Subject Vessels Under the Select Luxury Items Tax Act
Luxury Tax Notice LTN3
January 2023
This version replaces the one dated August 2022. This notice has been updated to include proposed tax policy changes that would expand existing luxury tax transitional relief for subject vessels sold under written agreements made prior to January 1, 2022.
The purpose of this notice is to provide information relating to the application of the luxury tax on certain vessels. Vessels that could be subject to the luxury tax include yachts, cruisers, sailboats, deck boats, waterskiing boats and houseboats priced above $250,000.
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 or its regulations.
If this information does not completely address your particular situation, call 1‑866‑330‑3304.
Table of Contents
- Overview
- Vessels subject to the luxury tax
- Application of the luxury tax
- General calculation of the luxury tax (except for improvements)
- Taxable amount for sales of subject vessels
- Taxable amount for importations of subject vessels
- Taxable amount for leases of subject vessels
- Taxable amount for uses of subject vessels that cease to be qualifying subject vessels
- Taxable amount for subject vessels held by a person ceasing to be a registered vendor
- Determining the retail value
- Calculation of the luxury tax on improvements
- Reporting the luxury tax and filing returns
- Applying for tax certificates
- Applying for special import certificates
- Penalties
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.
The 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, and came into effect on September 1, 2022.
Vessels subject to the luxury tax
The luxury tax applies to vessels that meet the definition of subject vessel under the Act and are priced or valued above the $250,000 price threshold, unless an exemption applies.
Under subsection 2(1), subject vessel means a vessel that meets both of the following conditions:
- it is designed or adapted for leisure, recreation or sport activities
- it has a date of manufacture after 2018
Vessel means a boat, ship or craft that is designed, or is capable of being used, solely or partly for navigation in, on, through or immediately above water, without regard to the method or lack of propulsion.
Examples of subject vessels include yachts, cruisers, sailboats, deck boats, waterskiing boats and houseboats.
As discussed in the “Application of the luxury tax” section of this notice, there are certain circumstances where the luxury tax will not apply if a subject vessel is used or reasonably expected to be used in qualifying activities and the subject vessel is not a select subject vessel. Under subsection 2(1), select subject vessel means a subject vessel that is equipped with a bed, bunk, berth or similar sleeping amenity. A select subject vessel is not eligible for an exemption from the luxury tax regardless of its use.
Examples of select subject vessels include yachts, houseboats and any sailboats or motorboats with such sleeping amenities.
Exclusions
Subsection 2(1) excludes certain vessels from the definition of subject vessel. The following are not considered subject vessels and are not subject to the luxury tax:
- a floating home as defined in subsection 123(1) of the Excise Tax Act
- a vessel designed and equipped solely for commercially catching, harvesting or transporting fish or other living marine resources
- a vessel designed and equipped solely for ferrying passengers or vehicles on a fixed schedule between two or more points
- a vessel with sleeping facilities for more than 100 individuals who are not crew members
- a vessel registered with a government before September 2022,Footnote 1 provided that a user of the vessel has possession before this date
- a subject vehicle or a subject aircraft
Application of the luxury tax
In general, the luxury tax on subject vessels applies to sales or importations of subject vessels priced or valued above the $250,000 price threshold. However, the luxury tax could also apply if a person leases out, uses or has an improvement made to a subject vessel priced or valued above the price threshold. In addition, the luxury tax applies if a person ceases to be a registered vendor of subject vessels and holds any tax-free inventory of subject vessels valued above the price threshold.
The sections below detail the various circumstances that trigger the application of the luxury tax on subject vessels, as well as any exemptions where the tax does not apply.
Selling subject vessels
The luxury tax applies to the sale of subject vessels priced above the $250,000 price threshold and is 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 vessel is transferred to the purchaser or when ownership of the subject vessel is transferred to the purchaser, whichever is earlier.
