Your Guide to the Proposed Canadian Luxury TaxIn April, the Trudeau administration unveiled the 2021 federal budget. Among 288 proposals aimed at combating COVID-19 and rebuilding the economy is the proposed Luxury Tax. With the administration’s re-election on September 20, the Luxury Tax is very likely to be passed into law.
The Luxury Tax will come into force on January 1, 2022 and will apply to sales of cars and personal aircraft over $100,000 and boats over $250,000.
The tax will be calculated at the lesser of either 10% of the entire value of the purchase, or 20% of the value over the tax threshold. The tax will apply to goods that are purchased, leased, financed, or imported alike. GST will be calculated on the final price of the item inclusive of the luxury tax, so the new tax will also increase GST payments. Some vehicles would be exempt, including water scooters, cruise ships, ferries, floating homes, commercial fishing vessels, recreational vehicles, motorcycles, off-road vehicles, farm and construction vehicles, commercial aircraft, passenger aircraft with more than 40 seats, and public-sector vehicles like ambulances, hearses and buses. It is also worth noting that many private pleasure craft will fall under the threshold for the tax.
From the exemptions, it is clear that the tax is being targeted towards personal pleasure craft and leisure vehicles being purchased by very high-income Canadians. According to vehicle retail sales data, the tax is most likely to affect high income-earning men 30-60 years of age in BC, Alberta, Quebec and Ontario. Some commentators have pointed out that the luxury tax may be intended as a compromise: although Justin Trudeau has repeatedly reiterated his commitment to tackling growing wealth inequality in Canada, a significant wealth tax was notably absent from the budget. Despite his blunt instruction to the deputy Prime Minister in a January mandate letter to “[i]dentify additional ways to tax extreme wealth inequality,” Prime Minister Trudeau has been criticized for failing to follow through with effective wealth transfer strategies. The Luxury Tax may be intended as a concession.
The tax was part of the Liberals’ 2019 election platform, but is now being explicitly pitched as part of the COVID response. In April, Deputy Prime Minister Chrystia Freeland introduced the tax in her budget address, saying it is “fair to ask those who have prospered in this bleak year to do a little more to help those who still need help.” The federal budget report echoes her sentiment: “[even] as Canadians have sacrificed to keep our economy going through the pandemic, some of the wealthiest have done well. Those who can afford to buy luxury goods can afford to pay a bit more.” The stress on the tax’s intent to combat wealth inequality in the wake of COVID is also evident in the budget’s forward, where Ms. Freeland writes: “If you’ve been lucky enough, or smart enough, or hard-working enough, to afford to spend $100,000 on a car, or $250,000 on a boat – congratulations! And thank you for contributing a little bit of that good fortune to help heal the wounds of COVID and invest in our future collective prosperity.”
With a minority government, the Liberal administration will need political support to pass their legislation. The NDP, who ran in 2021 on a platform of taxing the richest Canadians to finance social programs, are very likely to support the proposed luxury tax. “[We] are going to keep on fighting to make sure that the super wealthy pay their fair share,” NDP leader Jagmeet Singh said in his concession speech.
The government estimates that the tax will bring in $34 million of revenue in the 2021-22 fiscal year, and $140 million by the end of fiscal year 2022-23. Over the next five years the luxury tax is anticipated to bring in $604 million, according to projections in the budget document. However, critics are concerned that the tax could hamstring Canadian industries that are just beginning to recover from the ravages of the COVID epidemic, as well as that the tax could prove ineffective at generating revenue, as consumers purchase fewer luxury goods that incur the additional tax and direct their spending power elsewhere.
A number of boating industry professionals have pointed out that similar luxury taxes have been introduced and repealed in other countries, notably in the USA in the early 1990’s. In 1991 a luxury tax on boats over $100,000 was introduced, only to be repeal in 1993 after causing considerable damage to the American boat building industry.
