driving easier for a disabled person. The cost of these modifications would not be taken into account in determining whether the price of the property exceeds the relevant thresholds.
Effective date
It is proposed that the luxury tax will apply to all deliveries and imports of selected goods from September 1, 2022.
However, the tax would not apply to deliveries or imports:
- which would otherwise be taxable on a selected item;
- for which the seller and the non-registered person have entered into a written agreement in good faith for the sale of the property before April 20, 2021; and
- possession of which would be transferred to the unregistered person or the latter imports the vehicle.
Registration and other rules
Persons who manufacture, sell at wholesale or retail, or import selected goods priced above the target price threshold will be required to register for the luxury tax file no later than the earliest of the following: the day on which they make a qualifying sale or import.
The registered seller will be responsible for collecting the luxury tax from the purchaser and remitting it to the Canada Revenue Agency (“CRA”). Returns for this tax will cover calendar quarters and must be filed, along with the required payment, by the last day of the month following the end of the reporting period.
As mentioned above, a registered seller will be able to make purchases of inventory free of luxury tax, unless these purchases are for the seller’s own use.
Penalties and interest similar to those applicable to GST/HST are provided for the application of the luxury tax.
Exemptions
Certain exemptions are provided for in the legislation to be adopted. Here is a non-exhaustive list of some of them:
- exemption based on the person acquiring the property, such as a fire or police department, hospital, municipality, Canadian or provincial government;
- exemption based on the nature of the purchaser’s use of the property, notably when the property will be used to transport goods (but not passengers), flight training, charter services, air ambulance services, flights serving remote communities, according to a list issued by the Government of Canada;
- temporary importation under certain conditions;
- when a tax paid certificate is issued by the CRA certifying that tax has already been paid on an aircraft or boat.
Don’t hesitate to contact our experts if you need more information about consumption taxes.
This article was written by Estelle Rancourt, Tax Manager.
