Budget 2025 proposes to drop the luxury tax on aircraft and vessels, as well as the underused housing tax (UHT), with the resulting administrative savings going toward tax compliance.
The luxury tax and UHT “have proven to be inefficient, costly to administer and challenging for Canadian industries at a time of ongoing economic uncertainty,” said the budget, released Tuesday.
The luxury tax on aircraft and boats would end the day after budget day — Wednesday. “All instances of the tax would cease to be payable after budget day, including the tax on sales, the tax on importations, and the tax on improvements,” the budget said.
Dropping the luxury tax on planes and boats — the tax would still apply to sales of new cars — is projected to have a revenue impact of $135 million over five years, from 2025 to 2030, the document said.
The government intends to eliminate the UHT as of the 2025 calendar year, “given other efforts” such as the federal foreign buyer ban, and municipal and provincial vacant home taxes, the budget said. Dropping the UHT is projected to have a revenue impact of $150 million over five years, from 2025 to 2030.
The UHT was an annual 1% tax on the ownership of vacant or underused housing in Canada, effective as of 2022. While the tax primarily targeted foreign owners of Canadian residential property, a Canadian who owned a property through a trust, corporation or partnership had to file a UHT return. (If the trust, corporation or partnership was substantially or entirely Canadian, it may have qualified for an exemption from the UHT as a “specified” Canadian trust, corporation or partnership.)
Taxpayers were given two extensions for filing UHT returns for the 2022 tax year, amid tax practitioners warning that many Canadians could have a UHT filing requirement and not know it. An example is when a child is put on title for a residential property by a parent who lives in the house as a beneficial owner (a bare trust arrangement).
The Liberals campaigned on the luxury tax in the 2019 election. The tax was first introduced in the 2021 federal budget and took effect on Sept. 1, 2022.
The luxury tax applies to the sale of new cars and, previously, new aircraft priced over $100,000 and new boats priced over $250,000. The amount levied is the lesser of 10% of the total price of the item and 20% of the total price of the item above the threshold. In addition to sales, the tax is generally imposed on importations, leases and certain improvements of vehicles and, previously, of aircraft and vessels.
Administrative savings go toward tax compliance
As previously announced, the federal government is also dropping the digital services tax, federal fuel charge and Canada carbon rebate for individuals and businesses. Dropping these measures, along with the luxury tax on aircraft and vessels and the UHT, will provide administrative savings, a portion of which will be reinvested to improve Canada Revenue Agency (CRA) services, strengthen compliance and reduce tax debt, the budget said. The CRA will also “modernize its administrative approach to enable greater productivity,” it said.
“AI and process automation will be leveraged to transform technologies, data and analytics systems for compliance and collection activities,” the budget said. “This will free up resources to tackle complex cases requiring human intervention and to address the backlog of tax debt.”
For example, by automating certain tasks in the risk scoring process, the CRA estimates that repetitive tasks will be reduced by 50% once fully implemented.
The revenue impact of this reinvestment is projected to be $655 million in 2026–27, $887 million in 2027–28, and $1.1 billion annually beginning in 2028–29 onward.
In its election platform, the Liberals had projected $3.75 billion in revenue over three years (2026–2029) from “increasing penalties and fines.” The party’s plan had said the government would leverage technology at the CRA “to better identify and prosecute instances of tax evasion, fix loopholes and strengthen enforcement.”
Instead of new penalties and fines, if the proposal in the budget is “about more effective enforcement and making sure there is compliance, I’m relatively more supportive of that,” said Brian Ernewein, senior advisor, national tax, with KPMG LLP in Ottawa.
A recent auditor general report found that CRA contact centres often provided incorrect answers to taxpayers’ questions. The agency is currently in the middle of a 100-day service improvement plan.
“Hopefully, some of those resources [i.e., administrative savings] will somehow find their way to improving service at the CRA,” said Jamie Golombek, managing director and head of tax and estate planning with CIBC Private Wealth in Toronto.