Jan 16, 2025
On January 1, 2022, the Select Luxury Items Tax Act, also known as the Luxury Tax Act, came into effect. This new tax, introduced as part of the 2021 Federal Budget, targets high-earning Canadians who can afford to buy expensive goods, making them contribute more to the tax system. This is a form of indirect tax, placing the tax-paying duty on the vendors of the luxury goods rather than directly on the high-earning individuals, with the understanding that the vendors will pass the tax burden onto the purchasers by incorporating the tax into the price of the goods.
Items Subject to the Luxury Tax
The items subject to luxury tax are vehicles and aircraft priced above $100,000 and vessels priced above $250,000, unless an exclusion or an exemption applies.
Subject vehicle means a motor vehicle that is meant to carry passengers, has a maximum seating capacity of 10, weighs 3,856 kg or less, was manufactured after 2018, and has at least four wheels. Examples of subject vehicles include sedans, coupes, hatchbacks, convertibles, sport utility vehicles (SUVs) and light pickup trucks. Ambulances, hearses and mobile homes are excluded.
Subject aircraft means an airplane, helicopter or glider that is meant to carry passengers, has a maximum seating capacity of 40 (excluding the pilot seats) and is manufactured after 2018.
Subject vessel means a boat that is meant for leisure, recreation or sport, has a cabin for sleeping, and is manufactured after 2018. Boats used for commercial fishing, ferry or cruise activities are excluded.
A vehicle, aircraft or vessel that is marked to carry cargo exclusively or for use in military or policing activities is excluded from being considered a subject item. Even though the Luxury Tax Act is effective from January 2022, a vehicle, aircraft or vessel that is registered with a government and taken possession by the end-user before September 2022 is also excluded.
Furthermore, even when a vehicle, aircraft or vessel is a subject item, there are special exemptions available. For example, when an item is used primarily for emergency medical or firefighting activities, for training purposes, or for weather surveying or aerial spraying activities (in the case of airplanes), it is exempted from being taxed.
Responsibility for Paying the Luxury Tax
Generally, the person importing the item into Canada or selling the item is liable for paying the luxury tax. There are, however, several exemptions.
When the subject item is sold to the Crown or an agent of the Crown, an indigenous governing body (e.g., an Indian band council), or a foreign representative entitled to GST/HST exemption (e.g., a diplomatic agent or a consular officer), the purchaser shall be responsible for paying tax.
A vendor who imports or sells subject items in the course of its business of selling subject items in Canada must be registered with the CRA. To register, the vendor files Form L500 when a subject item is imported or sold, at the latest.
When importing the subject item, the registered vendor holds the item tax-free until the item is eventually sold to a non-registered person (i.e. the end-user) or becomes a capital asset of the vendor’s business (e.g. when the item is employed by the business or leased out). In other words, only when the subject item is no longer held as part of the business inventory is the vendor required to pay luxury tax on the item.
Also, a transfer (sale) of the subject item to another registered vendor does not trigger the luxury tax. The registered vendor that subsequently sells the item to a non-registered person or uses the item as a capital asset in its business is responsible for paying the tax.
Calculation of the Luxury Tax
The luxury tax payable is the lesser of 10% of the taxable amount of the subject item and 20% of the amount above the price threshold ($100,000 for vehicles and aircraft and $250,000 for vessels).
The taxable amount in respect of the sale of the item is the sale price plus any improvements to the item in connection with the sale (except cleaning, maintenance, repair, or replacement of damaged or defective parts). The taxable amount in respect of the importation of the item is the import value as determined under the Customs Act (generally, the price paid for the imported goods) plus any duties and taxes in connection with the importation (excluding GST/HST).
In a way, the luxury tax payable is compounded because it is added to the value of the subject item for the purpose of GST/HST calculation, i.e., GST/HST is based on the sum of the value of the item and the luxury tax amount.
Pro Tax Tip – Pay Attention to the Luxury Thresholds
There are penalties associated with the failure to pay and report luxury tax. The penalty is the sum of 1% of the tax payable and 25% of the tax payable multiplied by the number of months, not exceeding 12 months, when the return was not filed.
If your business sells a large number of subject items, the penalties can add up to a huge sum. Therefore, it is advised that you establish a mechanism of automatic notice when your sale prices exceed the luxury thresholds ($100,000 for a vehicle and aircraft and $250,000 for a vessel) and pay luxury tax whenever appropriate.
Also note that there are exclusions and exemptions that you can take advantage of to alleviate the tax burden. You should consult with an experienced Canadian tax lawyer to ensure your business’s compliance with the law while avoiding overpaying taxes to the CRA.
FAQ
My business provides repair services for luxury items and needs to import them into Canada. Do we need to pay luxury tax?
No, this is another exemption to the luxury tax. Where a subject item is imported for the sole purpose of maintenance, overhaul or repair of the item in Canada, where no title to the item is passed to the importer, and where the item is exported immediately once the work on the item is completed, no luxury tax is payable. It is recommended that you consult with an experienced Canadian tax lawyer to explore the potential exclusions or exemptions that might be available to you.
My business improves the handicapped accessibility of the luxury vehicles that we sell. Are those improvements taxed under the Luxury Tax Act?
No, not all improvements are included in the taxable amount subject to luxury tax. Specifically, improvements made for child safety or accessibility purposes are excluded. Customizations made to adapt a vehicle to its operation by a disabled person are also excluded.
DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
