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
- Vehicles 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 vehicles
- Taxable amount for importations of subject vehicles
- Taxable amount for registrations of subject vehicles owned by a registered vendor
- Taxable amount for leases of subject vehicles
- Taxable amount for subject vehicles 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
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:
- it is designed or adapted primarily to carry individuals on highways and streets
- it has a seating capacity of not more than 10 individuals
- it has a gross vehicle weight rating that is 3,856 kg or less
- it has a date of manufacture after 2018
- it is designed to travel with four or more wheels in contact with the ground
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:
- an ambulance
- a hearse
- a motor vehicle clearly marked for policing activities
- a motor vehicle clearly marked and equipped for emergency medical or fire response activities
- a recreational vehicle designed or adapted to provide temporary residential accommodations and equipped with at least four of the following:
- cooking facilities
- a refrigerator or ice box
- a self-contained toilet
- a heating or air-conditioning system that can function independently of the vehicle engine
- a potable water supply system that includes a faucet and sink
- a 110-V to 125-V electric power supply, or a liquefied petroleum gas supply, that can function independently of the vehicle engine
- a motor vehicle registered with a government before September 2022, provided that possession was also transferred to the user of the vehicle before this date
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:
- 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 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:
- the purchaser and a military authority or a police authority (where applicable) enter into an agreement that is a lease, licence or similar arrangement at or before the time the sale is completed
- the military authority or the police authority (where applicable) has the right to use the subject vehicles for a period of at least six months under the agreement
- the purchaser transfers possession of the subject vehicles to the military authority or the police authority (where applicable) under the agreement
- the purchaser provides to the vendor and the vendor retains evidence satisfactory to the CRA that all of the above conditions are met in respect of the subject vehicles
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:
- the registered vendor owns the subject vehicle at that particular time
- the subject vehicle is registered at that particular time with the Government of Canada or a province
- the subject vehicle has never previously been registered with the Government of Canada or a province
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:
- where the vehicle is equipped for policing activities, the lessee must be either a policing authority or a military authority. Where the vehicle is equipped for military activities, the lessee must be a military authority
- the lessee has the right to use the subject vehicle for a period of at least six months under an agreement that is a lease, license or similar arrangement
- the registered vendor transfers possession of the subject vehicle to the lessee under the agreement
- the registered vendor retains evidence satisfactory to the CRA that the above conditions are met in respect of the subject vehicle
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 person is the owner of the subject vehicles at the particular time it ceases to be a registered vendor of subject vehicles
- the subject vehicles have not been registered with the Government of Canada or a province before the time that the person ceases to be a registered vendor of subject vehicles
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:
- tangible personal property that is installed in/on or affixed to the subject vehicle
- a service that modifies the subject vehicle and is physically performed on the subject vehicle
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:
- any repair, cleaning or maintenance service performed on a subject vehicle
- the provision of tangible personal property to a subject vehicle to replace other tangible personal property that is damaged, defective or non-functioning
- any improvement relating to a child safety seating system or a child safety restraint system
- any improvement relating to a trailer or camper
- any improvement that specially equips or adapts the subject vehicle for its use by, or in transporting, an individual using a wheelchair
- any improvement that specially equips or adapts the subject vehicle with an auxiliary driving control to facilitate the operation of the subject vehicle by an individual with a disability
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:
- the taxable amount multiplied by 10%
- 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):
- the value of the consideration for the sale of the subject vehicle
- the value of the consideration for any improvements made by the vendor to the subject vehicle in connection with the sale that is not included in the above
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:
- the value of the subject vehicle 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 vehicle 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 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:
- the retail value of the subject vehicle at the time at which it is registered with the Government of Canada or a province
- the retail value of the subject vehicle at the time at which the registered vendor first uses the subject vehicle
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:
- the retail value of the subject vehicle at the time at which possession of the subject vehicle is first transferred to the lessee under an agreement that is a lease, license or similar arrangement
- the retail value of the subject vehicle at the time at which the lessee first has the right to use the subject vehicle under the agreement
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:
- the fair market value (FMV) of the subject vehicle at that time
- the total amount of any transportation or freight fees for the transportation of the subject vehicle 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 vehicle 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 vehicle that is not already included in the FMV
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:
- $15,000 ($150,000 × 10%)
- $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:
- $23,000 ($230,000 × 10%)
- $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:
- 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 vehicle if the value of consideration for the improvements had been initially included at the time the luxury tax on the subject vehicle was triggered
- the amount determined under section 34 using the unimproved taxable amount, which is equal to the taxable amount of the subject vehicle
Therefore, the luxury tax on improvements made to subject vehicles 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 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.
| 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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