Luxury tax is an administrative headache, dealers say

It’s too early to assess the financial impact of the new federal luxury tax launched Sept. 1 on the auto retail sector but after two quarters living with it, the association representing Canada’s franchised dealers says it’s become an administrative headache.

The tax has created uncertainty about how it should be applied, said Charles Bernard, lead economist of the 3,400-member Canadian Automobile Dealers’ Association (CADA).

“The main problem with the tax has been the administrative burden that came with it,” Bernard told Automotive News Canada.

“It was a mess. When it came out even the people at CRA  [Canada Revenue Agency] didn’t know exactly how the law works. It came in in early September and even after Christmas people at CRA were still getting hammered with questions.”

However, CRA appeared to dispute the criticism.

“The CRA received a manageable number of calls that were responded [to] in a timely manner,” it said in an emailed statement.

The CRA created a “landing page” on its website last July to address questions and explain how the tax is applied.

“We met with the industry and their representatives and addressed their questions and concerns,” CRA said. “The information supplied in response to their questions was published on our web landing page.”

Bernard’s comments came in the wake of a Finance Department report released in March on the potential economic impact of the Select Luxury Items Tax Act.

The report projects the vehicle tax would raise an estimated $55 million for fiscal year 2022-23 and $450 million by fiscal 2026-27. An additional $5 million in GST revenue is also expected because of how the tax is calculated, the report said.

It will result in an estimated decline in gross domestic product (GDP) of between $19 million and $45 million for the automotive sector, it said.

It estimated job losses of between 155 and 255 full-time equivalent positions, hitting luxury-oriented dealers hardest. The sector-wide impact would be 255-425 jobs, while the overall impact on aviation, boating and automotive ranged from 400-870 job losses.

“I think it’ll take a few more months to see if there’s been a real effect on demand,” Bernard said. “Some dealers, luxury is only a part of their business.”

But uncertainties have had a noticeable effect, he said. For instance, it wasn’t clear whether winter tires for vehicles ordered before the tax but delivered after it took effect are subject to the levy, Bernard said.

'PEOPLE GOT SCARED'

Other buyers placed a pre-tax order under their company name but for personal use, then were stymied on delivery when they wanted to register it under their own name.

“A lot of people got scared,” said Bernard. “Some dealers were like, let’s hold off on the sale because I’m not sure I’ll be able to tax it properly.”

The confusion was evident to Mike Beck, general manager of Audi Edmonton North.

“Information came very late and was not completely clear from CRA,” he said via email. “Fortunately, our manufacturer was helpful in this process.”

The additional tax burden cost this store some sales, but

“with the limitations still on high-end cars we still have enough customers that are willing to pay [for now].”

So far, there have been no staff cuts at the dealership, and Beck did not anticipate any in “the near future.”

But once supplies normalize, he said the tax will have a more negative impact as customers look for less expensive options.

“This will result in lower sales opportunities for vehicles in excess of $100,000.”

The Finance Department report’s projections were based on new vehicle registration data from IHS Markit and sales and pricing data from Canadian Black Book. In 2022, 23,914 vehicles were above the $100,000 price threshold, about 75 per cent priced between $100,000 and $150,000.

Sales could drop by between $125 million and $210 million, or 0.15 and 0.25 per cent, largely affecting the segment below $150,000.

Data showed a spike in sales in the months ahead of the tax taking effect, though the report said other factors, such as supply disruptions and rising interest rates, may have been at work.