Car dealers: what does the new luxury tax mean for you?
Canada's new federal luxury tax will come into effect on September 1, 2022. It is crucial for car dealers to understand what types of vehicles are subject to the luxury tax, how it is calculated and reported, and what needs to be done to prepare for its introduction.
How does the luxury tax apply to car sales?
Car dealers will have to pay the luxury tax on sales of affected vehicles when the selling price, including improvements, exceeds $100,000. A covered vehicle is a motor vehicle with four or more wheels designed primarily to carry people, with no more than 10 seats and weighing no more than 3,856 kilograms. Certain types of vehicles are excluded, as mentioned later in this bulletin.
The luxury tax differs from the GST and QST and will be a component of the base on which the GST and QST are calculated. Dealers must ensure that they are aware of the impact of luxury tax costs on their sales. In this respect, dealers do not pay the luxury tax out of their own pockets, as they will be able to integrate the cost of the luxury tax into the selling price of the vehicles concerned.
When does the luxury tax come into effect?
The luxury tax will apply to sales of the vehicles concerned from 1 September 2022. It may also apply to sales of affected vehicles for which written agreements have been concluded with customers between January 1, 2022 and August 31, 2022 if the vehicle is delivered to the purchaser after August 31, 2022.
Luxury tax will generally not be payable by a registered dealer in respect of the sale of a covered vehicle if ownership and possession are transferred to the purchaser before September 1, 2022.
How will the tax on luxury goods be calculated and declared?
The car dealer will calculate the luxury tax on the lesser of these amounts:
20% of the retail price above the target price threshold (i.e. $100,000 for cars);
10% of the retail price of a car.
Tax will apply at the point of sale if the final selling price (including applicable duties, fees and taxes other than GST/HST or provincial sales taxes) exceeds the threshold.
Example:
A car dealer sells a motor vehicle to a consumer for $150,000. The consumer takes possession of the vehicle on September 10. In this case, the car dealer must calculate the luxury tax as follows:
The least of :
10% * sales price ($150,000) = $15,000
20% * the excess of the threshold in question (($150,000 - $100,000) = $50,000) = $10,000
As a result, the dealer will have to remit an amount of $10,000 on his luxury tax return for the quarter that includes the month of September 2022.
Modifications made within 12 months of purchase may also be subject to a self-assessment mechanism if certain conditions are met. Modifications to improve accessibility are generally excluded.
The first luxury tax return will cover the four-month period from the date of implementation (1 September 2022) to 31 December 2022. It must be paid to the government no later than 31 January 2023. Thereafter, all returns and rebates will be due one month after the end of each calendar quarter.
What should car dealers do to prepare?
It is important to understand which vehicles are subject to the luxury tax and which are not. The luxury tax does not apply to the following vehicles:
Vehicles sold for less than $100,000;
Vehicles manufactured before 2019;
Previously registered vehicles;
Sales of vehicles that are not designed primarily to transport people (for example, cargo vans);
Vehicles with fewer than four wheels;
VPassenger vehicles designed to carry more than 10 individuals;
Ambulances, police cars, fire engines, hearses and certain recreational vehicles.
Financing considerations
Under a lease, GST/HST and QST are paid by the lessee on periodic lease payments. Luxury tax, on the other hand, is paid in full by the dealer at the outset, and then recovered by the dealer or the financing entity that handles the vehicle and the lease, in one instalment or over time on the lease payments.
Because of this mechanism, the luxury tax will certainly have an effect on cash flow and financing. As a result, dealers will have to review their leases and calculations in order to factor the luxury tax into the rent. Finally, the amount of GST/HST and QST will be higher because of the initial or periodic payments attributable to the luxury tax made by the lessee.
In the case of an instalment sale, the dealer must pay the luxury tax up front, as well as the GST/HST and QST applicable to the sale price after the luxury tax has been applied. A decision will then have to be made as to whether the customer reimburses the luxury tax on signing the contract or prefers to add the amount of the luxury tax to the amount of the financing. Again, cash flow and financing will be factors that dealers and financing entities will not want to overlook.
What should you consider when preparing for the luxury tax?
Prepare to register to collect luxury vehicle tax if, as a car dealer, you plan to sell affected vehicles. Dealers will need to provide a purchase exemption certificate to their suppliers confirming that they are registered to pay the luxury tax;
Consider the cost of the luxury tax on any affected vehicles that the dealership allows, such as service vehicles or courtesy cars. The luxury tax will be payable at that time;
And consider structuring leases to minimise the effect of the tax on cash flow. Registered dealers who also lease vehicles to customers will be required to pay the luxury tax on the leased vehicle when possession is transferred to the customer, rather than during the term of the lease;
Configure sales and accounting systems to properly account for the luxury tax as a cost to the dealer and payable to the Canada Revenue Agency. Dealers should also be able to identify the sale of upgrades or improvements to be installed on vehicles as part of the sale that may trigger the luxury tax;
Review all sales where an agreement has been reached between January 1 and August 31, 2022, but where the vehicle will be delivered on or after September 1, 2022. If the luxury tax was not taken into account when the price was agreed, dealers may wish to review the terms of the sale to determine whether price adjustments can be made to reflect the additional cost.
It is essential that car dealers prepare adequately for the coming into force of this new luxury tax. Mallette's team of consumption tax specialists can help you implement the new luxury tax.
Inform yourself now
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