The National Marine Manufacturer’s Association of Canada estimates that the recreational boating industry in Canada generates up to $10 billion yearly in direct and indirect spending, and supports 75,000 Canadian jobs. Industry professionals and advocates are understandably anxious to avoid any damage to the sector.
The tax was originally proposed to apply to boats over $100,000, but the threshold was raised following lobbying efforts by the National Marine Manufacturer’s Association of Canada. NMMA Canada continues to advocate to have the tax repealed entirely. In May 2021, representatives from NMMA Canada met with members of parliament and the current senior advisor on tax policy, Dominic Cormier. The NMMA reports that Conservative MP’s were very receptive and committed to working with industry professionals to oppose the tax during budget committee hearings. Mr. Cormier was willing to listen and affirmed that the government would work with industry professionals on implementation, but gave no indication that he would oppose the tax. In consultations with NMMA Canada, Fisheries and Oceans Minster Bernadette Jordon and Transport Minister Omar Alghabra both acknowledged the organization’s concerns and committed to further consideration.
There have been concerns this year that buyers rushing to purchase luxury goods would cause a shortage of goods, and that shoppers trying to avoid the tax would end up paying a scarcity premium. Thus far, while the market has been busy, there is no definite indication of a scarcity premium. However, following the election, and with the growing certainty that the tax will be introduced, there may be a rush of buyers in the last quarter of the year.
Since April 2018 British Columbia has already had a provincial luxury tax on passenger vehicles over $125,000. An analysis by Scotiabank found that the BC luxury tax may have been partly responsible for a decline in luxury car sales. More information on the BC Luxury tax is available in PST bulletins 116 and 308.
Until September 30 the Department of Finance has an open consultation on the tax. They are seeking feedback from stakeholders and interested members of the public on the design and implementation of the tax.
Emails can be sent to fin.luxury-luxe.fin@fin.gc.ca with “Luxury Tax” in the subject line.
By Robin Smith, M.A., CCS
– Robin is a trade industry professional based in Victoria, BC.
In April, the Trudeau administration unveiled the 2021 federal budget. Among 288 proposals aimed at combating COVID-19 and rebuilding the economy is the proposed Luxury Tax. With the administration’s re-election on September 20, the Luxury Tax is very likely to be passed into law.
The Luxury Tax will come into force on January 1, 2022 and will apply to sales of cars and personal aircraft over $100,000 and boats over $250,000.
The tax will be calculated at the lesser of either 10% of the entire value of the purchase, or 20% of the value over the tax threshold. The tax will apply to goods that are purchased, leased, financed, or imported alike. GST will be calculated on the final price of the item inclusive of the luxury tax, so the new tax will also increase GST payments. Some vehicles would be exempt, including water scooters, cruise ships, ferries, floating homes, commercial fishing vessels, recreational vehicles, motorcycles, off-road vehicles, farm and construction vehicles, commercial aircraft, passenger aircraft with more than 40 seats, and public-sector vehicles like ambulances, hearses and buses. It is also worth noting that many private pleasure craft will fall under the threshold for the tax.
From the exemptions, it is clear that the tax is being targeted towards personal pleasure craft and leisure vehicles being purchased by very high-income Canadians. According to vehicle retail sales data, the tax is most likely to affect high income-earning men 30-60 years of age in BC, Alberta, Quebec and Ontario. Some commentators have pointed out that the luxury tax may be intended as a compromise: although Justin Trudeau has repeatedly reiterated his commitment to tackling growing wealth inequality in Canada, a significant wealth tax was notably absent from the budget. Despite his blunt instruction to the deputy Prime Minister in a January mandate letter to “[i]dentify additional ways to tax extreme wealth inequality,” Prime Minister Trudeau has been criticized for failing to follow through with effective wealth transfer strategies. The Luxury Tax may be intended as a concession.
