March 8th, 2023
Avoid charging or paying luxury tax when it is not applicable. Consultaxe explains the main exemptions of application.
In this article, we will discuss the main exemptions to the luxury tax. As a dealer and buyer of goods subject to the luxury tax, it is important to know the applicable exemptions to avoid charging or paying luxury tax when it is not applicable.
What goods are subject to the luxury tax?
The luxury tax is applicable as of September 1, 2022, on the retail sale and importation of certain vehicles and aircraft valued at more than $100,000, and ships valued at more than $250,000.
- Property Goods not subject to tax, transitional rules (purchase date)
A motor vehicle, aircraft, or ship registered with a government before September 2022 is not subject to the luxury tax, provided possession is transferred to the user before September 2022. Motor vehicles, aircraft, and ships are not subject to the luxury tax if they were manufactured before 2019.
In January 2023, the Canada Revenue Agency announced the expansion of the transitional rules, such that a ship or aircraft will not be subject to the luxury tax where a written agreement has been entered into prior to 2022 under certain conditions, namely:
- A purchaser enters into any of the following agreements prior to 2022:
- a written agreement for the purchase of the taxable property;
- a written agreement with respect to the taxable property, which includes all of the following:
- the obligation of the purchaser to enter into an agreement to purchase the taxable property at a later date;
- the obligation for the buyer to pay a deposit to the seller before 2022;
- a provision that the deposit is forfeited if the purchaser fails to fulfil his or her obligation to make the purchase according to the terms of the agreement;
- The buyer is not a registered seller and is not eligible to be a registered seller under the Certain Luxury Goods Tax Act.
Importation of a taxable good
The luxury tax will not apply to the importation of a taxable good that exceeds the specified threshold if the purchaser and seller have entered into a written agreement for the sale of the taxable vehicle before 2022 in the course of the seller’s business of selling taxable vehicles.
- Goods not subject to tax due to their characteristics
Motor vehicles not subject to the luxury tax (non-exhaustive list)
- Weight of the vehicle
- A vehicle weighing more than 3,856 kg
- Number of seats
- A vehicle with more than 10 seats
- Price of the vehicle
- An ambulance;
- A hearse;
- A motor vehicle clearly marked for police activities;
- A motor vehicle clearly marked and equipped for emergency medical or fire response activities;
- A recreational vehicle designed or arranged for use as a temporary living quarters and which is equipped with four or more of the following:
- an installation that allows you to cook,
- a refrigerator or icebox,
- a self-contained toilet,
- a heating or air conditioning system that can operate independently of the vehicle engine,
- a drinking water supply system that includes a faucet and a sink,
- a 110V to 125V electrical power system, or LP gas supply system, that can operate independently of the vehicle engine;
Aircraft not subject to the luxury tax (non-exhaustive list)
- An aircraft designed and equipped for military activities;
- An aircraft equipped exclusively for the transport of goods.
Ships not subject to the luxury tax (non-exhaustive list)
- A floating home as defined in subsection 123(1) of the Excise Tax Act;
- A ship designed and equipped exclusively for the commercial catching, harvesting, or transporting of fish or other living marine resources;
- A ship designed and equipped exclusively for the transportation of passengers or vehicles on a regular schedule between two or more points;
- A ship with berths for over 100 non-crew members.
3) What are the exemptions applicable to the taxable goods?
Exemption on sales between registered sellers
The luxury tax will generally not apply to sales of taxable goods between registered sellers of taxable goods. In order to purchase a taxable property without the luxury tax applying, the registered vendor purchasing the taxable property shall present an exemption certificate to the registered vendor selling the taxable good. The exemption certificate to present will depend on the type of property purchased:
- L100-1 for vehicles;
- L100-2 for ships;
- L100-3 for aircraft.
Exemption on sales of previously registered taxable vehicles (used vehicles)
The luxury tax will generally not apply to sales of taxable vehicles above the specified threshold that have already been registered with the Government of Canada or a province.
Example:
A dealer who is a registered seller of taxable vehicles sells a used taxable vehicle for more than $100,000. The taxable vehicle has already been registered with the Province of Alberta. The luxury tax will not apply to this sale as the used vehicle has already been registered with the Alberta government.
