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Luxury Tax: Nobody Wins

Autosphere » Dealerships » Luxury Tax: Nobody Wins
Brian murphy
Brian Murphy, Managing Director, Kelley Blue Book & Data Solutions, Cox Automotive Canada and Brazil. PHOTO Cox Automotive

The proposed levy appears to offer few real benefits.

On August 10th, 2021, the Canadian Department of Finance issued a notice for consultation on the new proposed Luxury Tax on new automobiles, aircraft and boats.

Some of you may recall that, during the last federal election in 2019, the Luxury Tax was first mentioned in a Liberal policy paper with very little detail, other than that there was a plan to, “…introduce a new 10 percent tax on luxury cars, boats, and personal aircraft over $100,000.

The tax was again outlined in the most recent government budget, but this consultation notice asking for input brings the tax one step closer to implementation.

Participation encouraged

I encourage key stakeholders in the industry to participate in the consultation by providing feedback on this pending change.

The Luxury Tax will apply to vehicles priced over $100,000, at the lesser of 10% of the total price of the vehicle, or 20% of the total price above $100,000.

The proposed tax, in my opinion, is not in any way constructive for our industry; particularly when one considers what the auto business has been through in the last two years. With a planned effective date for January 1, 2022, the timing could not be worse for the retail auto sector.

rolls royce
A luxury tax on higher-end vehicles could create a significant ripple effect through the entire industry and the economy. PHOTO Huw Evans

As our industry struggles to contend with the impact of COVID-19, I expect this tax on consumers will have several effects that are undeniably negative— the first one being the potential for job loss.

With the tax creating higher costs for consumers, typically this reduces demand for services. As a result, retailers may experience a decline in volumes for luxury automobiles.

This is particularly the case in British Columbia which already has a luxury tax on vehicles over $55,000.  The B.C. luxury tax, which was implemented in 2018, sees an escalating tax of up to 20% for vehicles over $150,000.

With the tax-on-tax effect, this means a B.C. buyer will now be paying 39% tax on a high-end vehicle worth over $250,000.

Quebec also has a luxury tax of 1% of the amount of original purchase price is over $40,000. The increased taxation will likely result in fewer buyers overall, meaning fewer dealership staff will be needed to service them.

Certainly, vehicles over $100,000 have a higher margin and those dollars help to fund operations, including paying staff and investing in facilities.

Thorny issue

Given the persistent short supply of products in the industry at the moment it may also prove to be a thorny issue for consumers who don’t get their vehicle delivered by December 31, 2021.

Following that date, a consumer will have to accept the tax or possibly walk away from the sale of the vehicle.  Dealers may then have to sell a given unit a second time.

The information provided so far indicates this tax only applies to new vehicles.

One of the side effects that I anticipate is that the prime populations of used vehicles (1-3 years old) will see an uptick in prices as savvy consumers work to avoid the tax by switching to used vehicles.

This also may result in the importation of lightly used luxury vehicles, especially at the very high end of the price spectrum to avoid tax. These imports then deny Canadian dealers the opportunity of a new vehicle sale. Of course, as with many taxes, the proposed luxury tax may also encourage some Canadians to register vehicles in other countries to avoid the tax here at home.

The U.S. has seen this recently as consumers are registering high-end exotics in states like Montana to avoid paying taxes in their home state.

The tax does only impact the top tier of the market which is around 200 different vehicles over $100,000 from the nearly 4,000 that Kelley Blue Book tracks, so approximately 5% of the market.

The list, as you might expect, includes many high-end luxury cars which make up about 80% of the list. The tax will also impact the higher end of the pickup truck market, as well as the top tier of zero-emissions vehicles.

However, given that the tax applies to the total sale amount, vehicles that are $90,000 and up risk being bumped above $100,000 on the total bill.

Impact on accessories

The tax is also expected to negatively impact the sale of accessories and F&I products as it will apply to any accessories or other items added to the vehicle in the first 12 months.

The tax applies to the total price, not just the MSRP. So, a consumer buying a $90,000 truck is going to have to be cautious about what they add to the final bill. This could also change consumer behaviour as that $8,000 pack of safety equipment might now be a big “no” as it would push the car price that much closer to the threshold.

Furthermore, the tax may also inadvertently slow EV adoption at the higher end of the market. I estimate that about 9% of the affected vehicles are EVs.

Can someone who is paying over $100,000 for a vehicle, which is more than twice the market average, afford to pay more tax?

Perhaps they can, however, the presently proposed tax may have several consequential effects, none of which are constructive during this challenging time for the auto sector.

Links to consultation on new luxury tax

English: https://www.canada.ca/en/department-finance/programs/consultations/2021/consultation-proposed-luxury-tax.html

French: https://www.canada.ca/fr/ministere-finances/programmes/consultations/2021/consultation-taxe-luxe.html

 


Brian Murphy is Managing Director, Kelley Blue Book & Data Solutions, Cox Automotive Canada and Brazil. You can reach him at [email protected].

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