Subject Vehicles Under the Select Luxury Items Tax Act

Luxury Tax Notice LTN2

August 2022

The purpose of this notice is to provide information relating to the application of the luxury tax on certain vehicles. Vehicles that could be subject to the luxury tax include sedans, coupes, hatchbacks, convertibles, sport utility vehicles and light-duty pickup trucks priced above $100,000.

Except as otherwise noted, all statutory references in this publication are to the provisions of the Select Luxury Items Tax Act. The information in this publication does not replace the law found in the Act.

If this information does not completely address your particular situation, call 1‑866‑330‑3304.

Table of Contents

Overview

The Government of Canada has introduced a luxury tax on the sale or importation of certain vehicles and aircraft priced above $100,000 and certain vessels priced above $250,000.

On August 10, 2021, the Department of Finance Canada (Finance Canada) published a background paper on the design of the proposed luxury tax for public consultation. On March 11, 2022, Finance Canada also released draft legislative proposals for stakeholder input. The proposed Select Luxury Items Tax Act was included in Bill C-19, Budget Implementation Act, 2022, No. 1, which received royal assent on June 23, 2022.

The luxury tax will come into effect on September 1, 2022.

Vehicles subject to the luxury tax

The luxury tax will apply to vehicles that meet the definition of subject vehicle under the Act and are priced or valued above the $100,000 price threshold, unless an exception applies.

Under subsection 2(1), subject vehicle means a motor vehicle that meets all of the following conditions:

Examples of subject vehicles include sedans, coupes, hatchbacks, convertibles, sport utility vehicles and light‑duty pickup trucks.

Exclusions

Subsection 2(1) excludes certain vehicles from the definition of subject vehicle. The following are not considered subject vehicles and will not be subject to the luxury tax:

Application of the luxury tax

In general, the luxury tax on subject vehicles will apply to sales or importations of subject vehicles priced or valued above the $100,000 price threshold. However, the luxury tax could also apply if a person registers, leases out or has an improvement made to a subject vehicle priced or valued above the price threshold. In addition, the luxury tax will apply if a person ceases to be a registered vendor of subject vehicles and holds any tax-free inventory of subject vehicles valued above the price threshold.

The sections below detail the various circumstances that will trigger the application of the luxury tax on subject vehicles, as well as any exemptions where the tax will not apply.

Selling subject vehicles

The luxury tax will apply to the sale of subject vehicles priced above the $100,000 price threshold and will be payable at the time the sale is completed, as set out in subsections 18(1) and (3), subject to certain exceptions. Generally, a sale is considered completed when possession of the subject vehicle is transferred to the purchaser or when ownership of the subject vehicle is transferred to the purchaser, whichever is earlier.

In most cases, the vendor of the subject vehicle will be liable for the luxury tax on the sale of a subject vehicle priced above the price threshold. However, under subsection 18(2), the purchaser of the subject vehicle will be liable for the luxury tax in sales transactions where the vendor is any of the following:

The luxury tax will not apply to the sale of a subject vehicle priced above the price threshold where a purchaser and a vendor have entered into a written agreement for the sale of the subject vehicle before 2022 in the course of the vendor’s business of selling subject vehicles.

Exemption on sales between registered vendors

Subsection 19(1) provides that the luxury tax will generally not apply to sales of subject vehicles priced above the price threshold between persons that are registered vendors of subject vehicles. Effectively, registered vendors of subject vehicles will be able to purchase and hold tax-free inventory of subject vehicles priced above the price threshold and defer the application of the luxury tax until the subject vehicles are sold to persons that are not registered, such as consumers.

For more information on applying to register as a registered vendor under the Act, refer to Luxury Tax Notice LTN1, Registration Under the Select Luxury Items Tax Act.

As set out in subsection 19(1), in order to purchase subject vehicles priced above the price threshold without the luxury tax applying at the time the sale is completed, the purchasing registered vendor will need to provide an exemption certificate to the selling registered vendor in accordance with section 36. An exemption certificate is a document in which a purchaser attests to a vendor that the purchaser is eligible for an exemption from the luxury tax. To be eligible for an exemption from the luxury tax on the purchase of subject vehicles priced above the price threshold, the purchaser must be a registered vendor of subject vehicles at the time the sale is completed.

