If your wealthy clients are planning to buy a luxury vehicle, they may want to do so by the end of this year.
In Monday’s federal budget, the Liberals made good on a campaign promise to introduce a tax on luxury vehicles and aircraft costing $100,000 or more and boats costing $250,000 or more.
The proposed tax, which would take effect Jan. 1, 2022, would be the lesser of two amounts: either 10% of the purchase price, or 20% of the amount by which the purchase price exceeds the luxury threshold ($100,000 for cars and aircraft and $250,000 for boats).
“It gives the purchaser a choice: they can pay 10% of the full value, or they can pay 20% on the amount of excess over $100,000,” said Joseph Micallef, partner and national leader, financial services, with KPMG in Canada.
GST/HST would then be applied to the final sale price inclusive of the luxury tax.
Various vehicles will be exempt from the new tax, including motorcycles, all-terrain vehicles, snowmobiles, racing cars and recreational vehicles.
The Liberals originally proposed a luxury vehicle tax in their 2019 election campaign platform. They projected the tax will raise $34 million in the 2022 tax year, and a total of $604 million over the next five years.
“It’ll be interesting to see if it actually raises the amount that it claims — I would be surprised,” said Elliot Hughes, senior advisor with Ottawa-based Summa Strategies Canada Inc.
However, the move allows the Liberals to show voters they’re serious about asking wealthy Canadians to pay a greater share of tax, Hughes said.
“This allows them, from a political perspective, to say they are going after wealthier Canadians and trying to make them pay their fair share, even if some of the projections for the tax revenues may be a little inflated,” he said.
Micallef suggested the luxury vehicle tax could be a “prelude” to the Liberals introducing other taxes targeting wealthy Canadians.
Both the NDP and Green Party of Canada have proposed an outright wealth tax on residents whose fortunes exceed $20 million — a proposal that has widespread support among voters of all political stripes, including those in the highest income bracket.
While the Liberals have stopped short of a wealth tax, the budget included measures to crack down on tax evasion and aggressive tax avoidance.
For instance, the Liberals are proposing to amend the Income Tax Act to prevent a “small number of high-net-worth taxpayers” from avoiding the collection of their tax debts by transferring their assets to a non-arm’s length person (such as a corporation) so they appear to have insufficient money left to pay their debts.
The budget also earmarked $304.1 million over five years for the Canada Revenue Agency (CRA) to ramp up GST/HST audits of large businesses and to weed out tax evasion involving trusts, among other initiatives. The government expects these efforts to recover $810 million.
Additionally, the government plans to spend $230 million over five years to improve the CRA’s ability to collect taxes — a measure it predicts will yield an additional $5 billion in tax revenue.
If your client works in luxury vehicle sales, Monday’s announcement may not hurt their business. Micallef said he was “doubtful” the new tax would impact sales of luxury vehicles.
“I think if someone truly wants a vehicle, the fact that it’s going to cost you more probably won’t dissuade you from making that purchase,” he said.