The proposed federal luxury tax on new vehicles will inflict a whole lot of pain for very little gain, dealers and economists warn.
“Historically, these taxes have never achieved their main goal, which is to raise revenue, and are considered to be ineffective,” said Tim Reuss, president of the Canadian Automobile Dealers Association (CADA), which had lobbied against the “Robin Hood” measure.
“It will be detrimental to the industry, and particularly now amid the pandemic with the sector hard hit and down 20 per cent in 2020,” Reuss said in a statement. “Now is not the time to introduce a new tax, when the auto sector is trying to recover from the crisis.”
The federal government announced in its April budget that, effective Jan. 1, 2022, vehicles $100,000 and more will be levied with a luxury tax that ranges up to 10 per cent depending on the purchase price. Boats and aircraft priced at $250,000 are also affected.
The federal levy will apply to the vehicle’s price after PST, GST or HST are added, a federal Finance Department official said.
Ottawa, which projects a $154.7-billion deficit for this fiscal year, estimated the move would reap $604 million in new tax over five years. But a 2019 Scotiabank analysis of British Columbia’s experience with its luxury tax suggests the levy won’t meet the federal government’s revenue expectations.
HISTORICALLY, VEHICLE SALES ARE HURT
In 2018, British Columbia raised the provincial sales tax on cars priced at more than $125,000, adding as much as 20 per cent to a new vehicle on top of the five per cent federal GST.
Scotiabank’s report said luxury car sales “reversed gears sharply in 2018, shifting from growth above 10 per cent year over year in 2017 to a fiveper-cent year-over-year contraction in 2018.
“Most economists would agree that such a luxury tax is economically inefficient,” the report said.
Dealers interviewed by Automotive News Canada said the federal luxury levy will likely put a damper on sales as consumers find ways of avoiding the tax.
Francesco Policaro, CEO of the Policaro Group in Brampton, Ont., expects many buyers who were considering vehicles priced in the low $100,000s will likely opt for vehicles below the federal tax threshold. Buyers of exotic cars, priced at $200,000 or more, will likely abstain from purchasing in protest over the tax, he said.
“They have the money, but they pay a lot of tax already,” said Policaro.
The luxury tax “suppresses spending,” and that may reduce the overall revenue the federal government takes in.
Of the brands the company sells at its four dealerships, Policaro estimated 50 per cent of Porches sold will be over the $100,000 threshold, 10 per cent of BMWs, five per cent of Lexuses and almost none of the near-luxury Acuras, except for the high-performance NSX model which can cost $200,000.