In most cases, the vendor of the subject vessel is liable for the luxury tax on the sale of a subject vessel priced above the price threshold. However, under subsection 18(2), the purchaser of the subject vessel is liable for the luxury tax in sales transactions where the vendor is any of the following:
- Her Majesty in right of Canada or a province
- an agent of Her Majesty in right of Canada or a province
- an Indigenous governing body
- a foreign representative who is entitled to relief of the GST/HST in respect of the sale
The luxury tax does not apply to the sale of a subject vessel priced above the price threshold where a purchaser and a vendor have entered into a written agreement for the sale of the subject vessel before 2022 in the course of the vendor’s business of selling subject vessels.
In response to industry feedback, the Department of Finance Canada is prepared to recommend to the Minister of Finance regulatory amendments that would have the effect of expanding existing transitional rules for relief of subject vessels sold under written agreements made prior to January 1, 2022.
Specifically, in addition to the current transitional rule, which states that luxury tax is not payable where an agreement in writing for the sale of a subject item (including a subject vessel) is made prior to 2022, the Department is prepared to recommend that luxury tax would not be payable in respect of a subject vessel if:
- a purchaser enters into either of the following, before 2022:
- a written agreement for the purchase of the subject vessel
- a written agreement in respect of the vessel containing all of the following:
- an obligation on the purchaser to enter into an agreement for the purchase of the subject vessel at a future date
- an obligation on the purchaser to pay a deposit to the vendor before 2022
- a provision under which the deposit is forfeited if the purchaser does not fulfill their obligation to complete the purchase transaction as contemplated in the agreement
- the purchaser is not a registered vendor and is not entitled to be a registered vendor under the Act
If this proposed transitional rule applies to a particular subject vessel, luxury tax would not be payable on the subject vessel on any future transactions.
Note that this commentary should not be taken as a statement by the CRA that the proposed amendments will be made in their current form.
Exemption on sales to registered vendors of subject vessels
Under subsection 19(4), the luxury tax generally does not apply to subject vessels priced above the price threshold that are sold to registered vendors of subject vessels. Effectively, registered vendors of subject vessels are able to purchase and hold tax-free inventory of subject vessels priced above the price threshold and defer the application of the luxury tax until the subject vessels 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.
In order to purchase subject vessels priced above the price threshold without the luxury tax applying at the time the sale is completed, a purchaser must provide an exemption certificate to the 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 vessels priced above the price threshold, the purchaser must be a registered vendor of subject vessels at the time the sale is completed.
Purchasers of subject vessels priced above the price threshold should use Form L100-2, Luxury Tax Exemption Certificate for Subject Vessels, as an exemption certificate to certify that they are registered vendors of subject vessels.
Example
A vendor is selling subject vessels priced above $250,000 to a yacht retailer that is a registered vendor of subject vessels.
The vendor could sell the subject vessels to the retailer without the luxury tax applying at the time the sale is completed if the retailer provides an exemption certificate for this sale to the vendor.
By providing an exemption certificate certifying that it is a registered vendor of subject vessels, the retailer would be able to defer the application of the luxury tax by purchasing and holding its inventory of subject vessels priced above the price threshold on a tax-free basis.
Exemption on sales of qualifying subject vessels
The luxury tax generally does not apply to the sale of a subject vessel, other than a select subject vessel, priced above the price threshold that is determined to be a qualifying subject vessel of the purchaser at the time ownership of the subject vessel is transferred to the purchaser. Where there are multiple purchasers, to be eligible for an exemption from the luxury tax, the subject vessel must be a qualifying subject vessel of each of the purchasers at the time ownership is transferred to the purchasers.
A qualifying subject vessel of a purchaser is a subject vessel that:
- is not a select subject vessel
- is, at the time ownership of the subject vessel is transferred to the purchaser, reasonably expected to be used, as determined under subsection 11(4), at least 90% of the time in Canada for a purpose other than the leisure, recreation, sport or other enjoyment of any of the following:
- the purchaser
- a lessee under an agreement that is a lease, licence or similar arrangement (for example, a lease, a rental, a time-share or a charter)
- a guest of the purchaser or the lessee as defined under subsection 2(1)
As set out in subsection 19(4), in order to purchase a qualifying subject vessel without the luxury tax applying at the time the sale is completed, a purchaser must provide an exemption certificate to the vendor in accordance with section 36.
