Overview
Do you have Cadillac taste? Saving for your dream car just may have become more of a dream and less of a reality. The federal government's newly implemented luxury vehicle tax has driven up the price of luxury cars across Canada.
The new legislation was first proposed by the federal government in Budget 2021: A Recovery Plan For Jobs, Growth, And Resilience. Chapter 10 of the 2021 Budget, tabled in Parliament on April 19, 2021, discusses the government's responsibility to keep the tax system fair, ensuring that "everyone pays their fair share of tax." Section 10.1 of the 2021 Budget describes, inter alia, the taxation of luxury vehicles.
Luxury Vehicle Tax
On March 11, 2022, Finance Canada released draft legislation of the Select Luxury Items Tax Act. The act was later introduced in section 135 of Bill C-19 titled "An Act to implement certain provisions of the budget tabled in Parliament on April 7, 2022, and other measures”. Bill C-19 received royal assent on June 23, 2022. The act came into force on September 1, 2022.
Outcome
As per sections 9 and 34 of the Select Luxury Items Tax Act, subject vehicles valued over $100,000 will be taxed the lesser of: 1) 10% of the taxable amount of the vehicle, and 2) 20% of the amount above the price threshold.
For example, if you are purchasing a vehicle with a taxable amount of $120,000, the luxury tax will be calculated as the lesser of 10% of $120,000, which is equal to $12,000, and 20% of $20,000.00, which is equal to $4,000. So, the luxury tax on a vehicle sold for $120,000 would be $4,000.
Note that GST/HST is charged on the total amount of the subject vehicle plus the luxury tax. For example, if a vehicle is valued at $120,000 and the luxury tax is calculated to be $4,000, the GST/HST will be calculated on the sub-total of $124,000.
Impact
As per section 18(2) of the act, with some exceptions, vendors of vehicles priced above $100,000 are responsible for paying the luxury tax when such a vehicle is sold. The luxury tax is calculated on the total price of the vehicle sold. Vendors must exercise caution when calculating the luxury vehicle tax as they will be the ones to bear the tax burden if the numbers are miscalculated.
For 2022, there is only one reporting period: September 1, 2022 to December 31, 2022. The deadline to file a return is January 31, 2023. Quarterly reporting periods will begin in 2023. For a list of important dates and deadlines, see the Canada Revenue Agency's Luxury Tax Notice LTN2 published on the Government of Canada's website.
Subject Vehicles
Vehicles that fall under the scope of the act are defined as motor vehicles that are designed or adapted "primarily to carry individuals on highways and streets." They must have a manufacture date after 2018, have four or more wheels in contact with the ground, have a gross vehicle weight rating that is 3,856 kg or less, and have a seating capacity of no more than 10 individuals. Subject vehicles may include sedans, coupes, hatchbacks, convertibles, light-duty pickup trucks, sport utility vehicles (SUVs), minivans, supercars and roadsters.
Used vehicle dealers will need to be satisfied that the tax has previously been paid, where applicable. The luxury tax will not apply to subject vehicles that have been previously registered as required under the Act.
Exceptions
Vehicles that are excluded from the luxury tax include motorcycles, snowmobiles, vehicles that are not designed to be driven on highways and streets such as those that are not street legal, policing vehicles, hearses, ambulances, medical response vehicles, fire response vehicles and recreational vehicles (RVs).
Effect of Vehicle Improvements
Improvements, such as car modifications, made within the first year of purchase may be subject to the luxury tax as per sections 29 to 32 of the act. Improvements are only subject to the luxury tax when the purchased vehicle was originally subject to the luxury tax (vehicles over $100,000), or, if the improvements bring the value of a vehicle over $100,000 within the first year after purchase. Car modifications will be subject to the luxury tax when they cost more than or equal to $5,000. In the event that a purchaser makes improvements to their vehicle that are subject to the luxury tax, they will be required to self-assess a luxury tax liability and pay taxes on the day following the improvement period. Costs associated with vehicle safety, maintenance, repair, replacement of damaged parts, or accessibility modifications are exempt from the luxury tax.
Luxury tax of improvements is calculated by determining the luxury tax of the vehicle post-improvements and subtracting the luxury tax of the vehicle pre-improvements. For example, if you purchased a vehicle for $150,000 and made improvements to the vehicle that totaled $10,000, the taxable amount for the improvements would be the luxury tax calculated on a vehicle with a total value of $160,000, minus the luxury tax calculated on the original value of the vehicle at $150,000, for a total of $12,000 minus $10,000 which is equal to $2,000 in additional tax payable the day after the improvement period.
Penalties
In the event that a person fails to file a return as required under the act, they will be liable to a penalty equal to the sum of 1% of the total amount that was required to be paid for the reporting period and 25% of that amount multiplied by the number of complete months, not exceeding 12 months, from the day on which the return was required to be filed.
For example, if a vendor had to pay $100,000 in luxury vehicle taxes for a particular reporting period, and the vendor's payment is six months late, they would be liable to pay a penalty equal to 1% of the total amount owed for that reporting period (1% of $100,000) which is equal to $1,000, plus 25% of the result in the first calculation (25% of $1,000) which is equal to $250, multiplied by the number of months that the payment has been outstanding ($250 multiplied by six months late) which is equal to $1,500, for a total penalty ($1,000 plus $1,500) equal to $2,500.
Application to Leased Vehicles
Brand new leased vehicles are subject to the luxury vehicle tax. Pre-owned leased vehicles that have previously been registered in Canada are not subject to the luxury tax, even if they are valued above the price threshold of $100,000. The tax becomes payable by the vendor once the lessee has the right to use the vehicle and must be paid upfront in its entirety. This contrasts with GST/HST, which is payable upon each intermittent lease payment.
Application to Electric Vehicles
Many brands are beginning to introduce electric vehicles to the market. Although some are more affordable than others, many electric vehicles come at a steep cost. There are no exceptions under the act exempting electric vehicles from the luxury vehicle tax. Electric cars priced above $100,000 will be subject to the newly imposed tax.
However, the federal government's Incentives for Zero-Emission Vehicles (iZEV) Program offers up to $2,500 in incentives for hybrid vehicles, and up to $5,000 in incentives for longer-range electric vehicles. Incentive programs such as iZEV can help to alleviate the burden of cost created by the luxury vehicle tax.
Fillmore Riley LLP's Taxation Practice
We offer tax advice to both individual and business clients on a wide range of matters, including corporate and commercial transactions, estate planning, and tax dispute resolution and litigation. For more information, or if you have any questions, please contact a member of the Fillmore Riley Taxation practice.