Introduction to Luxury Tax
Effective on September 1, 2022, the Select Luxury Items Tax Act imposes the Luxury Tax on Subject Items, which include certain types of aircraft, vehicles, and vessels. The Luxury Tax was first proposed in Budget 2021 and estimated to increase federal revenues by $604 million over a five-year period. Notwithstanding other criteria, vehicles and aircraft priced above $100,000 and vessels priced above $250,000 will be subject to the Luxury Tax.
The amount of tax payable is equal to the lesser amount that is either 10% of the total item value or 20% of the difference between the total item value and the price threshold for each category. Improvements (excluding accessibility modifications), additions, taxes, duties, charges, fees, and amounts paid in respect of the delivery or importation of the Subject Items will be included in the total item value. Additionally, the resulting Luxury Tax is then added to the cost of the Subject Items before calculating the payable GST/HST.
Aircrafts, Vehicles, And Vessels That Are Subject to The Luxury Tax
The Luxury Tax is applicable to Subject Items that "means a subject aircraft, a subject vehicle or a subject vessel", pursuant to the Select Luxury Items Tax Act.
Subject vehicles, with a price threshold of $100,000, include a motor vehicle that is designed or adapted primarily to carry individuals on highways and streets; can seat 10 or fewer individuals; weighs less than or equal to 3,856 kg; is manufactured after 2018; and is designed to travel with four or more wheels in contact with the ground.
The concept of subject vehicles excludes ambulances. vehicles equipped for emergency medical response activities or emergency fire response activities, a hearse, a police car, and qualifying recreational vehicles. A qualifying recreational vehicle must be equipped with at least four of the following elements, including cooking facilities, a refrigerator or ice box, a self-contained toilet, a heating or air-conditioning system, a portable water supply system that includes a faucet and a sink, a 110-v to 125-v electric power supply or a liquefied petroleum gas supply. Additionally, a motor vehicle registered and delivered to the buyer before September 2022 will not be subject to the Luxury Tax.
Subject aircraft, with a price threshold of $100,000, describes an aeroplane, glider or helicopter that is manufactured after 2018 in accordance with subsection 101.01(1) of the Canadian Aviation Regulations. The definition specifically excludes an aircraft that is designed for military activities or equipped for the carriage of goods only.
Subject vessel, with a price threshold of $250,000, means a vessel that is designed or adapted for leisure, recreation, or sport activities, and is manufactured after 2018. A floating home, a vessel designed and equipped solely for commercial fishing or ferry, a vessel that has sleeping facilities for over 100 individuals excluding crew members, a vessel that is registered or possessed before September 2022 are excluded from the definition of subject vessel.
Calculating The Luxury Tax
The calculation of the Luxury Tax may seem easy at first but it can become quite complicated. To begin with, there are different price thresholds for different Subject Items. For motor vehicles and aircraft, the price threshold is set at $100,000. Vessels are not subject to the Luxury Tax unless they worth $250,000 or more.
The next step involves the calculation of any improvement costs or additional fees that are necessary for the vendor to import or deliver the vehicle. This can complicate the calculation due to the potential disputes between the taxpayer and the Canadian Revenue Agency on what costs should be added into the item value. Upon determining the final item value, the Luxury Tax is then calculated to be the lesser amount of either 10% of the total item value or 20% of the differences between the total item value and the price threshold.
For example, a vehicle with a value of $180,000 will be subject to $16,000 of Luxury Tax, which is 20% of the difference between $100,000 and $180,000 as 10% of the total item value yields a higher payable amount. In contrast, an aircraft that is worth $500,000 will be subject to $50,000 of Luxury, which is 10% of the total item value since 20% of the difference between $500,000 and $100,000 exceeds $50,000.
The Luxury Tax Registration
The Luxury Tax registration is required to be completed by the earlier of the day of the first sale or first import of a subject item after September 1, 2022. The Canadian Revenue Agency (CRA) recommends any Canadian vendors dealing with the Subject Items to register before September 2022 to be prepared. Specifically, a business should complete the Luxury Tax registration if it is a manufacturer, wholesaler, retailer, or importer that sell or import certain vehicles and aircraft priced over $100,000 and certain vessels priced over $250,000.
Businesses can either complete the registration via the Business Registration Online, the CRA My Business Account by completing the form L500, or postal mail that includes the completed form L500. There may be additional forms that need to be filed together with the registration, including but not limited to L500-1, Non-Resident – Records Kept Outside Canada, and L500-2, Application or Revocation of the Authorization to File Separate Luxury Tax Returns for Branches and Divisions.
Our expert Canadian tax lawyers can provide legal advice on filing the right forms to comply with the Luxury Tax registration process.
The Tax-Paid Certificate
The Luxury Tax is due at the filing deadline of each reporting period of a business. A Tax-Paid Certificate, once obtained, serves as proof and confirmation that the Luxury Tax due on an item has been paid in order for the tax to not apply in the future ever again.
There is a one-year limit on the application of a Tax-Paid Certificate with possible exceptions that can be granted by the Canadian Revenue Agency. The Tax-Paid Certificate specifies the identification number of the subject item, the date on which the certificate came into effect, that tax in respect of the subject item was paid, and any other information prescribed by the Select Luxury Item Act.
Pro Tax Tips – Calculating Luxury Payable Tax!
The Luxury Tax seems straightforward with the two formulas provided by the Canadian Revenue Agency. The total amount of Luxury Tax due is determined by the lesser of either 10% of the total item value or 20% of the differences between the total item value and the price threshold. However, the total item value must include any improvement, addition, delivery charges, or other relevant costs, resulting in potential disputes on the applicable Luxury Tax payable.
In addition, the total HST/GST payable will be calculated with the applicable Luxury Tax and included in the price of the Subject Items. For example, a $120,000 vehicle that is being purchased by an Ontario business has incurred an addition $5,000 in delivery charges, improvement, and excise tax. The applicable Luxury Tax is then calculated to be $5,000. The HST/GST will be 13%*($5,000+$125,000) = $16,900.
Our experienced Canadian tax planning lawyers recommend that any improvements or additions be made after receipt of the Subject Item so it will not be subject to Luxury Tax.
When Is the Luxury Tax Due?
The Luxury Tax is due at the filing deadline of each reporting period. For example, if a corporation has a year-end date of December 1, the Luxury Tax, being part of the calculation of total payable tax, will be due on December 1 for each year.
Do I Need To Register For the Luxury Tax?
A Canadian business that regularly sells, imports, or exports luxury vehicles, aircraft and vessels for personal use should definitely complete the Luxury Tax registration. There are no charges in registering with the Canadian Revenue Agency.
If you are really unsure about the Luxury Tax registration or if the registration has not been completed more than 30 days after you have submitted the application, you should contact the Canadian Revenue Agency for more information. You can also consult one of our experienced Canadian Tax Lawyer to understand your tax obligations on luxury goods.