Purchasers of subject vessels priced above the price threshold should use Form L100-2 as an exemption certificate to certify that they are eligible for an exemption from the luxury tax on qualifying subject vessels.
Example
A vendor is selling a subject vessel priced above $250,000 to a purchaser that is not a registered vendor of subject vessels.
The subject vessel is a sailboat. The subject vessel is not a select subject vessel. The purchaser is a sailing instructor and is purchasing the subject vessel to be used solely for offering sailing lessons along the coast of British Columbia to paying customers.
The vendor could sell the subject vessel to the purchaser without the luxury tax applying at the time the sale is completed if the purchaser provides an exemption certificate for this sale to the vendor certifying that it is a purchaser of a qualifying subject vessel.
Exemption on sales of subject vessels with tax certificates in effect
As set out in subsection 19(5), the luxury tax does not apply to the sale of a subject vessel priced above the price threshold if there is a tax certificate in effect for the subject vessel in accordance with section 37 at the time the sale is completed. A tax certificate is a certificate issued by the Canada Revenue Agency (CRA) for a subject vessel that indicates that the luxury tax has already been paid or reported for that subject vessel.
Under subsection 37(1), a person must apply to the CRA for a tax certificate in respect of a subject vessel if the following conditions are met:
- tax in respect of the subject vessel became payable by the person on a particular day
- tax was paid on account of the importation of the subject vessel or, in any other case, the person has reported the tax with the CRA on the return for the reporting period that includes the particular day
- any amount of rebate available under the Act in respect of the subject vessel is less than the amount of the tax
Once the CRA approves an application for a tax certificate, the CRA will issue a tax certificate for the subject vessel identified in the application, indicating the hull identification number of the subject vessel and the effective date of the tax certificate.
Tax certificates will be available online through a searchable registry that will allow purchasers of subject vessels to verify whether a tax certificate is in effect for a particular subject vessel. Effectively, a tax certificate allows a purchaser to be able to purchase a subject vessel without the luxury tax applying at the time the sale is completed.
Importing subject vessels
Subsection 20(1) provides that, subject to certain exceptions, the luxury tax applies to the importation of subject vessels valued above the $250,000 price threshold in accordance with the Customs Act.
The luxury tax does not apply to the importation of a subject vessel valued above the price threshold where an importer has entered into a written agreement with a vendor for the sale of the subject vessel before 2022 in the course of the vendor’s business of selling subject vessels.
In response to industry feedback, the Department of Finance Canada is prepared to recommend to the Minister of Finance regulatory amendments that would have the effect of expanding existing transitional rules for relief of subject vessels sold under written agreements made prior to January 1, 2022.
Specifically, in addition to the current transitional rule, which states that luxury tax is not payable where an agreement in writing for the sale of a subject item (including a subject vessel) is made prior to 2022, the Department is prepared to recommend that luxury tax would not be payable in respect of a subject vessel if:
- an importer that is a purchaser enters into either of the following, before 2022:
- a written agreement for the purchase of the subject vessel
- a written agreement in respect of the vessel containing all of the following:
- an obligation on the importer to enter into an agreement for the purchase of the subject vessel at a future date
- an obligation on the importer to pay a deposit to the vendor before 2022
- a provision under which the deposit is forfeited if the importer does not fulfill their obligation to complete the purchase transaction as contemplated in the agreement
- the importer is not a registered vendor and is not entitled to be a registered vendor under the Act
If this proposed transitional rule applies to a particular subject vessel, luxury tax would not be payable on the subject vessel on any future transactions.
Note that this commentary should not be taken as a statement by the CRA that the proposed amendments will be made in their current form.
For more information on the application of the luxury tax on the importation of subject vessels, refer to Canada Border Services Agency (CBSA) Memorandum D18-4-1, Select luxury items tax on importation.
