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Canada Luxury Car Tax

Canada Luxury Car Tax

The federal government’s recent implementation of a luxury tax on new vehicles priced over $100,000 in Canada has left many consumers with unanswered questions. With this new tax coming into effect on September 1, 2022, high-end car shoppers want to understand how the tax will impact them. This article provides a comprehensive overview of Canada’s new federal luxury tax, examining key details like what vehicles it applies to, notable exemptions, how the tax is calculated, and the implications for used luxury car sales. We’ll also look at the rationale behind the tax, controversies, and expert perspectives on how it could reshape the luxury auto market.

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What Vehicles Does the Luxury Tax Apply To?

The federal luxury tax applies to new passenger vehicles with a total retail price above $100,000. This includes luxury models like SUVs, vans, coupes, sedans, station wagons and more. However, the tax only affects vehicles that have never been registered in Canada before.

Specifically, the tax applies to new passenger vehicles that meet all of the following criteria:

 

  • Have a total retail price above $100,000
  • Are classified as passenger vehicles, including SUVs, vans, coupes, sedans, station wagons
  • Have never been registered with a provincial motor vehicle authority in Canada previously

 

So if you are purchasing a brand new luxury vehicle priced over $100,000, you will need to pay the federal luxury tax on top of the selling price. But if you are buying a used luxury vehicle, it may be exempt from the tax depending on its registration history in Canada.

 

Key Exemptions for Used Luxury Vehicles

There are some key exemptions to the luxury tax that apply specifically to used luxury vehicles that have previously been registered in Canada.

 

Used Vehicles Previously Registered in Canada

One of the main exemptions is for used luxury vehicles that have already been registered with the Government of Canada or a provincial government before the tax took effect. So if you purchase a pre-owned vehicle that was previously registered in Canada, even if it is a high-end luxury model priced over $100,000, it will not be subject to the new federal luxury tax.

This exemption acknowledges that used luxury vehicles have already had taxes applied when they were first registered and sold new. Imposing an additional luxury tax on pre-owned models would amount to double taxation.

 

Vehicles Manufactured Before January 1, 2019

The luxury tax also does not apply to used luxury vehicles that were manufactured before January 1, 2019. So if you find a pre-owned luxury car, SUV, or van built in 2018 or earlier, it will be exempt from the tax regardless of its sale price.

This provision avoids imposing a retroactive tax on vehicles originally purchased new before the luxury tax was conceived and announced.

 

Vehicles Ordered Before 2022

There is also an exemption for certain vehicles ordered in 2021 before the luxury tax was officially passed into law, but not delivered to the purchaser until 2022 or later. This covers buyers who placed pre-orders on high-end models priced over $100,000 based on the tax laws at the time.

As long as there is documentation showing the vehicle order was made prior to January 1, 2022, the luxury tax will not apply even though delivery occurred after the tax took effect.

 

Other Notable Exemptions

In addition to used luxury vehicles, there are some other key exemptions from the federal luxury tax in Canada:

 

Commercial Vehicles

The luxury tax does not apply to commercial vehicles like pickup trucks, cargo vans, box trucks, and other vehicles mainly used for commercial purposes. This includes popular models like the Ford F-150, RAM 1500, Mercedes Sprinter, and Ford Transit.

To qualify as exempt, these vehicles must be registered and insured as commercial vehicles. Personal use luxury pickup trucks and vans would still be subject to the tax.

 

Motorhomes and Campers

Recreational vehicles like motorhomes, travel trailers, and camper vans are exempt from the federal luxury tax regardless of their retail price. This includes both new and used RVs and campers.

Luxuriously appointed Class A and Class C motorhomes often exceed $100,000 in price but remain exempt as they are not defined as passenger vehicles under the luxury tax legislation.

 

Public Sector Vehicles

Vehicles purchased by federal, provincial, territorial, municipal, or local governments are exempt from the luxury tax. This includes vehicles for police, fire departments, ambulances, public transit, and other public sector uses.

Many public service vehicles like ambulances and police cars have prices exceeding $100,000 but will not be subject to the federal tax.

 

How the Luxury Tax is Calculated

The luxury tax is calculated as 10% of the total retail price above $100,000. This means that only the portion of the price over $100,000 is taxed at 10%, not the entire vehicle price. Here’s how it works:

 

  • If a vehicle costs $150,000, the luxury tax would apply to the $50,000 above the $100,000 threshold (150,000 – 100,000 = 50,000)
  • 10% of $50,000 is $5,000, so the luxury tax owing would be $5,000

 

The tax becomes payable when the purchaser takes possession of the vehicle. This means the luxury tax must be paid upfront in full when buying the car.

