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FAQ: Canada’s new luxury tax and dealerships

October 19, 2022

FAQ: Canada’s new luxury tax and dealerships

Synopsis
5 Minute Read

There are many questions dealerships have about how Canada’s new Select Luxury Items Tax Act will impact their business. MNP has responded to the most common ones here, to help you adjust to and comply with the new legislation.

National Leader, Dealerships

Note: this article was originally published on August 31, 2022 and has been updated based on recent discussion with the government.

The federal government has released and approved legislation on a tax on the sale of luxury vehicles, aircraft, and boats, which came into effect on September 1, 2022.

The following are the most frequently asked questions MNP has received from vehicle dealerships about the new luxury tax, and our answers.

What vehicles fall under the luxury tax?

The new tax will apply to vehicles that meet the definition of a “subject vehicle” under the Select Luxury Items Tax Act exceeding the established price threshold of $100,000, before GST / HST. A subject vehicle is:

  • designed or adapted to carry individuals on highways or streets;
  • has a seating capacity of not more than 10 individuals;
  • has a gross vehicle weight rating (GVWR) that is 3,856 kg or less;
  • has a date of manufacture after 2018; and
  • is designed to travel with four or more wheels in contact with the ground.

Recreation vehicles will not be included, provided they meet certain established criteria.

The tax is determined as the lesser of:

  • 10 percent of the vehicle’s total price, and
  • 20 percent of the amount by which the total price exceeds the threshold.

Canada’s luxury tax applies to the total price of the vehicle, including additions, levies, duties, charges, fees and amounts in respect of delivery or importation.

Is the tax payable on acquisition of a vehicle by a dealer from a manufacturer?

The acquisition of a subject vehicle by a registered vendor is exempt from the luxury tax provided the acquiring registered vendor (the dealer) completes and provides Form L100-1, Luxury Tax Exemption Certificate for Subject Vehicles to the selling registered vendor (the manufacturer) prior to the acquisition.

Is the tax based on the selling price or the manufacturer’s suggested retail price?

The luxury tax is calculated on the total price for the sale of a subject vehicle, including the value of consideration for any improvements or additions made by the vendor in connection with the sale, plus any taxes, duties, charges, fees and amounts paid in respect of delivery or importation of that subject vehicle.

When is the tax required to be calculated?

Unlike most sales taxes, the luxury tax is levied on the registered vendor and becomes payable on the earlier of:

  1. When the subject vehicle is sold and when possession of the subject vehicle is transferred to the purchaser or to another person, and
  2. When ownership of the subject vehicle is transferred to the purchaser.

What vehicles are exempt from the tax?

Vehicles used for military or policing activities are exempt from the tax, as are ambulances, hearses, police cars, fire trucks, and recreational home vehicles. Vehicles with a GVWR greater than 3,856 kilograms are also exempt.

Used vehicles that have been previously registered with the Government of Canada or a province are exempt.

Does the tax apply to First Nations?

The tax is payable at the vendor level, therefore the status of the purchaser of the vehicle is not relevant. A dealership would still be required to pay the luxury tax on vehicles sold to Indigenous peoples.

Is the luxury tax applicable on dealer transfers? What about demos?

Dealer transfers of a subject vehicle by a registered vendor are exempt from the luxury tax provided the acquiring registered vendor completes and provides Form L100-1 Luxury Tax Exemption Certificate for Subject Vehicles to the selling registered vendor.

The luxury tax will apply to vehicles that have previously not been registered with a government. The luxury tax is payable by the registered vendor at the time that they register the subject vehicle valued above $100,000. Whether luxury tax applies to demo vehicles will depend on how the vehicles are used and licensed.

How is the luxury tax calculated when there is a trade-in? Is it calculated on the gross or net amount?

The simple answer is the luxury tax is calculated on the gross selling price of the vehicle. There's no reduction for the trade-in. However, the trade-in will still reduce the GST / HST calculation.

