Federal luxury tax is coming, and dealers warn the pain will be real

The federal government continues the march toward its Sept. 1 target to enact a new luxury tax on vehicles that cost more than $100,000, despite stiff opposition from dealers and a warning from Ottawa’s budget watchdog that the tax would cause luxury-vehicle sales to decline by more than half a billion dollars over the next five years.

In a May 26 report, Parliamentary Budget Officer (PBO) Yves Giroux estimated that the new tax on luxury vehicles would add $572 million to government coffers through the 2026-27 budget year but reduce sales by $566 million, or 19 per cent, over the same time span.

The assessment reiterates what dealers have been warning about the tax since it was first floated, said Huw Williams, public affairs director for the Canadian Automobile Dealers Association (CADA).

“There’s going to be a clear decline in sales. There’s going to be a clear change in consumer behaviour,” Williams said, all to collect a “paltry” amount of tax dollars relative to overall government spending.

From the tax’s scheduled implementation date midway through the 2022-23 budget year until the 2026-27 budget year, the PBO estimates luxury-vehicle sales will average $666 million a year.

Internal CADA estimates predict an even steeper sales decline than the PBO assessment, Williams said, but the industry association has not made the figures public.

“We think [the PBO] numbers should be scary enough for government to change course and certainly to look at jurisdictions where they should provide exemptions.”

TAX ‘REMAINS A PRIORITY’

Despite vocal opposition from CADA and other groups, Ottawa has not wavered.

“The government was reelected on a platform that included a commitment to bring forward a luxury tax on yachts, private jets and luxury cars, and implementing this measure remains a priority,” said Jessica Eritou, a spokeswoman for Finance Minister Chrystia Freeland.

The government packaged the luxury tax into a budget implementation bill introduced on Parliament Hill on April 7.

The new tax has dealers bracing for lost revenue, rushing to line up vehicles for customers before Sept. 1 and warning other buyers facing longer lead times about the impending levy, said Chris Pfaff, CEO of Pfaff Automotive Partners.

Along with a flurry of customers looking to purchase vehicles before the tax takes effect, Pfaff said his dealership group, a part of U.S.-based Lithia Motors Inc., is already facing cancelled orders for vehicles it will be unable to source before the deadline.

Pfaff Auto operates luxury and performance-vehicle dealerships in the Toronto and Vancouver areas, but what portion of its business will be affected by the luxury tax varies by brand. Every sale at the retailer’s two McLaren stores will fall under the new levy, Pfaff said, along with a considerable percentage of sales at its two Porsche locations. At the company’s BMW and Audi dealerships, he estimated that 15 to 20 per cent of sales come in at more than $100,000.

WORKERS WILL SUFFER

Luxury buyers’ losses will be limited to their wallets, Pfaff said, but that is not the case for those in the industry.

“At the end of the day, it’s not the wealthy that are going to suffer,” he said, referencing technicians, salespeople and other service staff as being among those who will be “penalized unfairly.”

For Pfaff and other dealers, the tax has also prompted reflection about the future of luxury vehicles in Canada.

One Ontario dealer opted to exit the luxury segment entirely. In May, Leavens Automotive Group sold two dealerships — Porsche of London and Audi Windsor — to Edmonton-based AutoCanada Inc. for an undisclosed price.

Chris Leavens, head of the dealership group, gave several reasons he decided to sell, and the spectre of the new tax was one of them.

“Part of it was timing, part of it was concerns about the luxury tax and Liberal spending like there’s no tomorrow,” he said.

After the sale, the group continues to operate six dealerships in southwestern Ontario, all of them non-luxury brands.

IMPLEMENTATION ALSO A CONCERN

How the tax will be rolled out is another concern for retailers. The Canada Revenue Agency is working on a system to administer the tax, Williams said, but the intricacies will not be known until after it is signed into law.

Luxury-vehicle buyers in British Columbia and Quebec — two provinces that already have different forms of a provincial luxury tax on their books — may be forced to pay up twice. With both taxes in effect in B.C., luxury sales could be taxed at a rate of up to 38 per cent.

CADA and other stakeholders have been lobbying the federal government to write in an exemption. But so far, Finance Canada has pushed forward on applying the tax across the board, Williams said. The industry organization continues to lobby MPs and senators as the legislation works its way through Parliament.

Buyers crossing the U.S. border to circumvent the luxury tax represent another challenge for Ottawa.

“Luxury-vehicle buyers are a sophisticated bunch,” said David Adams, head of the Global Automakers of Canada. He expects some buyers to find their way around the tax, potentially diverting sales from Canada.

Pfaff warned of a repeated outcome, saying the market experienced a similar shift in 2018. When the B.C. government raised its tax on luxury vehicles, he said, registrations shifted to Alberta. Faced with a new hurdle, he said, “people start thinking creatively” about how they can get around it.

‘BEST TIME’ FOR A TAX

The tight supply of vehicles, however, could work in the government’s favour.

“We have such pent-up demand. You could argue this is the best time, if ever, to implement this tax,” Pfaff said — before adding that the ramifications for the midto long term are more detrimental.

Likewise, Andrea Baldi, CEO of Automobili Lamborghini America, said his brand’s Canadian customers are not balking over the luxury tax.

“There’s no hesitation, nobody is cancelling or telling us, ‘Oh, my God, 10 per cent more,’”Baldisaid, pointing to the scarcity of vehicles.

With vehicle demand outstripping supply, Lamborghini is expecting no change in its sales numbers, which totalled an estimated 336 vehicles in Canada last year, according to the Automotive News Research & Data Center.

As Ottawa presses forward on its Sept. 1 enactment date, CADA is pledging that the fight will not end there.

“This is an issue that we’re not going to be dropping one way or the other,” Williams said. “We’ll be holding the government to account as we go forward on this.”