Exemption on importations by registered vendors of subject vessels
Subsection 21(1) provides that the luxury tax does not apply to subject vessels valued above the price threshold that are imported by a registered vendor of subject vessels. Effectively, registered vendors of subject vessels are able to import and hold tax-free inventory of subject vessels valued above the price threshold and defer the application of the luxury tax until the subject vessels 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 subject vessels with tax certificates in effect
Subsection 21(4) provides that the luxury tax does not apply to the importation of a subject vessel valued above the price threshold if there is a tax certificate in effect, indicating that the luxury tax has already been paid or reported for that subject vessel.
Tax certificates will be available online through a searchable registry that will allow importers of subject vessels to verify whether a tax certificate is in effect for a particular subject vessel. Effectively, the tax certificate allows a person to be able to import a subject vessel without the luxury tax applying at the time of importation. The tax certificate must be presented to the CBSA.
Exemption on importations of subject vessels with special import certificates in effect
Under subsection 21(5), the luxury tax does not apply to the importation of a subject vessel, other than a select subject vessel, valued above the price threshold if there is a special import certificate in effect for the subject vessel in accordance with section 38.
A special import certificate is a certificate issued by the CRA to an importer for a subject vessel that indicates that the CRA is satisfied that the importer meets the conditions to import a qualifying subject vessel without the luxury tax applying at the time of importation.
To qualify for a special import certificate for a subject vessel, the following conditions must be met:
- the importer must be an owner of the subject vessel at the time at which the subject vessel is accounted for in accordance with section 32 of the Customs Act
- the subject vessel must be a qualifying subject vessel of the importer
To be a qualifying subject vessel of the importer, the subject vessel must not be a select subject vessel and must be used or reasonably expected to be used, as determined under subsection 11(4), at least 90% of the time in Canada for a purpose other than the leisure, recreation, sport or other enjoyment of the importer, a lessee under an agreement that is a lease, licence or similar arrangement, or a guest of the importer or lessee as defined under subsection 2(1).
An importer must present the special import certificate to the CBSA to be exempt from the luxury tax on the importation of the subject vessel.
Leasing out subject vessels
Under subsection 25(1), subject to certain exceptions, the luxury tax applies if a person is an owner of a subject vessel valued above the price threshold and provides the right to use the subject vessel to a lessee under an agreement that is a lease, licence or similar arrangement. The luxury tax is payable by the person at the time at which the lessee first has the right to use the subject vessel under the agreement, as set out in subsection 25(2).
Exemption on leases of qualifying subject vessels
Under paragraph 25(3)(a), the luxury tax does not apply to a subject vessel owned by a particular person that is leased out to a lessee if it is a qualifying subject vessel of the particular person.
To be a qualifying subject vessel of a particular person, the subject vessel must not be a select subject vessel and must be used or reasonably expected to be used, as determined under subsection 11(4), at least 90% of the time in Canada for a purpose other than the leisure, recreation, sport or other enjoyment of the particular person, a lessee under an agreement that is a lease, licence or similar arrangement, or a guest of the particular person or the lessee as defined under subsection 2(1).
Exemption on leases of subject vessels with tax certificates in effect
Under paragraph 25(3)(c), the luxury tax does not apply to a subject vessel valued above the price threshold that is leased out to a lessee where a tax certificate is in effect for the subject vessel. If a tax certificate indicates that the luxury tax has already been paid or reported for that subject vessel, the luxury tax on the lease of the subject vessel does not apply.
Using subject vessels that cease to be qualifying subject vessels
Under section 26, the luxury tax generally applies to a subject vessel valued above the price threshold that is owned by a person at a particular time and is used in Canada at the particular time when it ceases to be a qualifying subject vessel. The luxury tax is payable by the person at the particular time.
A subject vessel ceases to be a qualifying subject vessel if it ceases to be used or reasonably expected to be used, as determined under subsection 11(4), at least 90% of the time in Canada for a purpose other than the leisure, recreation, sport or other enjoyment of the person, a lessee under an agreement that is a lease, licence or similar arrangement, or a guest of the person or the lessee as defined under subsection 2(1).