Importantly, any trade-in credits or discounts do not reduce the purchase price for calculation of the luxury tax. The tax is based on the total pre-tax retail price paid by the purchaser. So trade-ins and other credits have no effect on the luxury tax amount owing.

 

The Tax and Private Sales

One key exemption to note is that the federal luxury tax only applies to vehicles sold by registered dealerships in Canada. Private person-to-person sales of used luxury vehicles are exempt from the tax, even if the sale price is above $100,000.

For example, if you purchased a used 2019 Bentley Continental for $120,000 from an authorized Bentley dealership in Canada, you would need to pay the luxury tax on the $20,000 above the $100,000 threshold. However, if you purchased the same used Bentley from a private seller, like an online listing or classified ad, the luxury tax would not apply at all.

This provides more flexibility for buyers looking for high-end used vehicle models that retail above $100,000. You can source a used luxury vehicle from a private seller without incurring the additional 10% luxury tax premium. Just ensure you take steps to validate the private sale is legitimate and the vehicle is registered in your name after purchase.

The key factor is that the luxury tax only applies to retail sales from registered dealers in Canada. Private person-to-person transactions are exempt. So if you can find a used luxury vehicle priced over $100,000 from a private seller, you stand to avoid paying the luxury tax completely.

 

Why the Luxury Tax Was Implemented

The federal government’s primary motivation for implementing the luxury tax was to discourage luxury consumption, especially for vehicles with very high price tags. This aims to reduce greenhouse gas emissions from expensive vehicles that tend to have lower fuel efficiency. There is also criticism that luxury vehicles promote inequality and are symbolic of excess wealth.

By making luxury cars more expensive through the tax, policymakers hope to curb demand among wealthy consumers. The tax essentially creates a financial disincentive for purchasing ultra-luxury new vehicles.

A secondary but still important motivation was to raise government revenue. The tax is projected to bring in $595 million in its first full year, rising to $645 million annually by 2026. This added revenue can help fund government programs and services.

The luxury tax is not a major revenue generator on its own. But when combined with other tax measures focused on the wealthy like the luxury yacht and private aircraft tax, it contributes to the government’s fiscal objectives.

 

Criticism and Controversy

The implementation of the luxury tax has not come without some criticism and controversy. There are concerns from some industry experts and consumers that the tax limits consumer choice and freedom. Many argue that the tax unfairly penalizes buyers who have worked hard and saved diligently to purchase the vehicle of their dreams.

There are also worries that the tax may simply encourage more consumers to purchase used luxury vehicles instead of new ones. Since the tax only applies to new vehicles that have never been registered in Canada before, buyers may turn to the used car market to find luxury models and avoid paying the additional tax premium. Some predict dealers specializing in high-end used cars may actually benefit from the policy.

The tax has also faced opposition for targeting specific industries and consumer goods. Critics argue a broader tax across all luxury items may have been more fair. There are also concerns about the tax leading to decreased sales and revenue for Canadian dealerships near the US border, as buyers may choose to shop in the US where no luxury tax exists.

Overall, the tax is seen by some as an overreach of government into consumer choice. They argue that individuals who can afford expensive vehicles should not face additional taxes, and that the market should dictate prices and demand. However, others contend luxury taxes are a reasonable policy to generate tax revenue from those most able to pay.

 

Impact on the Auto Industry

The implementation of the luxury tax is expected to have a significant impact on auto sales in the luxury vehicle segment. Industry analysts predict lower sales volumes as the tax makes expensive models less affordable. This will likely lead to some downsizing, where wealthy consumers opt for more attainable vehicles priced just under the $100,000 threshold.

Major luxury automakers like Mercedes-Benz, BMW and Audi are anticipating changes in buyer behavior. Some forecasts estimate luxury vehicle sales could decline by 10-20% in Canada due to the tax. Automakers are already adjusting production plans and inventory to account for decreased demand in top-end models.

There will likely be a shift towards more affordable luxury vehicles priced below the threshold. Brands are expected to expand offerings in lower price brackets to cater to this demand. For example, Mercedes launched the new E-Class luxury sedan with a starting price of $68,000. More models like this just under the threshold aim to attract buyers turned off by the tax premium.

