Expert Insights: Automotive luxury tax - issues and challenges

Canada’s new federal luxury tax took effect Sept. 1, and auto dealers continue to face challenges understanding the nuances of how and when the tax is calculated as well as how it affects their final sale price to the customer. Getting it wrong can be costly because the tax is levied on the dealer, and it is difficult if not impossible to change the price after the sale has been closed. BDO’s National Indirect Tax Practice leader, Brian Morcombe, and Director Bruce Goudy help clients ensure that their invoicing and reporting systems properly account for the luxury tax and that their teams understand the nuances to avoid costly errors.

Q: Do you expect that dealerships will have to confront new administrative challenges to support the implementation of the luxury tax? Brian Morcombe and Bruce Goudy:

Brian Morcombe and Bruce Goudy: Dealers already face many indirect-tax compliance challenges in addressing the complexities of tax treatments for discounts, manufacturer promotional allowances, rebates, coupons and trade-ins. If they do not get it right, it can result in costly audit assessments from tax authorities. This new luxury tax is one more responsibility added to dealerships’ burden. It requires careful planning to ensure the tax is properly calculated and contemplated for sales of subject vehicles of more than $100,000, including any improvements forming part of that sale. A subject vehicle is a motor vehicle with four or more wheels, designed primarily to carry individuals, with a seating capacity of not more than 10 individuals and a weight not exceeding 3,856 kilograms. Dealers need to know what types of vehicles are caught in the luxury tax and what are not. For example, in addition to price, the gross-vehicle-weight rating must be considered in addition to the number of passengers, and the invoicing system should reflect that for each sale. Luxury tax may also be payable by the dealer on certain service vehicles and courtesy cars at the time they are licensed with a provincial tax authority. This means a process would need to be implemented to track and report the luxury tax payable on those vehicles in the appropriate reporting period.

Q: Consumers often find loopholes to avoid paying taxes, so isn’t this law susceptible to these loopholes? What might those be?

Morcombe and Goudy: The intent of the luxury tax is to tax vehicles (including improvements) valued at more than $100,000. If a dealer charges a fee for a vehicle and a separate fee for one or more other supplies, the legislation requires that the prices attributed to those supplies be reasonable (i.e., to not try to keep the price unreasonably low to avoid luxury tax). Also, administrative fees or other similar charges must be included in the base on which luxury tax is determined. While acknowledging that that may be subjective, the intent is clearly to provide an equitable result to competing dealers making a similar sale.

Q: Are any improvements that buyers make to their vehicles subject to luxury tax? 

Morcombe and Goudy: Purchasers intending to make improvements do not need to self-assess and remit luxury tax on improvements if their original purchase of the vehicle did not attract luxury tax. However, if improvements valued at more than $5,000 are made within the first year after the sale to a vehicle that was subject to luxury tax, the owner is required to self-assess and remit the applicable tax on the improvements.

Q: Given that some provinces—British Columbia and Quebec, specifically—also impose vehicle taxes, doesn’t that create an inherently unfair tax structure? What can be done to remedy that?

Morcombe and Goudy: Provinces are responsible for levying their own taxes on vehicle transactions, so the tax costs varies from province to province even before the introduction of the federal luxury tax. It is not expected that the introduction of the luxury tax will cause the provinces to revisit their existing tax structure.

Q: What will the impact of the luxury tax be on overall sales? What about its effect on the used-vehicle market? 

Morcombe and Goudy: Where a vehicle was previously licensed with a provincial or federal government for use on public roads, the sales of such used vehicles will generally not be subject to luxury tax, even if the sale price exceeds $100,000. Currently, the demand for used vehicles is high due to the supply chain challenges for new vehicles, and it is unclear whether the application of luxury tax to new vehicles selling for more than $100,000 will be large enough to discourage a potential purchaser.

Q: Considering that vehicle demand is high and supply low, is this a good time to impose a luxury tax? 

Morcombe and Goudy: Many dealers and purchasers would likely argue that it is not a good time to impose the tax. If the sale price of a new vehicle is higher as a result of the luxury tax, that vehicle may be somewhat less attractive to purchasers, but it is not clear whether it would be sufficient to cause purchasers to not make that purchase.

For more information about the new luxury tax and how it will affect auto dealers, visit our website: https://www.bdo.ca/LuxuryTaxAutodealers

ABOUT THE PANELISTS

BRIAN MORCOMBE
Indirect Tax Practice Leader
Brian is the Indirect Tax Practice Leader in Canada. He has more than 20 years’ experience providing GST/HST, QST and PST solutions to nonresident and resident manufacturers, distributors, charities, financial institutions, municipalities, universities/colleges, schools and hospitals, to name a few.

BRUCE GOUDY
Director, Indirect Tax Practice
Bruce is a director within the Indirect Tax Practice in BDO's Markham, Ont., office, with more than 25 years of experience providing advice on indirect-tax issues, including assistance with difficult audits, identifying and securing refunds of overpaid taxes, compliance and reporting, and accounting for indirect-tax contingencies.