Purchasers of subject vehicles priced above the price threshold should use Form L100-1, Luxury Tax Exemption Certificate for Subject Vehicles, as an exemption certificate to certify that they are registered vendors of subject vehicles.

Example

A manufacturer that is a registered vendor of subject vehicles is selling subject vehicles priced above $100,000 to a dealership that is also a registered vendor of subject vehicles.

The manufacturer could sell the subject vehicles to the dealership without the luxury tax applying at the time the sale is completed if the dealership provides an exemption certificate for this sale to the manufacturer.

By providing an exemption certificate certifying that it is a registered vendor of subject vehicles, the dealership would be able to defer the application of the luxury tax by purchasing and holding its inventory of subject vehicles priced above the price threshold on a tax-free basis.

Exemption on sales of previously registered subject vehicles

In most cases, the luxury tax will not apply to sales of subject vehicles priced above the price threshold that have been previously registered with the Government of Canada or a province, as set out in subsection 19(2). However, the luxury tax will apply if the subject vehicle was registered only because of the sale and has never otherwise been registered with the Government of Canada or a province.

A subject vehicle is considered registered with a government if it is registered with or licensed by that government for the purposes of permitting that subject vehicle to travel on public roads within the jurisdiction of that government.

The luxury tax will also apply to sales of subject vehicles priced above the price threshold if a vendor is Her Majesty in right of Canada or a province, an agent of Her Majesty in right of Canada or a province, or an Indigenous governing body and the vendor imported the subject vehicle without the luxury tax applying. When the vendor later sells the subject vehicle to a purchaser, the purchaser will be liable for the luxury tax in accordance with subsection 18(2) even if the subject vehicle has been previously registered.

Example

A dealership that is a registered vendor of subject vehicles sells a used subject vehicle priced above $100,000. The subject vehicle was previously registered with the province of Alberta.

The luxury tax will not apply to this sale as the used subject vehicle has been previously registered with the Government of Alberta.

Exemption on sales of subject vehicles equipped for military or policing activities

Under subsection 19(3), the luxury tax will not apply to sales of subject vehicles priced above the price threshold that are equipped for military activities if the purchaser is a military authority. Subsection 19(3) also provides that the luxury tax will not apply to sales of subject vehicles priced above the price threshold that are equipped for policing activities if the purchaser is a military authority or police authority.

If the purchaser is not a military authority or a police authority (where applicable) but leases out these subject vehicles to a military authority or police authority (where applicable), the luxury tax will not apply if all of the following conditions are met:

Importing subject vehicles

Subsection 20(1) provides that, subject to certain exceptions, the luxury tax will apply to the importation of subject vehicles valued above the $100,000 price threshold in accordance with the Customs Act.

The luxury tax will not apply to the importation of a subject vehicle valued above the price threshold where an importer has entered into a written agreement with a vendor for the sale of the subject vehicle before 2022 in the course of the vendor’s business of selling subject vehicles.

For more information on the application of the luxury tax to the importation of subject vehicles, visit the Canada Border Services Agency webpages.

Exemption on importations by registered vendors

Subsection 21(1) provides that the luxury tax will not apply to subject vehicles valued above the price threshold that are imported by a registered vendor of subject vehicles. Effectively, registered vendors of subject vehicles will be able to import and hold tax-free inventory of subject vehicles valued above the price threshold and defer the application of the luxury tax until the subject vehicles are sold to persons that are not registered, such as consumers.

For more information on applying to register as a registered vendor for the purposes of the Act, refer to Luxury Tax Notice LTN1.

Exemption on importations of previously registered subject vehicles

Generally, the luxury tax will not apply to importations of subject vehicles valued above the price threshold that have been previously registered with the Government of Canada or a province, as set out in subsection 21(2). However, the luxury tax will apply if the subject vehicle was registered in connection with the importation and has never otherwise been registered with the Government of Canada or a province.

