Introduction of the Luxury Tax

On September 1, 2022, a new federal tax was introduced with the enactment of the Select Luxury Items Tax Act (hereinafter “luxury tax”). It applies on the purchase of three types of subject items manufactured after 2018: new vehicles, aircraft and vessels that exceed specified price thresholds (hereinafter “luxury items”).  The luxury tax may also be levied on the rental and import of such items, in addition to their purchase.

Subject to certain exceptions, the luxury tax applies to the following items, at the following thresholds:

• Subject vehicles priced at $100,000 or more;
  • A subject vehicle means a motor vehicle that meets the following conditions: (1) it is designed or adapted primarily to carry individuals on highways and streets, (2) it has a seating capacity of not more than 10 individuals, (3) it has a gross vehicle weight rating that is 3,856 kg or less, (4) it has a date of manufacture after 2018, and (5) it is designed to travel with four or more wheels in contact with the ground.
  • Certain vehicles are specifically excluded from the definition, including ambulances, police vehicles and hearses.
• Aircraft (e.g. aeroplane or helicopter) priced at $100,000 or more;
• Vessels (e.g. yacht or sailboat) priced at $250,000 or more.

At the time of purchase, these prices must take into account the costs associated with the luxury item in question, including customs and freight fees, as well as improvements made to the item. Note that sales taxes are not included when determining the price of the luxury item. The luxury tax is added to the price of the subject items before calculating the applicable sales taxes.

The luxury tax is the lesser of the following two amounts:

• 20% of the difference between the total item value and the price threshold for each luxury item category;
• 10% of the total item value.

The amount of the luxury tax is calculated and charged to the customer at the time of purchase of the luxury item (for leased items, the luxury tax will likely be charged to the customer by the lessor, but will be spread over the lease term of the item).

Briefly, subject luxury item vendors include manufacturers, wholesalers, retailers or importers of such items. These entities must be registered from their first sale of subject luxury items in order to collect and remit this tax to the tax authorities. Returns must be filed with the tax authorities by any vendor registered in the plan, based on a reporting period that usually corresponds to a calendar quarter. Returns must be filed by the end of the first month after the end of the reporting period, and the same deadline applies for remittance of amounts collected. 

The luxury tax may also apply to improvements made to a subject item after the sale when certain conditions are met.

Note that certain exemptions apply to cascading sales of luxury items by registered vendors to other registered vendors. Furthermore, luxury items registered with the government on September 1, 2022 would not normally be subject to the luxury tax.

To learn more, we invite you to contact your Crowe BGK advisor.