The New Luxury Tax In Canada And How It Works
On Sept. 1st, 2022, the Canadian federal government introduced a new "luxury tax" which is applicable to certain vehicles priced above $100,000. This new tax is estimated to bring in an additional $163 million in revenue a year.
Chrystia Freeland, our Deputy Prime Minister and Finance Minister suggested that the government has had to spend extraordinary sums of money to "keep Canadians healthy and safe" throughout the pandemic, and "to keep the economy going". This measure is intended to tackle inequality and have Canadians who can afford to buy luxury items contribute more.
Overview
The Luxury Tax applies to new vehicles with a 'total price' of $100,000 or more. Total price includes charges and fees but does not include the applicable GST/HST or provincial sales tax. So the luxury tax is applied on the total before GST/HST are added.
The tax structure is complicated with various exceptions and specific criteria, so this article does not include all details - it's meant as an overview to give you a basic explanation of what it is and how it works. For a thorough explanation, please refer to this government page.
What vehicles are subject to the luxury tax?
Vehicles that will fall into this category include the following:
- Passenger vehicles typically for personal use, including coupes, sedans, station wagons, sports cars, SUVs, CUVs, passenger vans, minivans with a seating capacity of not more than 10 passengers, and light-duty pick-up trucks.
- They have a date of manufacture after 2018
- They weigh 3,856 kg or less
- They were not registered with the government prior to Sept. 1, 2022 - in other words, possession/ownership was not transferred to the user of the vehicle before September.
There are some vehicles which are exempt from the new tax such as some recreational vehicles, some heavy duty trucks, and specialty vehicles like those marked for policing activities. Also, vehicles manufactured before 2018 or vehicles registered with the government prior to Sept. 1, 2022 are excluded.
How is the luxury tax calculated?
There are 2 possible calculations that are used and it’s always the lessor of the 2 that applies.
1. Calculation A is 20% of the retail sale price that is above the threshold of $100,000
2. Calculation B is 10% of the full retail sale price
We’ve done the calculations and the quickest way to explain how this works out, is to say that for every $1000 over $100,000, it’s $200 in additional luxury tax using Calculation A.When you get up to $200,000 you reach the break-even point and Calculation B goes into effect which is 10% of the full price.
Looking for more clarification? Okay, here are some examples:
Example 1 - $101,000 car
Calculation A (20% of anything over the threshold of $100,000)
This vehicle has $1,000 above the threshold and 20% of that $1000 is $200, so the calculation would indicate a $200 luxury tax
Calculation B (10% of the full price)
That same car taxed at 10% of the full amount, would indicate a $10,100 luxury tax
Clearly Calculation A is the lower of the 2, and the luxury tax would be $200
Anything from $100,000 to $199,999 will fall into Calculation A and the range for the tax will be from $0 at the low end up to $19,999 tax for a vehicle priced at $199,999
At $200,000 it’s the break-even point for the 2 calculations, so from there up, Calculation B is the one that all vehicles will fall into, which is 10% of the total amount.
Example 2 - $220,000 car
Calculation A (20% of anything over the threshold of $100.000)
This vehicle has $120,000 above the threshold and 20% of that $120,000 is $24,000, so the calculation would indicate a $24,000 luxury tax.
Calculation B (10% of the full price)
That same car taxed at 10% of the full amount, would be $22,000.
So Calculation B is the lower of the 2, and the luxury tax would be $22,000.
Once again, please note that this is by no means a comprehensive explanation of the luxury tax which also affects improvements to your vehicle that are added after purchase.
If you would like detailed information about all the criteria considered in this luxury tax, please visit this page and read the Canada Revenue Luxury Tax Notice LTN2.
If you're in the market for one of these luxury vehicles, feel free to browse through our current inventory of luxury cars and trucks.