Luxury Tax Explained

What is a Luxury Tax?

• It is a tax on the sale of certain luxury goods exceeding established price thresholds
• It was first proposed by the Government of Canada as part of the 2021 Federal Budget and took effect on September 1, 2022.

The items subject to Luxury Tax where the price thresholds are exceeded include, but are not limited, to the following:

1. Vehicles: Any subject vehicles, priced over CAD 100,000
2. Airplanes: Any subject aircraft, priced over CAD 100,000
3. Vessels: Any subject boats, priced over CAD 250,000

Luxury Tax Rate

The Luxury Tax rules will apply whether the Subject Item is delivered in Canada by way of sale or similar arrangement, certain lease arrangements, or by importation into Canada. The amount of luxury tax payable will be determined as the lesser of:

1. 10% of the total taxable amount; and
2. 20% of the total taxable amount exceeding the price threshold

Example

Let's say you are purchasing a luxury car that costs $150,000, and the luxury tax threshold is set at $100,000.

Step 1: Calculate the total taxable amount

The price of the car is $150,000.

Step 2: Calculate the two options for the luxury tax:

Option 1 (10% of the total taxable amount):

10% of $150,000 = $15,000.

Option 2 (20% of the amount exceeding the price threshold):

The threshold is $100,000, so the amount exceeding the threshold is $150,000 - $100,000 = $50,000.

20% of $50,000 = $10,000.

Step 3: Compare the two amounts:

Option 1: $15,000

Option 2: $10,000

Conclusion:

Since the lesser amount is $10,000, the luxury tax payable in this case would be $10,000.

This calculation ensures that the tax is based on the most favorable option for the purchaser.

Exemption

• A vehicle will no longer be subject to Luxury Tax in any future sales as a used car, once its initial luxury tax is applied and paid
• Airplanes and boats for qualifying activities would be exempt from the luxury tax; however, an exemption certificate must be obtained
• For an aircraft or boat previously subject to the luxury tax, a tax-paid certificate must be obtained for the Luxury Tax to not apply again
• Leased assets: Vehicles, airplanes, and boats that are leased rather than sold will not be subject to the Luxury Tax at the time of the lease. However, the Luxury Tax may apply when the lease agreement is terminated and the asset is sold, unless it qualifies for another exemption.

Who is Required to Pay the Luxury Tax?

• An entity (individual or corporation) is required to register as a vendor in respect of the type of subject item if they make qualifying sales or importation, in case the subject item has never been registered
• Generally, the payment of any applicable Luxury Tax is imposed on the registered vendor who delivers the subject item to a non-registered consumer

Penalties

• Penalties will apply for failure to pay the amount of Luxury Tax due, failure to file returns, failure to register, or false statements etc.
• Interest will be imposed on late payments

Get in touch with Prasad & Company LLP today and schedule a consultation to discuss your needs and options.

* Refer to the ‘Select Luxury Items Tax Act’ for more details

Works Cited

• Agency, Canada Revenue. “Government of Canada.” Canada.Ca, / Gouvernement du Canada, 30 May 2023, www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/luxurytax.html. Accessed 1 Nov. 2024.
• Branch, Legislative Services. “Consolidated Federal Laws of Canada, Select Luxury Items Tax Act.” Select Luxury Items Tax Act, laws-lois.justice.gc.ca/eng/acts/s-8.35/page-1.html. Accessed 1 Nov. 2024.
• “Canada’s Luxury Goods Tax Is Here.” MNP.Ca, MNP, 31 Aug. 2022, www.mnp.ca/en/insights/directory/proposed-canada-luxury-tax. Accessed 1 Nov. 2024.
• “Canada’s New Luxury Goods Tax to Know for 2024.” Faber LLP, 10 May 2024, faberllp.ca/canadas-new-luxury-goods-tax-to-know/. Accessed 1 Nov. 2024.
• Kagan, Julia. “What Is a Luxury Tax? Definition, How It Works, and Example.” Investopedia, Investopedia, www.investopedia.com/terms/l/luxury_tax.asp. Accessed 1 Nov. 2024.