Dealerships and Budget 2021

April 27, 2021

Dealerships and Budget 2021

Synopsis
4 Minute Read

Find out the impacts on dealerships of proposed measures announced in the Federal Government’s 2021 Budget.

The Federal Government tabled its first budget in two years in April 2021, containing more than $100 billion in spending and supporting a wide range of Canadians and their businesses. Certain announcements contained in the Budget will directly impact dealerships. 

Highlights of the impacts on dealers include:

Emergency business support programs extended

The Canada Emergency Wage Subsidy, the Canada Emergency Rent Subsidy and the Lockdown Support have all been extended through June 2021 to September 25, 2021, with the potential to be extended to November 20, 2021, if necessary. 

The subsidy rates decline over this period as the government works towards a full phase out, but the extension is a welcome relief for many dealers who have relied on this support during the pandemic. 

A new support program, the Canada Recovery Hiring Program, was introduced and intended to support businesses as they hire more workers. 

Immediate expensing of depreciable property

To encourage investment in the economy, the Budget introduced immediate expensing of certain depreciable property, purchased beginning April 19, 2021, and ending January 1, 2024. There is a $1.5 million dollar limit that must be shared by associated companies. The $1.5 million limit applies annually, prorated for years shorter than 365 days. Many assets will qualify; however, buildings and goodwill will be excluded from this enhanced write-off.

For dealers, the positive impact of the enhanced write-off is twofold. First, capital purchases will qualify for immediate expensing, saving tax at combined federal and provincial rates of up to 31 percent. Second, the enhanced write-off may incentivize business clients to purchase more from dealerships.

Luxury tax on new cars, aircraft and boats

The Budget proposed, effective for purchases beginning on or after January 1, 2022, an additional tax on new luxury cars and aircraft priced over $100,000 and boats priced over $250,000. Used cars, aircraft and boats currently appear to be exempt from the new tax. Federal and provincial sales tax will apply to the gross price, making it even more punitive to the end consumer. The formula results in the luxury tax equaling the lesser of 10 percent of the total price of the item or 20 percent of the amount over the threshold. 

For example, consider a luxury car with a pre-tax price tag of $140,000. The lesser of the two rates is determined as follows: 

  1. 10% x $140,000 = $14,000; or
  2. 20% x ($140,000 - $100,000) = $8,000. 

As a result, the price of the vehicle would increase to $148,000 plus GST / HST / PST. 

There are a number of vehicles and aircraft that will be excluded from the new tax, such as motorcycles, ATVs, racing cars, motor homes, and construction, commercial, and farm vehicles. The rules for boats are similar in that commercial fishing boats, ferries, and floating homes will all be excluded. However, the general rule is if a personal-use vehicle can accommodate less than 10 passengers, it may be caught by this new tax. 

 It is anticipated the dealership will be responsible for collecting and submitting this tax.

Zero-emission technology

Leading to Budget Day there was a significant push for green measures, including incentives for manufacturing zero-emission vehicles (EV), manufacturing EV charging systems, and manufacturing batteries and fuel cells for EV. The government support for the infrastructure build out is a positive for many dealers who are selling EVs.

In Budget 2021, there were no programs announced to incentivize consumers to purchase EVs.

Interest deductibility limits

While the details have yet to be confirmed, the proposed rules around interest deductibility will be something to watch. The new rules would limit the amount of interest that can be deducted to 30 percent of “tax EBITDA,” which is the company’s taxable income before accounting for interest expense, interest income, income tax and amortization.

Exemptions from this rule would be available for:

  • Canadian-controlled private corporations that, along with any associated corporations, have taxable capital of less than $15 million; and
  • Groups of corporations and trusts whose net interest expense is less than $250,000

While an individual dealership may qualify for an exemption, it is anticipated most dealership groups will not be eligible.

Draft legislative proposals are expected to be released for comment in the summer of 2021. These rules are currently proposed to come into effect for years starting on or after January 1, 2023. MNP will ensure concerns regarding the impact of these new rules on our dealer clients will be heard during the consultation process. 

For a more detailed analysis of the announcements included in Budget 2021, please view our 2021 Federal Budget Summary.

Contact your local Business Advisor to find out more about how these changes impact you and your business.

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