Will Canada’s proposed luxury vehicle tax hurt sales?

A proposed luxury goods tax came to fruition in Canada's Budget 2021. What impact will this have on luxury vehicle sales?

John Zekany, Americas Vehicle Forecast Analyst

09 August 2021

While campaigning for the 2019 Canadian federal election, Prime Minister Justin Trudeau and his Liberal party proposed a luxury goods tax. This came to fruition earlier this year in Canada’s Budget 2021. In an advance release of the final document, Deputy Prime Minister and Minister of Finance Chrystia Freeland provided the following explanation:

“[…] it is also fair to ask those who have prospered in this bleak year to do a little more to help those who have not. That is why we are introducing a luxury tax on new cars and private aircraft worth more than $100,000 and pleasure boats worth more than $250,000. If you’ve been lucky enough, or smart enough, or hard-working enough, to afford to spend $100,000 on a car, or $250,000 on a boat – congratulations! And thank you for contributing a little bit of that good fortune to help heal the wounds of COVID and invest in our future collective prosperity.”

Canada’s budget implantation (Bill C-40) passed and is now law, but the luxury tax, as well as some additional measures, are still subject to further consultation. The Liberal party may trigger a snap election before January 2022 and the new government could make changes to this tax, for better or for worse.

As the levy currently stands, it would amount to 10% of the vehicle’s value, or 20% of the value above the C$100,000 threshold – whichever is less. It would be applied at the final purchase price, so the taxable amount is based on the final price, once other taxes have been applied. The levy can vary geographically, depending on the taxation method in each specific province. In Ontario, for example, a vehicle costing C$150,000 would have a final price of C$169,500 after the 13% Harmonized Sales Tax is applied, meaning that the luxury tax would amount to C$13,900, or 20% of the amount above the C$100,000 threshold. That same model in British Columbia, meanwhile, would be subject to a luxury tax of C$17,800 as the province has higher tax rates.

It remains to be seen how much this tax, if implemented as currently drafted, will affect the Premium Vehicle market, but if history is anything to go by, the segment would be unlikely to experience rapid growth over the coming years. When British Columbia imposed its own luxury car tax in 2018, sales in the segment went from growth in excess of 10% year-on-year in 2017 to -5% year-on-year in 2018, according to a report published by Scotiabank in 2019. While the government estimates that the tax will increase federal revenues by C$604 million over five years, the report suggests that this will not be the case as “most economists would agree that such a luxury tax is economically inefficient.”

As of now, most vehicles that would be subject to the tax fall within the Super-Premium category, although some models at the higher end of the Premium category will also be liable. As vehicle prices in Canada increase, in line with the recent trend, the tax is likely to catch more and more models in the Premium and even Non-Premium segments. Certain higher-trim Large Pickups, for example, can have a pre-tax price in excess of C$85,000, and figures such as this are only likely to rise in future as models integrate more advanced technologies and features.