Exemption on sales of eligible taxable aircraft
The luxury tax generally does not apply to the sale of a taxable aircraft that is considered an eligible taxable aircraft of the purchaser at the time ownership of the taxable aircraft is transferred to the purchaser.
A taxable aircraft is an eligible taxable aircraft of a person at any time if the following conditions are met:
- the person owns the taxable aircraft at the time;
- the taxable aircraft must be operated at least 90% of the time in Canada on eligible flights.
A flight is considered an eligible flight if any of the following conditions apply:
- the purpose of the flight is to provide a scheduled service, as defined in subsection 3(1) of the Transportation Information Regulations;
- the purpose of the flight is to provide either an aerial firefighting service, an aerial forest fire control service, or an aerial search and rescue operation or service;
- the purpose of the flight is to provide air ambulance or air transport service for the removal and transportation of human organs for transplantation into humans;
- the purpose of the flight is to provide an aerial weather modification service, aerial surveying service, aerial public works or construction service, or aerial spraying service;
- the purpose of the flight is to provide a flight training air service;
- the flight is for the transportation of goods only;
- all or substantially all of the passenger seats on the flight are offered individually for sale to the general public, and all or substantially all of the passengers on the flight deal at arm’s length with the person operating the taxable aircraft for the flight, any person who is an owner of the taxable aircraft, or any other person who offers one or more of the seats for sale;
- the flight begins or ends at a place that is located in a remote community listed in the schedule of the Act;
- the flight is conducted in the course of a business belonging to an owner of the taxable aircraft (and there is a reasonable expectation of profit) and is not conducted for leisure, recreational, sporting, or other personal use of an owner of the taxable aircraft, a lessee under an agreement that is a lease, licence, or similar arrangement (for example, a lease, rental, timeshare or charter), or for a guest of an owner or the lessee of the taxable aircraft.
Exemption on sales of taxable aircraft for export purposes
The luxury tax generally does not apply to a sale of a taxable aircraft for export by a registered seller of taxable aircraft to a person who is not a registered seller of taxable aircraft.
How to take advantage of the applicable exemption?
A purchaser of taxable aircraft with a sale price above the specified threshold should use the L100-3 form as a certificate of exemption to certify that the good qualifies for the luxury tax exemption on eligible taxable aircraft. Purchasers of covered aircraft will be able to check online, using a searchable registry, whether a tax certificate exists for a particular taxable aircraft.
Exemption on sales of qualifying taxable ships
The luxury tax will generally not apply to the sale of a taxable ship, other than a designated taxable ship, that exceeds the specified threshold and is considered an eligible taxable ship of the purchaser at the time the ownership of the taxable ship is transferred to the purchaser.
A designated taxable ship is a taxable ship that is equipped with a bed, berth, or similar sleeping equipment. A designated taxable ship cannot be exempted from the luxury tax, regardless of its use. Designated taxable ships include yachts, houseboats, and any sailboat or motorboat with sleeping quarters.
An eligible taxable ship of a buyer is a taxable ship
- which is not a designated taxable ship;
- at the time the ownership of the taxable ship is transferred to the purchaser and it is reasonable to expect that the taxable ship will be used at least 90% of the time in Canada for purposes other than leisure, recreation, sport, or other personal use, by one of the following persons:
- the buyer;
- the lessee under an agreement that is a lease, license, or similar arrangement (for example, a lease, rental, timeshare, or charter);
- a guest of the buyer or lessee.
A purchaser of taxable ships with a sale price above the specified threshold should use the L100-2 form as a certificate of exemption to certify that it qualifies for the luxury tax exemption on eligible taxable ships. Purchasers of taxable ships will be able to check online, using a searchable registry, whether a tax certificate exists for a particular taxable ship.
Please contact us if you would like more information and to discuss your specific situation.
The information presented in this article is intended to provide information to Consultaxe clients and others whom the topic interests. The information presented herein is general and not exhaustive. Before making a decision, readers should consult a professional advisor.
References
https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/luxury-tax.html
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ltn1/registration-under-select-luxury-items-tax-act.html
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ltn2.html
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ltn3.html
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ltn4.html
