The new luxury sales tax in Canada was approved by the country’s Parliament in August of 2022. This new law is set to go into effect on September 1, 2022 and will require customers to pay an additional tax when purchasing luxury cars, aircraft, and boats. Businesses that purchase, import, or export these luxury items should be aware of the implications of this new tax. If you have questions regarding Canada’s luxury sales tax or any other tax concern, you can learn more by contacting Canadian tax lawyer Jeremy Scott at (902) 403-7201.
How Does Canada’s Luxury Tax Work?
Canada’s new luxury tax law is known as the Select Luxury Items Tax Act, which was part of Bill C-19, Budget Implementation Act, 2022, Number 1. Under this law, the Government of Canada has established a luxury tax on the sale and importation of certain vehicles, aircraft, and water vessels. All Canadian manufacturers, wholesalers, retailers, and importers of qualifying vehicles are required to pay the Select Luxury Items Tax.
The Canada Revenue Agency produces Luxury Tax Notices which assist taxpayers in understanding how this tax will be administered. These notices may be frequently updated as policy in this area evolves.
The Canada Revenue Agency defines “subject vehicle” as a motor vehicle worth over $100,000, that was manufactured after 2018 and that meets all of the following criteria:
- The vehicle’s primary purpose is to transport individuals on highways and streets
- The seating capacity is no more than 10 people
- The gross vehicle weight rating is under 3,856 kilograms
- The vehicle has four or more wheels that touch the ground
These broad categories apply to virtually any passenger vehicle that is valued at over $100,000.
Any aircraft valued at over $100,000 will be deemed a subject aircraft if it was manufactured after 2018 and has a maximum carrying capacity of no more than 40 seats. This means that commercial aircraft, such as passenger planes used by major airlines, will not be subject to the luxury tax.
A subject vessel is any water vessel manufactured after 2018 that is primarily designed for leisure, recreation, or sporting and valued at over $250,000. This includes personal boats like yachts, houseboats, sailboats, and motorboats. However, commercial fishing vessels, cruise ships, ferries, and floating homes are all exempt from paying the new luxury sales tax in Canada.
How Much is the Luxury Tax?
Those subject to the luxury sales tax will be required to pay the lower of the following two figures:
- 10% of the retail sale price of the luxury item, or
- 20% of the retail sale price over the designated price threshold ($100,000 for vehicles and $250,000 for water vessels)
The luxury tax also applies to improvements and aftermarket modifications that are made at the time of sale. In addition, the tax is added to the final sales price when calculating GST and any applicable provincial sales taxes.
Who is Required to Register Under the Luxury Tax Law?
Vendors of subject vehicles, aircraft, and vessels must register as registered vendors if they either sell or import subject items that have never been registered with the government of Canada and meet the value thresholds. The CRA requires certain individuals to register with the agency under the new luxury tax law if certain circumstances apply. Those who are required to register must do so as registered vendors of the subject luxury items that they sell or import.
Individuals and businesses that qualify as registered vendors must apply to register with the Canadian Revenue Agency either by the earlier of the following two dates:
- The day they sell their first vehicle, aircraft, or vessel that is about the designated monetary threshold, or
- The day that the first above-threshold vehicle, aircraft, or vessel is imported
If you are unsure whether your business needs to register under the new tax law, you can learn more by speaking with Canadian tax lawyer Jeremy Scott.
How to Register as a Vendor of Luxury Items
There are a couple of options for registering as a registered vendor of luxury items under Canada’s new luxury tax law. You may either use the Business Registration Online system or fill out Form L500, Luxury Tax Registration Application and submit it to the Canada Revenue Agency. Those who wish to apply as vendors of multiple types of subject items must indicate this fact on their application.
Attention to detail is key during the application process, as errors or incomplete information can result in preventable delays in processing. According to the CRA, the application may be processed up to 30 days after the agency has received all required information. The CRA advises applying early to avoid any issues caused by long processing times. If the application is approved, the CRA will give the applicant a registration number, making them an official registered vendor.
What Happens if You Fail to Apply for Registration?
If an individual or business entity is required to register for the luxury tax and fails to do so, the CRA may send them a written request to register under the category of luxury goods that they work with. The recipient of this letter must either apply for registration or provide evidence that the luxury tax does not apply based on the circumstances. If the recipient does not fufill either of these two criteria within 60 days, the CRA may automatically register them as a registered vendor. When this happens, the CRA assigns a registration number and must notify them of this number, along with the date of registration.
Failure to register under the new luxury tax law can also result in a $2,000 fine. Importers that fail to register may face an additional fine of the greater of two figures: $1,000 or 50% of the amount of the luxury taxes that they owe.
Learn More from a Canadian Tax Lawyer
Canadian businesses involved in the sale, importation, or exportation of luxury vehicles, aircrafts, and water vessels should make sure they understand the new luxury sales tax in Canada. These businesses must also register as official registered vendors of the type(s) of luxury items they specialize in. If you are unsure regarding your obligations under this new tax law or another tax matter, Canadian tax lawyer Jeremy Scott is here to help. Contact Jeremy Scott Law today at (902)403-7201 for legal guidance on your tax situation.