Tax Insights: Finance releases draft legislative proposals to implement a luxury tax

In brief

On March 11, 2022, the Department of Finance released draft legislative proposals to implement a luxury tax on higher value vehicles, aircraft and boats (subject items). This proposed tax was first announced in the 2021 federal budget and, in August 2021, a backgrounder with further details was released and a public consultation process was initiated.

The new tax is proposed to be effective September 1, 2022, and will be:

• levied on the sale or supply by way of lease, license or other arrangement by a registered vendor and on the importation of subject items valued in excess of certain dollar amounts
• payable, in the case of:
  • sales, at the earlier of the time possession or ownership of the subject item is transferred to the purchaser
  • leases, when the lessee first has the right to use the subject item
  • imports, at the time of importation if the importer is not a registered vendor of the subject item

This Tax Insights discusses the luxury tax draft legislative proposals. Stakeholders are asked to provide comments to the Department of Finance by April 11, 2022.

In detail

When does the luxury tax apply

The luxury tax will be imposed on sales of most:

• vehicles and aircraft valued over $100,000
• vessels valued over $250,000

The following table specifies the items subject to the luxury tax, along with some exceptions:

In addition to the exceptions noted in the table above, the luxury tax will not apply to subject items that are both registered with a government and for which possession was transferred to the user before September 2022; this is consistent with the imposition of the tax beginning September 1, 2022.

Some exceptions will also apply for sales to specific purchasers who purchase or lease subject items for specific uses. These include purchasers who are registered vendors of the subject items, purchasers of a “qualifying subject aircraft” or for which the purchaser is a “qualifying aircraft user” and purchasers of a “qualifying subject vessel.” These purchasers will have to provide exemption certificates to the vendor to be exempt from paying the tax.

To avoid cascading of the tax, no tax will be payable on the sale of previously registered vehicles or the sale of a tax-paid aircraft or vessel. Purchasers of tax-paid aircraft or vessels will have to provide a tax-paid certificate to the vendor to be exempt from paying the tax.

Finally, the luxury tax will apply if an agreement for the sale is entered into before September 2022 and both possession and ownership of the subject item transfers after August 2022, unless the agreement for the sale was entered into writing before April 20, 2021.

How is the luxury tax calculated

The luxury tax is calculated as the lesser of:

• 10% of the “taxable amount”*
• 20% of the “taxable amount”* above:
  • for vehicles or aircraft, $100,000
  • for vessels, $250,000

<sup>* The ”taxable amount” is defined as:
- for sales, the total of the sales price and any charges for improvements provided by the vendor (or a non-arm’s length party of the vendor) in connection with the sale (the fair market value is used if the sale is made for no or nominal consideration or is made for less than fair market value between non-arm’s length parties)
- for leases, the fair market value</sup>

When must the luxury tax be paid

The draft legislative proposals require the tax to be paid, in the case of:

• sales, at the earlier of the time possession or ownership of the subject item is transferred to the purchaser
• leases, at the time the lessee first acquires the right to use the subject item
• imports, at the time of importation, if the importer is not a registered vendor of the subject item

The tax will generally be payable by the vendor, but, if the vendor is a federal or provincial government or agency, an indigenous governing body or a diplomat, the tax will be payable by the purchaser.

Other considerations

Improvements performed at the time of the sale

The taxable amount, in connection with the sale of a subject item, includes the consideration for any “improvement” in respect of the item that is provided by the vendor, or by a person that does not deal at arm’s length with the vendor.

An “improvement” is defined to mean the provision of:

• tangible personal property that is installed in or on, or is affixed to, the subject item
• a service that modifies the subject item and is physically performed in respect of the subject item

However, excluded from the definition of an “improvement” are:

• the provision of:
  • a repair, cleaning or maintenance service
  • tangible personal property to replace a damaged, defective or non-functioning item
  • a property or service to make the vehicle capable of transporting an individual using a wheelchair or an auxiliary driving control to facilitate the operation of the vehicle by an individual with a disability
• child safety systems

Improvements performed after the sale

The draft legislative proposals require owners of subject items who have improvements performed on them within one year after the sale, to self-assess additional luxury tax if the value of those improvements is $5,000 or more.

The takeaway

Purchasers who intend to acquire selected luxury goods after August 2022 should factor the luxury tax into their purchase price and be aware of the potential requirement to self-assess additional luxury tax. Suppliers of luxury vehicles, aircraft and vessels (and owners purchasing improvements to such items) should prepare to start calculating and remitting the luxury tax, starting in September 2022.