Estimated reading time 19 minutes, 32 seconds.
As aviation and aerospace continues to right itself in the wake of the Covid-19 pandemic, another economic challenge has arrived: Canada’s new luxury tax on select aircraft, passenger vehicles, and boats.
The Select Luxury Items Tax Act was initially proposed in the 2021 federal budget and came into effect on Sept. 1, 2022. It applies to the purchase of personal aircraft with fewer than 40 seats; passenger motor vehicles with 10 seats or less; and leisure, recreation, or sporting boats. In all cases, the tax will apply to “subject vehicles” manufactured after 2018.
When an applicable vehicle is sold in Canada or imported into the country, the luxury tax will apply. Specific price thresholds have been established, with the tax applying to aircraft and vehicles priced over $100,000, and boats over $250,000.
The amount of tax will be calculated as the lesser of either 10 percent of the total purchase price; or, 20 percent of the total price exceeding the price threshold. The luxury tax will be added to the price of the item before GST/HST is applied. Registered vendors — those who manufacture, wholesale, retail, or import qualifying luxury items — will be required to collect and pay the luxury tax on each transaction.
With this new tax, the Liberal government says it is taking steps to address this country’s growing gap between rich and poor. As the middle class continues to shrink, the government is searching for ways to redistribute income more fairly.
In her foreword to the 2021 budget, Chrystia Freeland, deputy prime minister and minister of finance, wrote: “If you’ve been lucky enough, or smart enough, or hard-working enough, to afford to spend $100,000 on a car, or $250,000 on a boat — congratulations! And thank you for contributing a little bit of that good fortune to help heal the wounds of Covid and invest in our future collective prosperity.”
While many Canadians do not contest the concept of income redistribution, they say the luxury tax was hastily implemented without appropriate study, and does not address the principles of fair taxation. Instead, they claim the tax will only serve to harm Canadian manufacturers and dealers of aircraft, cars, and boats, further handicapping these industries and ultimately threatening the jobs of ordinary citizens — the very people the new tax purports to help.
It’s a lesson learned by our neighbours to the south, when in 1990 the U.S. applied a 10 percent luxury tax to boat sales, among other things.
“The results were disastrous,” wrote boating industry CEO Bill Yeargin in February 2022. “Over 25,000 boating industry jobs were lost and a tax that was supposed to generate millions of additional government revenue actually cost the government revenue. Fortunately, Congress was quick to acknowledge the damage they were causing, and the tax was repealed.”
Yeargin said luxury taxes simply change consumer behaviour. To avoid the tax, buyers cancel their purchase, or conclude the transaction on foreign soil and base the asset outside the country. This hurts all domestic businesses associated with the manufacture, distribution, and sale of these items.
In his article, Yeargin cautioned the Canadian government to learn from not only the U.S., but the similar experiences of New Zealand, Italy, Norway, Turkey, and Spain — all of whom tried to implement luxury taxes but subsequently repealed them.
A Tax on Manufacturing
The effect of the luxury tax on the Canadian aviation and aerospace industry is expected to be significant.
“Implementing a luxury tax will affect jobs,” asserted Anthony Norejko, president and CEO of the Canadian Business Aviation Association (CBAA), which lobbied heavily against the tax, along with a consortium of other labor unions and industry groups.
He said the luxury tax is an ineffective tool to recoup the giant deficits associated with Covid-19.
“It’s inappropriate to suggest that putting a tax on aircraft is in any way going to recoup those dollars. It will be more prohibitive to own the products that Canadians make here at home. There is nothing there to strengthen the economy — it weakens us as we move forward. What it is and always has been is a tax on Canadian manufacturing.”
Norejko is frustrated that government seems to have designed and implemented the luxury tax without first conducting a proper economic impact analysis. He pointed to the minutes from a May 2, 2022, meeting of the House of Commons Standing Committee on Finance, where Bloc Québécois MP Gabriel Ste-Marie asked whether such an impact had been assessed.
“We haven’t done that type of assessment,” responded Miodrag Jovanovic, assistant deputy minister for finance. “However, the government has conducted an exhaustive consultation of the sector to ensure it minimizes the impact the tax will have on the private sector.”