The tax may also lead to brands repositioning vehicles that typically sold above $100,000 to now price them below the threshold. For example, BMW Canada lowered the retail price of certain X5 and X6 SUV models to start at $99,950. While a marginal change, it allows the brand to advertise “no luxury tax” on those vehicles.

Ultimately, the luxury tax will require brands, dealerships and consumers to rethink buying and ownership strategies around high-end vehicles. But the allure of luxury vehicles remains strong, and the market will adapt to find more tax-friendly options.

 

Consumer Sentiment on the Luxury Tax

The new federal luxury tax on vehicles over $100,000 has elicited mixed reactions from consumers, particularly luxury car owners and auto dealerships selling high-end models.

Many existing owners of luxury vehicles feel unfairly targeted by the tax. They argue that the tax punishes those who bought cars before the tax was implemented. Some have voiced concerns that the tax could negatively impact the resale value of their vehicles.

“I worked hard to be able to afford my Mercedes S-Class, now I feel like I’m being penalized for it,” said one owner on an online forum. “The tax makes no distinction between someone buying their first luxury car and those of us who have owned them for years.”

Other luxury car owners think the tax threshold of $100,000 is too low. They feel vehicles priced near that amount are middle-class choices and not truly luxurious.

“My BMW 5 Series cost around $120,000, it’s hardly a Bentley or Rolls-Royce,” commented one owner. “This tax targets upper-middle class buyers who have worked hard to own nice vehicles.”

Auto dealerships selling luxury brands have also voiced concerns. They worry the tax could dampen sales and force buyers to choose cheaper models or brands exempt from the tax.

“We’ve already seen clients shying away from our top trims and options to avoid pushing the price over $100k,” said a Porsche dealership sales manager. “The tax has squeezed our profit margins on higher-end models.”

Other dealerships fear backlogs as buyers rush to order cars before the tax takes effect on January 1st. This could frustrate buyers and harm the customer experience.

Despite some objections, other consumers think the tax is justified. These individuals view luxury cars as non-essential indulgences of the wealthy. They feel the tax revenue can be better spent on social priorities.

“I’m fine with this tax, luxury cars are playthings for the rich anyways,” read one online comment. “The government should tax luxury goods more to reduce inequality.”

As the implementation date nears, the luxury tax continues generating mixed reactions. But it’s clear the policy will fundamentally impact both consumers and dealers of high-end vehicles.

 

Future Outlook for Luxury Car Sales

The implementation of the luxury tax is expected to have a notable impact on sales of high-end vehicles in Canada. Here are some projections and trends to watch in the luxury auto market under the new tax regime:

 

Lower Sales Volumes Expected

Most industry analysts predict luxury car sales will decline in 2023 and beyond due to the tax. With a 10% premium added to vehicles over $100,000, consumers may think twice about purchasing expensive new models. This could motivate more buyers to consider lower-priced vehicles or models from 2022 or earlier that are exempt from the tax.

 

Increased Focus on High-End Trims

Auto manufacturers may shift more production capacity to vehicle trims that fall just under the $100,000 threshold. By pricing top-spec trims at $99,999 before additional fees, automakers can avoid having their models subject to the tax. This could expand options for consumers seeking fully loaded vehicles without the luxury tax.

 

More Leasing Activity Expected

With purchasing becoming more expensive, analysts expect luxury car shoppers may consider leasing as an alternative. Since the tax does not apply to vehicles upon lease termination, leasing provides a way to drive newer luxury models while avoiding the 10% luxury tax premium.

 

Strong Demand for Used Luxury Vehicles

As new luxury car sales weaken, demand is expected to surge for used models exempt from the tax. Dealers specializing in pre-owned luxury vehicles could benefit from this trend. For buyers, used luxury cars represent attractive options without incurring the luxury tax.

 

Buying Strategies Under the New Luxury Tax

For buyers in the market for high-end vehicles, the luxury tax requires new purchasing strategies to avoid paying the extra 10% premium or to minimize its impact. Here are some tips for getting the luxury car you want without overpaying under the new rules.

 

Consider Buying Used Luxury Vehicles

One of the biggest exemptions is that the tax only applies to new, not used, luxury vehicles. So purchasing a pre-owned luxury vehicle can help you avoid the tax completely. There are many lightly used models with low mileage after 1-3 years that offer the same luxury features and performance without the brand new price tag. Opting for a used version of a vehicle that would be over $100k new can save you thousands.

