Proposed luxury tax in Canada ‘could backfire badly’ if it sees light of day: CBAA

Sometime in the next couple of months, possibly into late spring, Finance Minister Chrystia Freeland is expected to table the federal government’s latest budget. With that in its collective mind, the House of Commons Standing Committee on Finance has just begun its “pre-budget consultations.”

Registered lobbyists and other witnesses will make their usual pitch for what should – and should not – be in that budget. Potentially grouped with other aviation interests, one of them would be the Canadian Business Aviation Association (CBAA), represented by Anthony Norejko, its president and chief executive officer.

His key issue will be the government’s latest attempt to impose a “luxury tax” on aircraft worth $100,000 or more, including duties, charges, and taxes other than provincial sales taxes. In short, it would apply to just about anything with wings manufactured since 2018 – short of an ultralight and its ilk. A new Cessna 172, the backbone of flight training in Canada, costs around $500,000.

Aircraft would be exempt from the tax if they are acquired by a “qualifying user,” such as a police or fire department, or when “all or substantially all” use has been certified to be in one or more “qualifying exempt activities.” Those would include service to remote communities accessible only by air; medevac or flight training services; scheduled public or cargo flights; and charter services where all or most seats are sold individually.

Freeland famously said in early 2021 that it is “fair to ask those who have prospered in this bleak year to do a little more to help those who still need help.”

The government’s hope is to generate some $640 million in new revenues over the first five years when the proposal is combined with a tax on boats costing more than $250,000.

Norejko warned that the whole effort could backfire badly in terms of how it affects aviation in general, a sector worth $12 billion with $3.5 billion in annual wages and salaries. Those are the “good, well-paid jobs” the government and others keep talking about.

For example, the country’s international airports, “expecting a long, slow climb out from the current air travel slump,” are exploring how to use their non-air assets to generate revenue, Norejko said.

Toronto Pearson International is where Montreal-based Bombardier began construction last November of a new Global aircraft manufacturing center on the north end of the airport property. The cost of the final assembly center is $400 million and, when it opens in 2023, will see 2,000 Bombardier employees relocated a few kilometres west from an outdated facility at Downsview Airport — which has been a Bombardier test facility since 1994. The new plant will see a 60 percent reduction in energy consumption and a more than 50 percent reduction in greenhouse gas emissions.

“It’s a perfect fit,” Norejko said. “You’ve got fantastic aircraft made in Canada, employing Canadians, and yet we’re going to design a system that completely penalizes the purchases from that asset.”

He noted that while the main impact would be on Bombardier’s Quebec and Ontario division, the company has a national supplier base.

“Job losses are the principal point here. Going in and creating this luxury tax for aircraft manufactured after 2018 is just going to hurt domestic manufacturing — Bombardier, Diamond, Viking/De Havilland, etc… So principally we need to see the exemption for business and commercial charter. The way it’s drafted is on a per-seat basis; nobody takes a business aircraft charter management program and puts it on that basis.”

And there’s another aspect to the law of unintended consequences: the impact on innovation. “Why repeat the failures of our Avro cancellation?” Norejko was referring to the federal government’s infamous, abrupt, and savage (and still not fully explained) shut down of the Avro Canada CF-105 Arrow.

The delta-winged Arrow held real promise of being the fastest and most capable aircraft of its type in the world, but the then-Conservative government shut it down in February 1959, ordering the destruction of the assembly line, all tooling, and plans, as well as the operational prototypes. That resulted in a mass exodus of expertise to other countries, including to the U.S. space program.

Washington also offers a sobering lesson about luxury taxes. Its experiment began in November 1991 when Republican President George H.W. Bush signed a bill into law. The idea was to tackle the budget deficit by generating revenues through, among other things, a tax on aircraft costing more than $250,000.

However, in August 1993, mainly due to pressure from the yacht-building industry, his Democrat successor, Bill Clinton, eliminated most of the tax, saying it was costing jobs. Though it remained in effect for high-end automobiles until 2002.

Back in Canada, there’s another potential victim as the tax proposal is currently drafted: the flights which handle donated organs. “They’re not medevacs and the only companies available to these organ donation flights are commercial charter companies,” Norejko pointed out. “There isn’t an aircraft or company that exists solely to do that.”

Meanwhile, as the first few months of 2022 unfold politically, the CBAA could be willing to settle for a cap on the proposed tax, perhaps on anything costing more than $1 million. “On a $75-million aircraft that Bombardier manufactures . . . a 10 percent luxury tax would be $7.5 million!”

Norejko said the government should refocus its sights on aircraft purchased strictly for personal use, which he acknowledged has “an element of luxury.” But if an executive in a company with a corporate aircraft uses it for personal travel, it would be appropriate to charge a percentage on top of the calculated rate for use of that aircraft.

The tax was supposed to take effect in January, but with that come and gone, Norejko said “the idea, at least from the government’s perspective, hasn’t disappeared yet.”

In the end, however, he predicted that if the tax does see the light of day, “in the end, it’s not going to be a successful program.”

He acknowledged that the opposition parties have supported the proposal. “But this is going to be a vote of confidence if they make something too crazy.”

Those votes require the approval of a majority of MPs and could result in a minister’s resignation or even the defeat of a government – which none of the major parties in Parliament really wants right now.

“It’s politically easy to talk about a luxury tax and how Canadians view it,” Norejko said. “It needs to be shifted to a conversation about the impact on jobs . . . and innovation. If we can convince folks that is the case, then perhaps we’ll see some change. We’ll push that issue.”

Norejko said that in today’s “challenging economic times,” the aerospace and other sectors are trying to rebuild from the coronavirus ravages of the past two years. “Now they try to tell the industry that they’re going to penalize these purchases?”

“It’s a very simple calculus” for the business aviation community, said Norejko. Members can opt to buy a foreign aircraft, but he conceded that although it’s always “a possibility” for some owners, foreign-registered aircraft are limited by regulation as to the number of days they can operate in Canada each year.

Or, they could simply not buy a new aircraft at all, which would mean — in most cases — sticking with an older and, hence, less efficient and more operationally costly platforms. Those likely would be less environmentally friendly, flying in the face of the government’s stated “green” plan to reduce emissions as it pushes toward a net-zero carbon economy by mid-century.

“There’s a lot to unpack,” Norejko concluded. “But January has come and gone and we expect that they’ll likely try to put something into the budget. There’s still an opportunity to influence the finance committee, but to date we have not received any level of comfort that business use and/or commercial charter is going to be excluded. That’s the most important point for Canada’s aviation and aerospace workers right now.”