However, the luxury tax does not apply to a subject vessel that ceases to be a qualifying subject vessel if a tax certificate is in effect, indicating that the luxury tax has already been paid or reported for that subject vessel.
Example
A waterskiing instructor owns a waterskiing boat for use solely to offer waterskiing lessons to paying customers in Lake Muskoka (Ontario). The waterskiing boat is a subject vessel valued above the price threshold. At a particular time, the waterskiing instructor uses the subject vessel half of the time to take friends and family for vacation activities. Consequently, the subject vessel ceases to meet the 90% threshold described in subsection 11(4).
The luxury tax is payable by the waterskiing instructor at the particular time that the subject vessel ceases to be a qualifying subject vessel.
Ceasing to be a registered vendor of subject vessels
As set out in section 27, the luxury tax generally applies to tax-free inventory of subject vessels valued above the price threshold that is owned by a person that ceases to be a registered vendor of subject vessels. The luxury tax is payable by the person at the particular time it ceases to be a registered vendor of subject vessels.
The luxury tax does not apply to subject vessels that are qualifying subject vessels of the person at the particular time. Subject vessels are considered to be qualifying subject vessels of a person if the subject vessels are not select subject vessels and they are used or reasonably expected to be used, as determined under subsection 11(4), at least 90% of the time in Canada for a purpose other than the leisure, recreation, sport or other enjoyment of the person, a lessee under an agreement that is a lease, licence or similar arrangement, or a guest of the person or the lessee as defined under subsection 2(1).
The luxury tax also does not apply to subject vessels that have tax certificates in effect, indicating that the luxury tax has already been paid or reported for those subject vessels.
Having improvements made to subject vessels
The luxury tax could apply when improvements are made to subject vessels, as set out in sections 29 to 32. According to subsection 8(1), an improvement to a subject vessel is the provision of either:
- tangible personal property that is installed in or on, or is affixed to the subject vessel
- a service that modifies the subject vessel and is physically performed on the subject vessel
Examples of improvements made to a subject vessel include motor upgrades, on-board lighting, cabinetry and countertop installations, sink and faucet upgrades, and navigation system installations.
The luxury tax on improvements typically only applies to improvements made to subject vessels that were already subject to the luxury tax. However, in the event that improvements are made in connection with the sale of a subject vessel, the calculation of the luxury tax payable on the sale of the subject vessel would take into account the cost of the improvements.
The luxury tax on improvements applies to improvements that total at least $5,000 made during the improvement period of the subject vessel as determined under paragraphs 29(1)(a) and 30(1)(a). The luxury tax on improvements is payable on the day following the improvement period.
If a sale triggered the luxury tax on a subject vessel, the purchaser would be liable for any luxury tax payable on after-sales improvements made to that subject vessel. Otherwise, the person that was liable for the luxury tax on a subject vessel would be liable for any luxury tax payable on improvements made to that subject vessel.
Example
On October 31, 2022, a registered vendor of subject vessels sells a subject vessel priced over $250,000 to a purchaser. The luxury tax applies to the subject vessel at the time the sale is completed.
During the improvement period between October 31, 2022, and October 31, 2023, the purchaser hires two service providers to install the following improvements on the subject vessel: custom cabinets, granite countertops and an air conditioning system. The total price of the improvements is $15,000.
The purchaser is liable for the luxury tax on improvements made to the subject vessel. The luxury tax will be payable on November 1, 2023.
Excluded improvements
Under subsection 8(2), the following improvements are not subject to the luxury tax:
- any repair, cleaning or maintenance service performed on a subject vessel
- the provision of tangible personal property to a subject vessel to replace other tangible personal property that is damaged, defective or non-functioning
General calculation of the luxury tax (except for improvements)
Generally, the luxury tax is calculated using the taxable amount of the subject vessel, in accordance with section 34. The luxury tax is equal to the lesser of 10% of the taxable amount of the subject vessel and 20% of the amount above the price threshold.