The tax was part of the Liberals’ 2019 election platform, but is now being explicitly pitched as part of the COVID response. In April, Deputy Prime Minister Chrystia Freeland introduced the tax in her budget address, saying it is “fair to ask those who have prospered in this bleak year to do a little more to help those who still need help.” The federal budget report echoes her sentiment: “[even] as Canadians have sacrificed to keep our economy going through the pandemic, some of the wealthiest have done well. Those who can afford to buy luxury goods can afford to pay a bit more.” The stress on the tax’s intent to combat wealth inequality in the wake of COVID is also evident in the budget’s forward, where Ms. Freeland writes: “If you’ve been lucky enough, or smart enough, or hard-working enough, to afford to spend $100,000 on a car, or $250,000 on a boat – congratulations! And thank you for contributing a little bit of that good fortune to help heal the wounds of COVID and invest in our future collective prosperity.”
With a minority government, the Liberal administration will need political support to pass their legislation. The NDP, who ran in 2021 on a platform of taxing the richest Canadians to finance social programs, are very likely to support the proposed luxury tax. “[We] are going to keep on fighting to make sure that the super wealthy pay their fair share,” NDP leader Jagmeet Singh said in his concession speech.
The government estimates that the tax will bring in $34 million of revenue in the 2021-22 fiscal year, and $140 million by the end of fiscal year 2022-23. Over the next five years the luxury tax is anticipated to bring in $604 million, according to projections in the budget document. However, critics are concerned that the tax could hamstring Canadian industries that are just beginning to recover from the ravages of the COVID epidemic, as well as that the tax could prove ineffective at generating revenue, as consumers purchase fewer luxury goods that incur the additional tax and direct their spending power elsewhere.
A number of boating industry professionals have pointed out that similar luxury taxes have been introduced and repealed in other countries, notably in the USA in the early 1990’s. In 1991 a luxury tax on boats over $100,000 was introduced, only to be repeal in 1993 after causing considerable damage to the American boat building industry.
The National Marine Manufacturer’s Association of Canada estimates that the recreational boating industry in Canada generates up to $10 billion yearly in direct and indirect spending, and supports 75,000 Canadian jobs. Industry professionals and advocates are understandably anxious to avoid any damage to the sector.
The tax was originally proposed to apply to boats over $100,000, but the threshold was raised following lobbying efforts by the National Marine Manufacturer’s Association of Canada. NMMA Canada continues to advocate to have the tax repealed entirely. In May 2021, representatives from NMMA Canada met with members of parliament and the current senior advisor on tax policy, Dominic Cormier. The NMMA reports that Conservative MP’s were very receptive and committed to working with industry professionals to oppose the tax during budget committee hearings. Mr. Cormier was willing to listen and affirmed that the government would work with industry professionals on implementation, but gave no indication that he would oppose the tax. In consultations with NMMA Canada, Fisheries and Oceans Minster Bernadette Jordon and Transport Minister Omar Alghabra both acknowledged the organization’s concerns and committed to further consideration.
There have been concerns this year that buyers rushing to purchase luxury goods would cause a shortage of goods, and that shoppers trying to avoid the tax would end up paying a scarcity premium. Thus far, while the market has been busy, there is no definite indication of a scarcity premium. However, following the election, and with the growing certainty that the tax will be introduced, there may be a rush of buyers in the last quarter of the year.
Since April 2018 British Columbia has already had a provincial luxury tax on passenger vehicles over $125,000. An analysis by Scotiabank found that the BC luxury tax may have been partly responsible for a decline in luxury car sales. More information on the BC Luxury tax is available in PST bulletins 116 and 308.
Until September 30 the Department of Finance has an open consultation on the tax. They are seeking feedback from stakeholders and interested members of the public on the design and implementation of the tax.
Emails can be sent to fin.luxury-luxe.fin@fin.gc.ca with “Luxury Tax” in the subject line.
By Robin Smith, M.A., CCS
– Robin is a trade industry professional based in Victoria, BC.