The key is the car must have been previously registered in Canada. So imported used luxury vehicles would still be hit with the tax. But models traded in or returned after a lease in Canada then resold by a dealer are exempt. So buyers open to going the used route have many options to dodge the tax.

 

Look at Models Just Under $100k Threshold

For buyers who want a brand new luxury vehicle, another option is to look at models priced just under the $100,000 cut-off. Many luxury automakers are strategically pricing top-trim vehicles at $99,999 or finding ways to include incentives or discounts to help keep the final price under $100k. This lets buyers still get a high-end new car without crossing the threshold.

However, it’s important to look at the final price after freight, PDI, and any dealer fees. Those extras can bump a vehicle over the threshold unexpectedly. But with some research, there are still new options for avoiding the luxury tax if you’re set on a new vehicle.

 

Lease Options for Luxury Vehicles

Leasing can be a smart alternative to purchasing for those seeking luxury vehicles without paying the full luxury tax. This is because leased vehicles are also exempt from the tax if they were previously registered in Canada.

For example, an individual could lease a 2-year old luxury vehicle that was first registered to a leasing company or dealership. When the lease ends, the car would then be exempt when it’s sold above $100,000 since it was already registered in Canada prior.

This exemption provides more flexibility for lessees, allowing them to enjoy luxury vehicles for a fraction of the purchase price, without incurring the luxury tax premium.

For those looking to lease new luxury vehicles, shorter lease terms of 2-3 years can help avoid some of the luxury tax costs. While the full 10% luxury tax applies at the start of new luxury leases, opting for shorter terms reduces the overall tax paid over the duration of the lease.

Additionally, leasing a luxury vehicle allows the flexibility to switch into a different car once the short lease ends. Lessees could then rotate into another exempt used luxury vehicle, avoiding consecutive new luxury purchases subject to the tax.

While leasing does come with downsides like mileage limits, it presents clever opportunities to enjoy luxury cars without paying the full tax burden. For price-conscious consumers, leasing high-end vehicles for shorter terms can provide an attractive and strategic option in Canada’s new luxury tax environment.

 

Conclusion

In summary, Canada’s new federal luxury tax applies only to new vehicles with a total retail price above $100,000 that have never been registered in the country before. Key exemptions exist for used luxury vehicles, vehicles ordered before 2022, and private sales between individuals.

The tax aims to make expensive new luxury vehicles less affordable, but leaves options open for buyers seeking high-end models through the used market or lease returns. For those purchasing new luxury cars above the threshold, proper tax planning and strategy will be essential to minimize the impact.

Overall, the new luxury tax will likely curb some demand for ultra high-end supercars, but a resilient luxury market and creative buying strategies will ensure a wide selection of prestigious vehicles remains available to those Canadians seeking indulgence on four wheels.

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Questions About Canada Luxury Car Tax

The Canada Revenue Agency has clarified that the federal luxury tax does not apply to used vehicles that have been previously registered in Canada. So if you are purchasing a used car or truck in Canada that has been registered before, even if the sale price is over $100,000, you will not have to pay the federal luxury tax.



In Canada, new vehicles with a manufacturer’s suggested retail price (MSRP) of $100,000 or more are considered luxury vehicles and are subject to the federal luxury tax. This includes the vehicle price plus options, fees and delivery charges. So even if you purchase a vehicle for under $100,000, if the total MSRP is over $100k it would be considered a luxury vehicle.

Yes, the federal luxury tax does apply to leased vehicles in Canada that have a total value of over $100,000. For leased vehicles, the tax is calculated based on the total value of the lease, including any downpayment. So even if your monthly lease payments are under $100k, if the total leased value exceeds that threshold, the luxury tax will apply.

Yes, certain commercial vehicles are exempt from Canada’s luxury tax, even if their value exceeds $100,000. This includes motor vehicles designed for carrying goods, equipment, or passengers used for commercial purposes. So delivery vans, work trucks, buses etc. would not be subject to the luxury tax. However, luxury SUVs and pickups would still be taxed.

Fully electric and some hybrid vehicles are exempt from Canada’s federal luxury tax, regardless of their sale price. This exemption is meant to encourage adoption of more environmentally-friendly vehicles. However, only select hybrid models qualify based on battery capacity and electric driving range. Check with the dealer to see if a specific hybrid model you’re considering is exempt.

