“It is fair to ask those who have prospered in this bleak year to do a little more to help those who have not. That is why we are introducing a luxury tax.” – Federal Finance Minister, Chrystia Freeland, April 19, 2021.
Tax initiatives targeting high-net-worth individuals have been rumoured for almost as long as Prime Minister Justin Trudeau’s Liberal government has been in power. Speculation was further fueled by the Prime Minister’s mandate letter to newly minted Federal Finance Minister, Chrystia Freeland, to “identify additional ways to tax extreme wealth inequality.” That was January 15, 2021.
As of April 19, 2021, fears of sweeping tax initiatives that would include a “wealth tax” on the net worth of wealthy Canadians have proven premature. In its place, the 2021 Federal Budget contained a “Luxury Tax” – essentially a consumption tax on luxury goods rather than a broad tax on total wealth.
At the Federal level, as of January 1, 2022, there will be a new sales tax on automobiles and personal aircraft valued at over $100,000, and watercraft valued at over $250,000, with certain exceptions (e.g., racing cars, motor homes, and vehicles used for commercial or public purposes). The tax will be calculated as the lower of 20% of the value over and above the threshold ($100,000 for cars and personal aircraft, and $250,000 for personal-use boats) and 10% of the full value of the luxury vehicle, and will be payable in addition to any other taxes already applicable to the purchase. Of note, the Federal Budget indicates that the Federal Goods and Services Tax or Provincial Harmonized Sales Tax (if applicable) would apply to the final sale price, inclusive of the proposed tax.
The Federal Luxury Tax may sound eerily familiar to residents of British Columbia, who have already been subject to an increased Provincial Sales Tax (“PST”) rates for luxury cars purchased for $55,000 and above. In this respect, the Federal legislation appears to have imported a concept already enacted in British Columbia as of April 1, 2018. At this early stage, it appears that the Federal tax will apply in addition to the British Columbia PST, which means vehicles purchased for over $100,000 in British Columbia will be subject to exorbitant tax rates.
While the Federal Luxury Tax may seem a convenient way to pay lip service to taxing “extreme wealth inequality,” the targeted individuals could easily mitigate the impact of this regime by curtailing their purchase of the luxury items in question. If that were the case, there would be an economic impact of reduced luxury consumption. The group that will certainly feel the affects of the Federal Luxury Tax the most will be the businesses, and more specifically, the individual salespeople, who make their livelihood from retailing these luxury vehicles as well as small manufacturers of designer watercraft.
According to the New Car Dealers Association of BC website, there are over 390 new car dealers throughout British Columbia: “[these dealerships] generate more than $16 Billion in economic activity, pump $2.9 Billion net GDP directly into BC’s economy, and employ more than 30,000 high paying, family supporting jobs in over 50 communities they serve.” It remains to be seen how this important segment of the economy will be affected by the increased encroachment of sales tax into their business. Similarly, the Federal Luxury Tax will likely have a sweeping impact on smaller scale dealers of personal-use aircraft and luxury boat dealers across the country.
As more details of the Federal Luxury Tax are expected in the near future, the Tax Group at Nerland Lindsey will continue to monitor this issue for any developments of interest, including signs of the direct and indirect impacts of this new tax. If you would like to discuss this article in greater detail, or any other tax law matter, please contact Catie Attwood at (403) 984-0378 or firstname.lastname@example.org.
Please note that the foregoing for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.