Trade Talk Blog T
he Government of Canada has implemented a new luxury tax to address the growing demand for high-end consumer goods. Aiming to reduce ostentatious consumption and promote financial equality, this luxury tax will be laid on top of existing GST and other provincial taxes. The substantial shift in the tax landscape will have far-reaching consequences for both importers and consumers alike.
As an importer, this new luxury tax could significantly impact your bottom line. And when it comes to vehicle imports, these taxes can add up quickly if not managed properly. The good news is that with some savvy knowledge and attention to detail, there are ways to minimize the financial inconvenience of this new tax while still bringing in high-end vehicles from abroad. So, buckle up and prepare for a fascinating ride as we dive deep into the world of Canada’s luxury tax on vehicles, aircraft, and vessels, exploring the finer details and the potential impact it will have on the luxury import market.
What is the luxury tax?
The luxury tax is a tax that specifically targets high-priced imported goods, such as vehicles, aircraft, and vessels. This tax is levied on top of existing Goods and Services Tax (GST) and other provincial taxes, increasing the overall taxation on these luxury items without affecting basic consumer goods. Imposing additional charges on vehicles and aircraft valued over $100,000 and vessels valued over $250,000, the luxury tax aims to generate revenue while promoting economic equity in the country.
On August 10, 2021, the Canadian government announced the new luxury tax. The tax was enacted on September 1, 2022, and its implementation was a strategic move by the Canadian government to reduce ostentatious consumption and curb the widening wealth gap in the nation. By imposing heavier taxes on luxury items, the government seeks to redistribute wealth and address the social implications of economic disparities among Canadians.
How the luxury tax affects importers
Importers looking to acquire luxury vehicles may be willing to pay a premium for their high-valued items. But how much more will they be willing to pay? The new luxury tax will subject luxury vehicles to a tax rate of 10% on the value of the good above the specified threshold or 20% of the value above the fair market value, whichever is lower. That means importers must adjust their pricing strategies and potentially pass these costs on to consumers.
This taxation policy not only stimulates healthy competition within the automotive industry but also fosters domestic economic growth without causing financial strain on consumers. Importers stand to benefit significantly from diverse opportunities in the high-end segment of the market, as the demand for luxury vehicles remains strong in Canada. By levying taxes on luxury cars, the Canadian government effectively regulates the flow of foreign capital into its economy. This enables local businesses to thrive and attract lucrative investments from international automakers incentivized to produce more fuel-efficient and environmentally-friendly models. Additionally, consumers opting for luxury models can enjoy the added advantage of increased social status and recognition, further raising the appeal of these high-end vehicles. As a result, importers can capitalize on a well-balanced luxury car market, fostering innovation and sustainability while maintaining robust revenue streams in the face of this progressive taxation system.
The good news is not all vehicles, aircraft, or vessels qualify for the new luxury tax.
How to determine if your vehicle, aircraft, or vessel qualifies for the luxury tax
Vehicles that qualify for the luxury tax
Any motor vehicle, including sedans, coupes, hatchbacks, convertibles, sports utility vehicles, and light-duty pickup trucks that meets the criteria below qualifies for the recent luxury tax.
