Why the proposed luxury tax might have no winners

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.

‘MONEY GRAB’

Perry Itzcovitch, dealer principal of Mercedes-Benz Downtown in Calgary, said many buyers will try to keep the purchase price below $100,000 to avoid the tax. He estimated that of 25 Mercedes models in his showroom now, about three would be affected by the tax.

“Is this really going to accomplish a lot? It’s just a money grab, really,” Itzcovitch said, adding that tax avoidance is a likely outcome.

“If our vehicles become too pricey in Canada, I could see people going south of the border,” he said. “If you’re driving something nice, maybe you’ll defer your purchase for two or three years.”

Even luxury zero-emission vehicles, such as the $125,000 Tesla Model X, will be fully taxed, a Finance Department official confirmed to Automotive News Canada. Ottawa offers rebates of up to $5,000 for zero-emission vehicles priced at less than $45,000.

The tax is also close to capturing pickups equipped with heavy-duty features to enable big payloads or towing large trailers. The off-road Ford F-150 Raptor, RAM 1500 Limited, GMC Sierra Denali and Silverado High Country can all be equipped with options that drive the price up to the range of $85,000 to $95,000, depending on the model.

‘REAL CONCERN’

Jay McKeen, dealer principal of Carter Cadillac in Calgary, said wellequipped heavy-duty diesel trucks are pushing $100,000, and “that’s a real concern for us and our clients.”

“If a 65-year-old couple are hauling a fifth-wheeler trailer, they’re going to need a three-quarter ton diesel to haul it. That’s not really a luxury situation.”

Buyers of the Cadillac Escalade SUV, which typically sells for about $120,000, will also face the tax although, “It’s not going to be cost-prohibitive for them,” McKeen said.

Policaro said all dealers — including those who sell vehicles under the $100,000 threshold — should be contacting their members of Parliament to protest the tax. He noted that with inflation, a well-appointed vehicle that is $85,000 today could easily reach the luxury threshold in a few years and be subject to the tax.

Because the tax disproportionately affects imported cars, it might run afoul of international trade deals, said industry stakeholders.

“The challenge with the luxury tax is that for all intents and purposes, it impacts essentially the European manufacturer base that has luxury vehicles,” said David Adams, president of the Global Automakers of Canada, which represents import brands.

“It doesn’t make a lot of sense in terms of the relationship we’re trying to construct with Europe” through trade agreements.

The government plans to bring forward a separate bill for the tax, “so there will be more opportunity to comment.”

The CADA said Ottawa proceeded with the measure “despite intense lobbying by the embassies of Germany, the U.K. and the European Union, whose vehicle manufactures will be the hardest hit by this tax.”

The association has pledged to continue the fight against the tax and is working closely with the manufacturers’ associations and trade officials from affected countries.