Federal luxury tax to cost more than $500M in sales over five years, warns PBO

The proposed federal luxury tax, expected to be enacted Sept. 1, will reduce sales of luxury vehicles in Canada by more than half a billion dollars over the next five years, according to a new estimate from Ottawa’s Parliamentary Budget Officer (PBO) Yves Giroux. 

The PBO assessment, released May 26, follows the government’s tabling of its latest budget implementation bill in Parliament April 7. The luxury tax bundled into Bill C-19 is the result of a 2019 Liberal campaign promise and lengthy consultations with industry.

Covering vehicles retailing for more than $100,000, the tax will add either a 10-per-cent charge to the full value of the vehicle, or 20-per-cent tax on the value of the vehicle above $100,000, whichever option is less costly. It will add similar new taxes to certain boats and aircraft.

The PBO report breaks out the amount of government revenue the tax is expected to bring in through its first five years, as well as the impact the tax will have on luxury vehicle sales.

Ottawa can expect the levy to add $572 million to government coffers through the 2026-27 budget year, the PBO report says, but vehicle sales will suffer as a result.

From its implementation Sept. 1 — midway through the 2022-23 budget year — until the 2026-27 budget year, the tax will reduce new luxury vehicles sales by $566 million, the PBO estimates. That translates to roughly $125 million in lost sales each year over the 4.5-year period. 

That also represents a 19-per-cent decline in annual luxury vehicle sales, which the PBO estimated would average about $666 million per year between 2022 and 2027.

The PBO did caution its forecast was based on a range of shifting variables and uncertain sales volumes for vehicles retailing over $100,000, meaning there are uncertainties baked into the estimate. The blowback from luxury vehicle buyers resulting from the new tax is also unknown.

“A behavioural response is expected. The exact magnitude of this response is uncertain and depends on the price sensitivity of consumers,” the report says.

The Liberal government has pushed forward on the luxury tax despite opposition from industry. The Canadian Automobile Dealers Association, for one, has criticized the levy as damaging and ineffectual.

Ottawa’s unwillingness to include an exemption to the tax for electric vehicles has also attracted the criticism of the Canadian Vehicle Manufacturers’ Association and the Global Automakers of Canada (GAC), which together represent North American and overseas automakers operating in Canada. The two groups say the refusal to carve EVs out of the tax runs counter to the government’s climate commitments.

Bill C-19 must still clear a series of legislative steps before becoming law.