If the vehicle:
- Is manufactured after 2018
- Is valued at over $100,000
- Is primarily designed or modified to carry people on streets and highways
- Is designed to travel with at least four wheels in contact with the ground
- Can seat a maximum of 10 individuals
- Has a gross vehicle weight rating of 3,856 kg or less
Some vehicles, however, are not subject to the tax, given they meet certain criteria. The following vehicles are not subject to the luxury tax:
- Vehicles that have been registered before September 2022, as long as possession of the vehicle was also transferred before that date
- Vehicles marked for policing, emergency medical, or fire response activities
- Recreational vehicles intended for a temporary residence and are equipped with at least four of the following:
- Cooking facilities
- A refrigerator or ice box
- A self-contained toilet
- A heating or air-conditioning system that functions independently of the engine
- A potable water supply system with a faucet and sink
- A 110-V to 125-V electric power supply or a liquefied petroleum gas supply that function independently of the engine
Aircraft that qualify for the luxury tax
Private jets, seaplanes, short takeoff and landing planes, gliders, and helicopters priced above $100,000 are subject to the luxury tax if:
- They are manufactured after 2018
- They are equipped with at least one pilot seat and have no other seating configuration
- They are equipped with at least one pilot seat or not equipped with seats and cannot have a seating configuration of at least 40 seats (excluding pilot seats)
- They are equipped with at least one pilot seat and one or more passenger seats and have 39 seats or less (excluding pilot seats)
- Aircraft registered before September 2022 are excluded from the luxury tax, given that possession was transferred before that date
- Aircraft designed or equipped for military purposes
- Aircraft equipped to carry goods only
Vessels that qualify for the luxury tax
All vessels manufactured after 2018 and designed or modified for leisure, recreation, or sporting activities are subject to the luxury tax if valued at over $250,000.
- Vessels that have been registered before September 2022 are excluded from the luxury tax, given that possession of the vessel was also transferred before that date
- Floating homes
- Commercial fishing vessels
- Cruise ships that can sleep over 100 passengers (excluding crew)
When do I have to pay the luxury tax on imported vehicles?
The luxury tax does not apply to you if you happen to be registered with the Canada Revenue Agency (CRA) as a registered vendor of the vehicles you are importing or selling.
Manufacturers, wholesalers, and importers of vehicles, aircraft, and boats subject to the luxury tax regime and valued above the price thresholds are required to register with the CRA. Once registered, you can import or purchase vehicles without paying the luxury tax at the time of sale or importation.
Additionally, a registered vendor can purchase a vehicle priced above the price threshold without the luxury tax applying if they are able to provide an exemption certificate to the selling registered vendor. An exemption certificate states that the purchaser is exempt from the luxury tax because they are a registered vendor of the vehicle in question. Form L100-1, Luxury Tax Exemption Certificate for Subject Vehicles, is used as an exemption certificate to attest the purchaser’s standing as a registered vehicle vendor.
You can find more information on how to register as a vendor here.
How much is the luxury tax on vehicles, aircraft, and vessels?
The luxury tax is calculated using the taxable amount of the vehicle, aircraft, or vessel. It applies to the sale, importation, registration, or lease of vehicles and aircraft priced above $100,000 and vessels priced above $250,000.
For vehicles and aircraft, the tax is the lesser of:
- The taxable amount multiplied by 10%
- The amount that results from subtracting $100,000 from the taxable amount and multiplying the difference by 20%
For vessels, the tax is the lesser of:
- The taxable amount multiplied by 10%
- The amount that results from subtracting $250,000 from the taxable amount and multiplying the difference by 20%
Reporting the luxury tax and filing returns
Registered vendors are required to report the luxury tax payable using Form B500, Luxury Tax and Information Return for Registrants. Even if you do not have luxury tax payable, all registered vendors and people required to be registered must file Form B500 with the CRA.
Individuals not registered or required to be registered should report their luxury tax payable using Form B501, Luxury Tax and Information Return for Non-Registrants. Non-registrants should only file Form B501 when they have luxury tax payable.
Registered and non-registered individuals should keep records to determine tax liabilities for six years from the year-end of the submitted records.
The new luxury tax regulations could prove challenging to vehicle importers. With some types of vehicles being excluded from the tax and a sliding scale on those that qualify, it is important to know exactly how much the luxury tax on imported vehicles will be before making any purchase. Additionally, it pays to stay apprised of government regulations like this to avoid any unwanted refunds or fees.
How GHY Can Help You
At GHY, we are committed to helping you save money on your imports. Book a meeting with one of our Trade Experts below today and we can help handle all your import needs. We can advise on how this new tax will affect your bottom line, saving you time and money in the long run.