Canada’s federal luxury tax is calculated as 20% of the value above $100,000 for new vehicles. For example, if you purchase a vehicle with an MSRP of $125,000, the luxury tax would be 20% x ($125,000 – $100,000) = $5,000. The tax is paid directly to the registered auto dealer when you purchase the luxury vehicle.



No, Canada’s federal luxury tax applies nationally, regardless of which province you purchase the luxury vehicle in. For example, if you live in British Columbia and purchase a vehicle in Alberta for over $100k MSRP, you will still need to pay the federal luxury tax. The tax is based on the vehicle value, not the jurisdiction.

The federal luxury tax is applied before GST/HST on new vehicle purchases in Canada. So you would first calculate 20% luxury tax on the vehicle value above $100k, then apply 5% GST or appropriate provincial sales tax rate on the full vehicle value including the luxury tax amount.



No, there is currently no exemption from Canada’s federal luxury tax for medical reasons or disabilities. The only exemptions are for certain commercial vehicles used for business purposes or zero-emission electric/hydrogen vehicles. Even with a valid medical requirement for a high-end vehicle, you would still need to pay the applicable luxury tax.

Yes, Canada’s federal luxury tax does apply when importing foreign vehicles to Canada if the vehicle value exceeds $100,000. Even if the vehicle was used or purchased at a lower price abroad, the import value assessed by the Canada Border Services Agency determines if luxury tax applies. Make sure to account for an additional 20% tax in your import budget.

For leased vehicles in Canada exceeding $100,000 in value, the federal luxury tax is paid directly by the leasing company or dealer to the Canada Revenue Agency. However, this cost is typically passed along to the lessee as part of their monthly payments. So while the lessee does not directly remit the tax, they do pay it indirectly via higher lease payments.

No, there are no special luxury tax exemptions for certain high-earning professionals in Canada like doctors, lawyers, or executives. All new vehicles with an MSRP exceeding $100,000 are subject to the 20% federal luxury tax regardless of who the vehicle is registered to or their occupation. The tax is based solely on vehicle value.

Yes, you need to pay GST or HST on the full purchase price of a luxury vehicle, including the luxury tax amount. For example:

 

Vehicle Price: $125,000

Luxury Tax (20% of $25,000): $5,000

Total Taxable Value: $130,000

GST (5%): $6,500

Total Taxes = $11,500

 

So GST is charged both on the vehicle sale price as well as the luxury tax component. Applicable provincial sales tax is calculated the same way.



Only up to certain limits. For vehicles purchased in Canada and used at least 50% for business, the maximum tax deduction allowed in the first year is $34,068 including GST/HST/PST paid. Deductions in future years are also capped based on declining balance thresholds. Any amounts exceeding the luxury vehicle limits cannot be written off. Make sure to consult an accountant on the specific limits based on your province and business type.

If you fail to pay the required federal luxury tax on vehicles exceeding $100,000 in Canada, you could face significant fines and penalties:

 

– 10% of the net luxury tax amount owed

– An additional 20% penalty if not paid over a year after becoming payable

– Interest charges compounded daily on unpaid balances

 

Criminal prosecution is also possible in more extreme tax evasion cases related to luxury vehicles.



For vehicles delivered to purchasers after September 1, 2022, the luxury tax applies in Canada regardless of when it was ordered or purchased. However, there was a short exemption window for vehicles ordered in writing before January 1, 2022 and delivered by September 30, 2022 without luxury tax. That exemption has now expired, so all new luxury vehicle purchases are subject to the tax.

No, the luxury tax calculation is based on the manufacturer’s suggested retail price (MSRP) only. Any rebates, discounts, incentives or promotional offers provided by the manufacturer or dealer directly lower the taxable MSRP. This reduces the base price threshold for luxury tax application from $100,000.

Maybe, depending on the situation. If the luxury tax has already been paid on a leased vehicle in Canada, transferring that lease to a new lessee would not trigger luxury tax again. However, any fees, excess wear or disposition costs assessed on transfer could push the total value over $100k and create a new tax liability. Consult the leasing company and financial advisor to ensure no surprise taxes apply upon transfer.

No. Canada’s federal luxury tax only applies to first-time registered and taxed new luxury vehicles purchased for over $100,000 MSRP. If you sell a used luxury vehicle that has already been registered in Canada before, the second-hand buyer does not need to pay luxury tax, even if the sale price exceeds $100k. The tax obligation stops with the first registered owner.

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