Exemption on importations of subject vehicles equipped for military or policing activities

Under subsection 21(3), the luxury tax will not apply to importations of subject vehicles valued above the price threshold that are equipped for military activities and imported by a military authority. Subsection 21(3) also provides that the luxury tax will not apply to importations of subject vehicles valued above the price threshold that are equipped for policing activities and imported by a military authority or police authority.

Registering subject vehicles owned by a registered vendor

Generally, the luxury tax will apply to subject vehicles valued above the price threshold that are owned by a registered vendor of subject vehicles if it registers the subject vehicle with the Government of Canada or a province (for example, to use as a demonstrator (demo) vehicle or a loaner vehicle).

Under subsections 23(1) and (2), the luxury tax will be payable by a registered vendor of subject vehicles at the particular time that the registered vendor registers a subject vehicle valued above the price threshold if all of the following apply:

However, the luxury tax will not apply if the subject vehicle is registered only because it is sold by the registered vendor to a purchaser.

Example

A dealership that is a registered vendor of subject vehicles registers with the Ontario Ministry of Transportation a subject vehicle in its inventory valued above $100,000 in order to use the subject vehicle as a demo vehicle.

The luxury tax is payable by the dealership at the particular time that the subject vehicle is registered with the Government of Ontario.

Leasing out subject vehicles

The luxury tax could apply to subject vehicles valued above the price threshold that are leased out by registered vendors of subject vehicles. Under subsection 24(1), the luxury tax will apply if a registered vendor of subject vehicles owns a subject vehicle valued above the price threshold that has not previously been registered with the Government of Canada or a province and provides the right to use the subject vehicle to a lessee under an agreement that is a lease, licence or similar arrangement. The luxury tax will be payable by the registered vendor at the time at which the lessee first has the right to use the subject vehicle under the agreement, as set out in subsection 24(2).

The luxury tax will not apply to leases of used subject vehicles valued above the price threshold if they have previously been registered with the Government of Canada or a province.

Exemption on leases of subject vehicles equipped for military or policing activities

Subsection 24(3) provides that the luxury tax will not apply to subject vehicles valued above the price threshold that are equipped for military activities and leased out by a registered vendor of subject vehicles to a military authority if certain conditions are met. Subsection 24(3) also provides an exemption on leases of subject vehicles valued above the price threshold that are equipped for policing activities and leased out by a registered vendor of subject vehicles to a military authority or police authority if certain conditions are met.

To qualify for the exemption, all of the following conditions must be met:

Ceasing to be a registered vendor of subject vehicles

As set out in section 27, the luxury tax will apply to tax-free inventory of subject vehicles valued above the price threshold that is held by a person that ceases to be a registered vendor of subject vehicles if all of the following conditions are met:

The luxury tax will be payable by the person at the particular time it ceases to be a registered vendor of subject vehicles.

Having improvements made to subject vehicles

The luxury tax could apply when improvements are made to subject vehicles, as set out in sections 29 to 32. According to subsection 8(1), an improvement to a subject vehicle is the provision of either:

Improvements made to subject vehicles include car modifications. Examples of improvements made to a subject vehicle include stereo system installations, body kit installations, engine upgrades, vehicle wrap installations and window tinting services.

The luxury tax on improvements will typically only apply to improvements made to subject vehicles that were already subject to the luxury tax. However, in the event that improvements are made in connection with the sale of a subject vehicle, the calculation of the luxury tax payable on the sale of the subject vehicle would take into account the cost of the improvements.

The luxury tax on improvements will apply to improvements that total at least $5,000 made during the improvement period of the subject vehicle as determined under paragraphs 29(1)(a) and 30(1)(a). The luxury tax on improvements will be payable on the day following the improvement period.

If a sale triggered the luxury tax on a subject vehicle, the purchaser would be liable for any luxury tax payable on after-sales improvements made to that subject vehicle. Otherwise, the person that was liable for the luxury tax on a subject vehicle would be liable for any luxury tax payable on improvements made to that subject vehicle.