The luxury tax on the sale, importation, lease or use of a subject vessel priced or valued above the price threshold, or on subject vessels valued above the price threshold held by a person ceasing to be a registered vendor of subject vessels is calculated as the lesser of:
- the taxable amount multiplied by 10%
- the amount that results from subtracting $250,000 from the taxable amount and multiplying the difference by 20%
Determining the taxable amount of a subject vessel for calculating the luxury tax payable depends on the circumstance that triggered the luxury tax on the subject vessel.
Taxable amount for sales of subject vessels
Generally, the taxable amount in respect of the sale of a subject vessel is the sum of the following, as set out in subsection 18(4):
- the value of the consideration for the sale of the subject vessel
- the value of the consideration for any improvements made by the vendor to the subject vessel in connection with the sale that is not included in the above
Taxable amount for importations of subject vessels
Under subsection 20(2), the taxable amount in respect of the importation of a subject vessel is the sum of the following:
- the value of the subject vessel as determined under the Customs Act
- the total amount of any duties and taxes (other than the GST/HST) that is payable on the subject vessel under the Customs Tariff, the Excise Tax Act, the Special Import Measures Act and any other law relating to customs
For more information on calculating the taxable amount in respect of importations of subject vessels, refer to CBSA Memorandum D18-4-1.
Taxable amount for leases of subject vessels
Under subsection 25(4), the taxable amount in respect of the leasing out of a subject vessel is the greater of the following:
- the retail value of the subject vessel at the time at which possession of the subject vessel is first transferred to the lessee under an agreement that is a lease, licence or similar arrangement
- the retail value of the subject vessel at the time at which the lessee first has the right to use the subject vessel under the agreement
Refer to the “Determining the retail value” section of this notice for more information on retail value.
Taxable amount for uses of subject vessels that cease to be qualifying subject vessels
As set out in subsection 26(4), the taxable amount in respect of the use of a subject vessel that ceases to be a qualifying subject vessel at a particular time is the retail value of the subject vessel at the particular time.
Refer to the “Determining the retail value” section of this notice for more information on retail value.
Taxable amount for subject vessels held by a person ceasing to be a registered vendor
Under subsection 27(4), the taxable amount in respect of a subject vessel held by a person is the retail value of the subject vessel at the time at which the person ceases to be a registered vendor of subject vessels.
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 vessel at any time is the sum of the following:
- the fair market value (FMV) of the subject vessel at that time
- the total amount of any transportation or freight fees for the transportation of the subject vessel that is not already included in the FMV
- the total amount of any duties, taxes and fees (other than the GST/HST) imposed under an Act of Parliament that is payable on the subject vessel and that is not already included in the FMV
- the total amount of any provincial levy and other amounts imposed under an Act of the legislature of a province that is payable on the subject vessel and that is not already included in the FMV
Example – Luxury tax on the sale of a subject vessel
A registered vendor of subject vessels sells a subject vessel to a purchaser. The selling price for the subject vessel is $370,000 but the registered vendor applies a discount of $20,000 to the price. The subject vessel is sold to the purchaser for a total consideration of $350,000, which consists of a trade-in valued at $150,000 and a cash payment of $200,000. Therefore, the taxable amount of the subject vessel for calculating the luxury tax is $350,000.
The luxury tax is equal to the lesser of:
- $35,000 ($350,000 × 10%)
- $20,000 [($350,000 − $250,000) × 20%]
The luxury tax payable is $20,000.
Example – Luxury tax on the use of a subject vessel that ceases to be a qualifying subject vessel
The owner-operator of a water taxi company owns a deck boat for use solely to provide on-demand marine transportation services across the Halifax harbour (Nova Scotia). The deck boat is not a select subject vessel. The deck boat is determined to be a qualifying subject vessel of the owner‑operator in accordance with subsection 11(4).
At a particular time, the owner-operator uses the subject vessel half of the time to take friends to tour the Halifax harbour. Consequently, the subject vessel is considered to be used in Canada at the particular time that it ceases to be a qualifying subject vessel, as it ceases to meet the 90% threshold described in subsection 11(4). At the particular time, the retail value of the subject vessel is $300,000 as determined under section 16. Therefore, the taxable amount of the subject vessel is $300,000.