Does the luxury tax apply to leases?

Yes, the luxury tax will be based on the full retail value or fair market value of the vehicle. Leases are treated the same as a sale and the vendor would assess the tax on the full retail value at the time of inception of the lease.

On a lease of a subject vehicle by a registered vendor, the luxury tax is calculated on the greater of:

  1. The retail value of the subject vehicle at the time at which possession of the subject vehicle is first transferred to the lessee under an agreement that is a lease, license, or similar arrangement, and
  2. The retail value of the subject vehicle at the time at which the lessee first has the right to use the subject vehicle under the agreement. The luxury tax is due in full at the inception of the lease.

On a lease of a subject vehicle by a non-registered vendor, the luxury tax is due in full at the time the vehicle is acquired by the non-registered vendor from a registered vendor (i.e. at the time the leasing company acquires the vehicle from a dealer).

It is a business decision of the dealer with regards to choosing to capitalize the luxury tax into the lease and build that tax into the lease payments or to require payment in full from a customer at lease inception.

If the vehicle was sold prior to January 1, 2022, but delivered on or after September 1, 2022, is the tax applicable?

No, the luxury tax does not apply if a buyer and a vendor entered into a bona fide written agreement for the sale before 2022, as part of the vendor’s business.

If the vehicle is delivered after September 1, 2022 but an agreement to lease the vehicle was entered into before January 1, 2022, is the luxury tax payable?

Yes. The luxury tax will be payable, even where the agreement to lease the vehicle was entered into before January 1, 2022.

Does the tax apply if accessories are billed separately from the vehicle but when added, push it over the threshold?

No. If the vehicle is not subject to luxury tax on the original purchase, then additions added to the vehicle during the first year will not make the vehicle subject to luxury tax. 

However, if the vehicle is subject to luxury tax at the time of purchase, the buyer will be required to remit luxury tax on any improvements made to the vehicle during the first year where those improvements are valued over $5,000. Even if the buyer goes to a separate vendor for add-ons, any improvement at time of sale and after sales improvements valued over $5,000 (other than repairs) made within one year after sale or commencement of the lease of the vehicle will also be subject to the luxury tax. Where add-ons or improvements are purchased from a separate vendor, it is the buyer’s responsibility to self-assess any applicable tax.

How does the luxury tax affect dealers in B.C. who already have a provincial luxury tax through the B.C. provincial sales tax (PST)?

Generally, BC PST is not included in the value on which luxury tax is calculated. 

We have confirmed with the Province of BC and the Canada Revenue Agency that the PST and the luxury tax will both be calculated on the total price (not including each other). The GST will be calculated on the total price plus the luxury tax (assuming it is being added to the value charged to the customer), unless the PST rate is higher than 12%, in which case the PST will also form part of the value that the GST is calculated on.

How does the luxury tax affect dealers in Manitoba and Saskatchewan?

In Manitoba and Saskatchewan the luxury tax is calculated on the total price of the vehicle. Where this is being passed to the consumer, it will be added to the base that the PST and the GST are calculated on.

How does the luxury tax affect dealers in Quebec?

In Quebec, the luxury tax is calculated on the total price of the vehicle. Where this is being passed to the consumer, it will be added to the base that the QST is calculated on and that the GST is calculated on.

When are returns and remittances due?

Returns are filed on a quarterly basis and are due with payment one month after the end of the reporting period. For 2022, there is a single reporting period from September 1 – December 31, 2022, with the return and remittance being due January 31, 2023. Starting in 2023, reporting periods are January 1 – March 31, April 1 – June 30, July 1 – September 30 and October 1 – December 31 with the returns and payments due one month following the end of each period.

Dealerships are advised to consider any changes to existing business processes that may be required to help comply with the new rules if they have not already done so.

Contact us

For more information, contact Chris Schaufele, CPA, CA, National Leader, Dealerships.

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