Luxury Car Tax in Canada

Luxury tax in Canada was brought into effect in September 2022 to levy tax on high-end vehicles, such as cars, airplanes, boats, etc., valued over a certain threshold. It is applicable on the sale, lease, or importation of:

• specific vehicles and aircraft priced beyond $100,000.
• specific vessels priced beyond $250,000.

Criteria defining a vehicle subject to luxury tax

Throughout this article, we will refer to “subject vehicles”, as a common denominator for vehicles that fall within the group that the luxury tax applies to.

The luxury car tax is applied to motor vehicles that fall within certain criteria. These vehicle types include convertibles, coupes, SUVs, hatchbacks, light-duty pickup trucks, sedans, and sports cars. Typically, a motor vehicle will be considered a subject vehicle if it meets all the eligibility criteria provided by the CRA. In addition to the threshold amounts provided above, a vehicle will not be subjected to luxury car tax unless it meets all of the following criteria:

• Primarily used to carry individuals on roads, including streets and highways
• Seating capacity of maximum 10 individuals
•  Gross weight of maximum 3,856 kg
•  Manufactured after 2018
•  Minimum of four wheels, having contact with the ground when being used 

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Vehicles excluded from luxury tax

A vehicle is not considered a subject vehicle and hence, will be exempt from the luxury tax if it is a:

• Motor vehicle registered and delivered prior to Sep. 2022
• Ambulance
• Motor vehicle used for policing, emergency medical or fire-control activities
• Hearse
•  Recreational vehicle used for offering temporary residential space equipped with four or more of the following facilities:
  • self-contained toilet
  • refrigerator
  • kitchen
  • air-conditioning or heating mechanism working independently of the vehicle’s engine
  • portable water supply system accompanied with a sink and faucet
  • electric power supply ranging between 110-V and 125-V or an LPG (Liquified Petroleum Gas) mechanism working independently of the vehicle’s engine 

Events and activities that trigger luxury tax

The luxury tax is applied if the subject vehicle, priced over the said threshold, is sold, imported, registered, leased out or improved/modified. The activities that trigger the luxury tax in different scenarios are:

 Sale of subject vehicles

When a subject vehicle is sold to a buyer who is not registered with the CRA as a vendor, the luxury tax becomes payable when the buyer takes possession or ownership of the vehicle, whichever happens earlier. 

Import of subject vehicles

If a subject vehicle priced beyond $100,000 is imported into Canada, it is subject to luxury tax. Note that GST/HST and provincial sales tax is not included in the $100,000 threshold, meaning that these taxes are added after calculating the total value of the vehicle.

Lease out subject vehicles

A registered vendor, who leases out the motor vehicle (over the $100,000 threshold) not previously registered with the respective provincial or federal government, must pay luxury car tax. The tax becomes payable when the lessee first receives the right to use the subject vehicle as provided in the contract.

Pre-sale improvements made to subject vehicles

These improvements are only subject to tax when performed on the subject vehicle priced over the threshold. However, if improvements are made specifically to sell the vehicle, the luxury tax will be payable on the sale as well as the improvement costs incurred. 

From a car owner’s perspective, improvements here refer to making modifications of a minimum of $5,000 to your subject vehicle. This can be in the form of installing a stereo system, upgrading the engine, getting windows tinted, installing vehicle wrap, and adding or modifying your vehicle’s components. 

The improvement tax is payable right after the day the improvement period ends. For instance, if a vehicle was sold on Apr. 15, 2023, the improvement period will be from Apr. 15, 2023 to Apr. 25, 2024. And, the luxury tax will be payable on Apr. 26, 2024.

Post-selling improvements

The buyer is accountable for bearing the luxury tax payments if any taxable improvements are made to the subject vehicle after its sale.

Vendor not registered anymore but still holding tax-free subject vehicles

An individual who ceases to be a registered vendor is liable to pay luxury tax, provided they hold tax-free subject vehicles that are priced over $100,000.

Exemptions for vendors under luxury tax

There are a few scenarios where vendors are not required to pay luxury tax:

• Sales occurring between registered vendors of subject vehicles, provided the purchasing registered vendor offers an Exemption Certificate (Form L100-1) to the selling registered vendor
• Sales, importation, or lease of subject vehicles that were previously registered with the Govt. of Canada or a province (Exception: If the vehicle was previously registered solely for sale or leasing purposes, luxury tax effects will apply).
• Sales, importation, or lease of subject vehicles primarily used for military or policing purposes
• Imports made by a registered vendor of subject vehicles until the registered vendor sells the vehicle to the non-registered party or consumer
• Improvements, including repairs, maintenance, cleaning, customised additions for disabled people, trailers and campers, addition of child safety mechanisms, and replacements of damaged components 

Luxury car tax calculation

The calculation of luxury tax considers the following two components and is the lesser of:

1. 10% of taxable amount
2. 20% of the difference between the taxable amount and the threshold of $100,000

For instance, if you are a registered vendor selling the subject vehicle at $120,000 to a non-registered customer, the luxury tax will be the lesser of:

1. 10% of $120,000, which amounts to $12,000
2. 20% of ($120,000 - $100,000), which amounts to $4,000

Hence, the luxury tax payable for the above scenario will be $4,000.

Significance of taxable amount under different scenarios 

It’s worth noting that the taxable amount can mean different things in different scenarios, such as sale, lease, import, etc. For instance, the components used to calculate the taxable amount for the sale of the subject vehicle will be different from those when leasing it out.

This table summarises how to calculate your taxable amount (that we earlier used in luxury tax calculation) in different scenarios. Note that GST/HST and provincial sales tax are not a part of the taxable amount and hence are not included in this table.

Calculation of luxury tax on vehicle improvements

If there are any improvements made to the subject vehicle, which were not included in its selling price, the luxury tax on improvements can be calculated as follows:

Step 1. Calculate the total taxable amount (including improvement costs), which is the sum total of the taxable amount of the subject vehicle and the improvement costs. Now, use the below formula and choose the lesser of the following two elements:

1. 10% of total taxable amount
2. 20% of difference between total taxable amount and threshold of $100,000 

Step 2. Consider the unimproved amount (excludes improvement costs), which is only the taxable amount of the subject vehicle. Now, use the below formula and calculate the lesser of the following two elements:

1. 10% of unimproved taxable amount
2. 20% of difference between unimproved taxable amount and threshold of $100,000

Step 3. Subtract the lesser of two amounts from step 1 and step 2 to get your luxury tax amount on the improvements 

Deadlines and penalties for missing luxury tax payments

Luxury tax returns must be reported quarterly. So, when reporting your returns, the first quarter will be from Jan. 1 to Mar. 31, the second quarter being from Apr. 1 to Jun. 30, and so on.

The deadline to file or pay your luxury tax will be the last day of the month following the last date of the quarterly reporting period. For instance, if your reporting period is in the first quarter (between Jan. 1 and Mar. 31), the due date to pay or file your tax would be Apr. 30. 

A person who fails to pay luxury tax by the due date must pay CRA a penalty dependent on the delinquent amount and the number of months that have passed since the due date. The penalty is calculated as follows:

• 1% of the amount that was required to be paid for the reporting period
• Take 25% of the above amount and multiply it by the number of months (capped at 12) that have passed since your due date.
• Now add together the 1% of the amount from A and the time-dependent amount from B. The combined amount of these two steps is the penalty owed to the CRA.

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