The luxury tax is equal to the lesser of:
- $30,000 ($300,000 × 10%)
- $10,000 [($300,000 − $250,000) × 20%]
The luxury tax payable is $10,000.
Calculation of the luxury tax on improvements
The luxury tax on improvements made to subject vessels is calculated in accordance with section 35. For improvements, the luxury tax is the difference between the following:
- the amount determined under section 34 using the total taxable amount, which is the taxable amount that would have been used to calculate the luxury tax on the subject vessel if the value of consideration for the improvements had been initially included at the time the luxury tax on the subject vessel was triggered
- the amount determined under section 34 using the unimproved taxable amount, which is equal to the taxable amount of the subject vessel
Therefore, the luxury tax on improvements made to subject vessels is calculated using the following formula:
| Where | |
| A | is the lesser of:
|
| B | is the lesser of:
|
Example – Luxury tax on improvements made to a subject vessel
A registered vendor of subject vessels sells a subject vessel to a purchaser for a consideration of $260,000. No improvements are made at that time. The taxable amount of the subject vessel is $260,000 and luxury tax of $2,000 is paid on the sale of the subject vessel. The unimproved taxable amount is $260,000.
During the improvement period, the purchaser hires a service provider to install the following improvements for the following consideration: an on-board vessel entertainment system for $10,000, a solar panel system for $7,000 and a navigation system upgrade for $3,000. The total consideration for the improvements is $20,000. The total taxable amount is $280,000.
The luxury tax on the improvements is calculated using the formula A − B where:
A is the lesser of:
- $28,000 ($280,000 × 10%)
- $6,000 [($280,000 − $250,000) × 20%]
B is the lesser of:
- $26,000 ($260,000 × 10%)
- $2,000 [($260,000 − $250,000) × 20%]
The luxury tax payable on the improvements is $4,000 ($6,000 − $2,000).
Reporting the luxury tax and filing returns
Registered vendors and persons that are required to be registered under the Act must 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 must 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.
However, every person that is not registered, that is not required to be registered and that does not have luxury tax payable must file Form B502, Luxury Tax - Information Return for Non-Registrants, for each reporting period where the person sells a subject vessel to a purchaser and either of the following applies:
- the luxury tax on the subject vessel is payable by the purchaser under subsection 18(2)
- the purchaser provides the person with an exemption certificate for the subject vessel
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.
| 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 |
Applying for tax certificates
A person that is liable for the luxury tax on a subject vessel must apply to the CRA for a tax certificate for that subject vessel, as set out in subsection 37(1). The person must apply to the CRA within one year after the tax became payable. Persons that are required to apply for tax certificates may do so using Form B500 or Form B501, where appropriate, at the time that they file their returns.
Alternatively, a person may apply for tax certificates by completing Form L501, Tax Certificate Application, and submitting it to the CRA.
Applying for special import certificates
An importer that meets the conditions to import a qualifying subject vessel must apply to the CRA for a special import certificate in order to be exempt from the luxury tax at the time of importation. The special import certificate should be presented to the CBSA.
To obtain a special import certificate, an importer must complete Form L502, Special Import Certificate Application, and submit it to the CRA.
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 is the sum of 1% of the amount that was required to be paid for the reporting period and 25% of the amount multiplied by the number of months, not exceeding 12 months, from the day on which the return was required to be filed.
Under section 112, every person that is required to apply for a tax certificate and fails to do so as and when required is liable to a penalty of $1,000. If a tax certificate is in effect and the person that applied for the tax certificate becomes aware that the conditions for the tax certificate are no longer being met, that person is required to provide written notice without delay to the CRA indicating that the conditions are not being met. Under section 113, every person that is required to provide written notice to the CRA and fails to do so as and when required is liable to a penalty of $1,000.
If an importer of a subject vessel makes a false declaration in its application for a special import certificate and uses the special import certificate to import the subject vessel without the luxury tax applying at the time of importation, the importer is liable to a penalty under section 111, in addition to any other penalty. The penalty is the greater of $1,000 and 150% of the luxury tax that would have been payable.
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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