Introduction to Luxury Tax

Overview of Luxury Tax Implementation

Effective on September 1, 2022, the Select Luxury Items Tax Act introduces the Luxury Tax in Canada. This tax is aimed at certain high-value items, including aircraft, vehicles, and vessels. The implementation of the Luxury Tax was initially proposed in Budget 2021, with an estimated increase in federal revenues of $604 million over a five-year period.

Which Items Are Subject to Luxury Tax?

The Luxury Tax applies to Subject Items, which include specific categories of vehicles, aircraft, and vessels. Vehicles and aircraft priced above $100,000 and vessels priced above $250,000 fall within the scope of the Luxury Tax.

Calculating the Luxury Tax

Determining the amount of Luxury Tax payable involves a calculation based on the total item value. This value is either 10% of the total item value or 20% of the difference between the total item value and the price threshold for each category. Various elements, such as improvements, additions, delivery charges, and other relevant costs, are included in the total item value. The resulting Luxury Tax is then added to the cost of the subject items before calculating the payable GST/HST.

Categories of Subject Items

Aircrafts

Subject aircraft, which are subject to the Luxury Tax, include aeroplanes, gliders, or helicopters manufactured after 2018, excluding those designed for military activities or equipped for cargo transport.

Vehicles

Subject vehicles, priced above $100,000, encompass motor vehicles designed primarily for carrying individuals on highways and streets. These vehicles should have a seating capacity of 10 or fewer individuals, weigh less than or equal to 3,856 kg, be manufactured after 2018, and travel with four or more wheels in contact with the ground.

Vessels

Subject vessels, with a price threshold of $250,000, refer to vessels designed or adapted for leisure, recreation, or sports activities, manufactured after 2018. However, floating homes, vessels designed solely for commercial fishing or ferry purposes, vessels with sleeping facilities for over 100 individuals (excluding crew members), and vessels registered or possessed before September 2022 are excluded from the definition of subject vessels.

Luxury Tax Registration Process

Registration Requirements

Businesses involved in the sale, import, or export of luxury vehicles, aircraft, or vessels priced above the specified thresholds must complete the Luxury Tax registration. It is recommended to register before the first sale or import of a subject item after September 1, 2022. Manufacturers, wholesalers, retailers, and importers dealing with these items should ensure they comply with the registration requirements.

Methods of Registration

Businesses can complete the Luxury Tax registration through various methods. These include Business Registration Online, the CRA My Business Account using Form L500, or submitting Form L500 via postal mail. Additional forms may be required, such as L500–1 (Non-Resident — Records Kept Outside Canada) and L500–2 (Application or Revocation of the Authorization to File Separate Luxury Tax Returns for Branches and Divisions).

Importance of Tax-Paid Certificate

Canadian businesses regularly engaged in selling, importing, or exporting luxury vehicles, aircraft, and vessels for personal use should complete the Luxury Tax registration. The registration process is free of charge. If unsure about registration requirements or if the registration has not been completed within 30 days of submission, contacting the Canadian Revenue Agency for guidance is recommended.

Obtaining a Tax-Paid Certificate

Once the Luxury Tax has been paid, businesses receive a Tax-Paid Certificate. This certificate serves as proof that the Luxury Tax due on an item has been settled, preventing future taxation on the same item. The certificate includes information such as the subject item’s identification number, the effective date of the certificate, confirmation of tax payment, and other prescribed details.

Expiration and Exceptions

The Tax-Paid Certificate is typically valid for one year. However, exceptions may be granted by the Canadian Revenue Agency. It is important to comply with the expiration dates specified on the certificate and seek exceptions, if applicable, to ensure ongoing compliance with tax regulations.

Calculating Luxury Tax

Calculating the Luxury Tax involves considering various factors, such as the specific formulas provided by the Canadian Revenue Agency. The total amount of Luxury Tax due is determined by the lesser of either 10% of the total item value or 20% of the difference between the total item value and the price threshold. However, it is crucial to include any improvements, additions, delivery charges, or other relevant costs when determining the total item value. This may lead to potential disputes regarding the applicable Luxury Tax payable.

Inclusion of HST/GST

The total HST/GST payable is calculated by including the applicable Luxury Tax and adding it to the price of the subject items. It is essential to factor this into the overall cost when purchasing luxury items subject to the Luxury Tax.

When Is the Luxury Tax Due?

The Luxury Tax is due at the filing deadline of each reporting period. For instance, if a corporation has a year-end date of December 1, the Luxury Tax, as part of the total payable tax calculation, will be due on December 1 each year.
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