Example

On September 22, 2022, a registered vendor sells a subject vehicle priced over $100,000 to a purchaser. The luxury tax applies to the subject vehicle at the time the sale is completed.

During the improvement period between September 22, 2022, and September 22, 2023, the purchaser hires three service providers to install the following improvements on the subject vehicle: performance tires, an infotainment system and an upgraded exhaust system. The total price of the improvements is $5,000.

The purchaser is liable for the luxury tax on improvements made to the subject vehicle. The luxury tax will be payable on September 23, 2023.

Excluded improvements

Under subsection 8(2), the following improvements are not subject to the luxury tax:

General calculation of the luxury tax (except for improvements)

Generally, the luxury tax is calculated using the taxable amount of the subject vehicle, in accordance with section 34. The luxury tax is equal to the lesser of 10% of the taxable amount of the subject vehicle and 20% of the amount above the price threshold.

The luxury tax on the sale, importation, registration or lease of a subject vehicle priced or valued above the price threshold, or on subject vehicles valued above the price threshold held by a person ceasing to be a registered vendor of subject vehicles is calculated as the lesser of:

  1. the taxable amount multiplied by 10%
  2. the amount that results from subtracting $100,000 from the taxable amount and multiplying the difference by 20%

Determining the taxable amount of a subject vehicle for calculating the luxury tax payable depends on the circumstance that triggered the luxury tax on the subject vehicle.

Taxable amount for sales of subject vehicles

Generally, the taxable amount in respect of the sale of a subject vehicle is the sum of the following, as set out in subsection 18(4):

Taxable amount for importations of subject vehicles

Under subsection 20(2), the taxable amount in respect of the importation of a subject vehicle is the sum of the following:

For more information on calculating the taxable amount in respect of importations of subject vehicles, visit the Canada Border Services Agency webpages.

Taxable amount for registrations of subject vehicles owned by a registered vendor

As set out in subsection 23(4), the taxable amount in respect of the registration of a subject vehicle owned by a registered vendor is the greater of the following:

Refer to the “Determining the retail value” section of this notice for more information on retail value.

Taxable amount for leases of subject vehicles

Under subsection 24(4), the taxable amount in respect of the leasing out of a subject vehicle is the greater of the following:

Refer to the “Determining the retail value” section of this notice for more information on retail value.

Taxable amount for subject vehicles held by a person ceasing to be a registered vendor

Under subsection 27(4), the taxable amount in respect of a subject vehicle held by a person is the retail value of the subject vehicle at the time at which the person ceases to be a registered vendor of subject vehicles.

Refer to the “Determining the retail value” section of this notice for more information on retail value.

Determining the retail value

As set out in section 16, the retail value of a subject vehicle at any time is the sum of the following:

Example – Luxury tax on the sale of a subject vehicle

A registered vendor of subject vehicles sells a subject vehicle to a purchaser. The selling price for the subject vehicle is $160,000 but the registered vendor applies a discount of $10,000 to the price. The subject vehicle is sold to the purchaser for a total consideration of $150,000, which consists of a trade-in valued at $50,000 and a cash payment of $100,000. Therefore, the taxable amount of the subject vehicle for calculating the luxury tax is $150,000.

The luxury tax is equal to the lesser of:

  1. $15,000 ($150,000 × 10%)
  2. $10,000 [($150,000 − $100,000) × 20%]     

The luxury tax payable is $10,000.

Example – Luxury tax on the lease of a subject vehicle

A registered vendor of subject vehicles leases out a subject vehicle that it owns and that has not previously been registered with the Government of Canada or a province. A one-year lease agreement between the registered vendor and a lessee is entered into on December 23, 2022, which gives the lessee the right to use the subject vehicle starting at that time. Possession of the subject vehicle is not transferred to the lessee until January 3, 2023.

On December 23, 2022, the retail value of the subject vehicle is $230,000, which is the sum of the $226,900 FMV of the subject vehicle at the time, a $2,000 freight fee and $1,100 in federal excise tax payable on the subject vehicle. By January 3, 2023, the retail value of the subject vehicle decreases to $210,000 as the FMV of the subject vehicle at that time is $206,900. The taxable amount of the subject vehicle is $230,000, the greater of the two amounts.

The luxury tax is equal to the lesser of:

  1. $23,000 ($230,000 × 10%)
  2. $26,000 [($230,000 − $100,000) × 20%]

The luxury tax payable is $23,000.

Calculation of the luxury tax on improvements

The luxury tax on improvements made to subject vehicles is calculated in accordance with section 35. For improvements, the luxury tax is the difference between the following:

Therefore, the luxury tax on improvements made to subject vehicles is calculated using the following formula:

A – B
Where  
A

is the lesser of:

  • the total taxable amount multiplied by 10%
  • the amount that results from subtracting $100,000 from the total taxable amount and multiplying the difference by 20%
B

is the lesser of:

  • the unimproved taxable amount multiplied by 10%
  • the amount that results from subtracting $100,000 from the unimproved taxable amount and multiplying the difference by 20%

Example – Luxury tax on improvements made to a subject vehicle

A registered vendor sells a subject vehicle to a purchaser for a consideration of $140,000. No improvements are made at that time. The taxable amount of the subject vehicle is $140,000, and luxury tax of $8,000 is paid on the sale of the subject vehicle. The unimproved taxable amount is $140,000.

During the improvement period, the purchaser hires a service provider to install the following improvements for the following consideration: a stereo system upgrade for $2,000, vehicle wrap for $3,500 and a remote starter system for $500. The total consideration for the improvements is $6,000. The total taxable amount is $146,000.

The luxury tax on the improvements is calculated using the formula A − B where:

A is the lesser of:

  • $14,600 ($146,000 × 10%)
  • $9,200 [($146,000 − $100,000) × 20%]

B is the lesser of:

  • $14,000 ($140,000 × 10%)
  • $8,000 [($140,000 − $100,000) × 20%]

The luxury tax payable on the improvements is $1,200 ($9,200 − $8,000).

Reporting the luxury tax and filing returns

Registered vendors and persons that are required to be registered under the Act should report their luxury tax payable for each reporting period on Form B500, Luxury Tax and Information Return for Registrants. Registered vendors and persons that are required to be registered under the Act must file Form B500 with the CRA for every reporting period even if they do not have luxury tax payable.

Persons that are not registered and not required to be registered under the Act should report their luxury tax payable for each reporting period on Form B501, Luxury Tax and Information Return for Non-Registrants. Persons that are not registered and not required to be registered are only required to file Form B501 with the CRA for each reporting period where they have luxury tax payable.

In most cases, returns may be filed by mail or electronically; however, the CRA could require certain persons to file electronically.

Every person that is required to file returns must keep all records necessary to determine their tax liabilities and obligations for a period of six years from the end of the year to which the records relate.

Reporting periods and filing/payment deadlines

In general, the reporting period of a person is a calendar quarter. The return must be filed by the end of the month that follows the end of a reporting period, and any amount owing for the reporting period is also due at that time.

For 2022, there is only one reporting period: September 1, 2022 to December 31, 2022. The filing/payment deadline is January 31, 2023.

Quarterly reporting periods and filing/payment deadlines effective 2023
Reporting period Filing/payment deadline
January 1 to March 31 April 30
April 1 to June 30 July 31 
July 1 to September 30 October 31
October 1 to December 31 January 31

Penalties

If a person is required to file a return for a reporting period and fails to do so, the person is liable to a penalty under section 107. The penalty will be the sum of 1% of the amount that was required to be paid for the reporting period and 25% of that amount multiplied by the number of months, not exceeding 12 months, from the day on which the return was required to be filed.

Further information

For all technical publications related to the Select Luxury Items Tax Act, go to Luxury tax technical information.

For all enquiries on the application of the luxury tax, call 1‑866‑330‑3304.

To request a ruling or interpretation related to the application of the luxury tax, write to:

Excise and Specialty Tax Directorate
Canada Revenue Agency
Place de Ville Tower A 11th floor
320 Queen St
Ottawa ON  K1A 0L5

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