In the meeting, Ste-Marie called that answer “really disturbing” and noted that a 20 percent tax can significantly impact industry and jobs.
Later in May, the Parliamentary Budget Officer (PBO) noted that the luxury tax could bring in $779 million over a five-year period — but it could also trigger a $2.9 billion drop in the sales of eligible vehicles over the same period.
The CBAA’s Norejko is frustrated by what he called the government’s “total lack of understanding” of the aviation industry. His association put forward a suggested tax threshold of $5 million to reflect the actual cost of aircraft, noting the current $100,000 figure is unrealistically low.
He also pointed to the threshold used to determine whether an aircraft is a business tool — and thus not subject to the tax — or simply for personal use. Whereas in the past, business usage more than 51 percent of the time would qualify an aircraft as a commercial tool, the government has now implemented a 90 percent threshold with the luxury tax. That means that aircraft used more than 10 percent of the time for personal use will automatically be subject to the luxury tax.
“I think the bigger issue is the unintended consequences,” he told Skies. “The shame of it all, is that despite what the PBO and opposition MPs said and put motions forward to that effect, the Liberal government is willing to just roll this thing out there.
“There will be folks who just don’t buy aircraft,” he warned, echoing Yeargin’s view of consumer behavior. “If you give someone eight million reasons to find an alternative, don’t be surprised if they find one.”
Jim Ferrier, interim president and CEO of the Canadian Owners and Pilots Association (COPA), said his general aviation (GA) membership views the luxury tax as mainly a “future problem” when it comes to the resale of aircraft built after 2018. While most of COPA’s 15,000+ members currently fly older aircraft, Ferrier said the $100,000 threshold for the tax is unrealistic from a recreational flying point of view.
“One big concern is the luxury tax is retroactive for the life of the aircraft, if its original use is tax exempt,” he said. “For example, a flight school brings a Cessna 172 into Canada for flight training. As a business, the school is luxury tax exempt. But what happens if they sell the same aircraft to a private individual down the road? It cost more than $500,000 new and will likely have appreciated. Is the next person in line looking at paying a tax based on its current value? That basically destroys the after-market availability of aircraft.”
Ferrier said the tax will also dissuade GA pilots from upgrading to newer aircraft, which can offer lower operating costs and are often more environmentally friendly. In an April letter to government, COPA also noted that there are no aircraft manufactured after 2018 that cost less than $100,000. Conversely, there are many so-called luxury cars available for less than $100,000; likewise, there are boats available for less than $250,000.
“I would wager my paycheque that I could find 100 boats for under $100,000 that I could buy brand new,” said Ferrier. “But it would be very difficult to find a brand new aircraft priced under $100,000. Whoever picked that number has never been involved in aviation.”
COPA, too, advocated for a $5 million threshold. In addition, the association proposed capping the luxury tax to a maximum of $1 million; changing its applicability to one-time use for new aircraft only; adding an exemption for those who choose to ‘fly green’; basing future tax on depreciated values versus fair market values; and removing any tax on subsequent improvements which are designed to increase safety.
“We even suggested the government has an environmental agenda they are trying to meet with regards to carbon, yet they’re de-incentivizing people to upgrade to new aircraft,” concluded Ferrier. “It seems to me like this is an announcement about ‘we’re taxing the rich.’ But that’s definitely not the case in general aviation.”
Stan Kuliavas is vice president of sales and business development at Levaero Aviation in Toronto, which sells new Pilatus aircraft and a variety of pre-owned makes. He said that from an aircraft dealer perspective, the luxury tax is surrounded by more questions than answers.
“Communication from the government regarding this tax has been vague, at best, since it was first proposed,” he told Skies. “The government has captured all aircraft built from 2019 onwards in this punitive tax structure, contradicting their other policies. While on one hand the prime minister is promoting a green agenda, on the other hand he is encouraging Canadians to purchase older, less fuel-efficient assets.”
Kuliavas pointed out that government regularly utilizes aircraft as the most efficient tool to conduct business across the country. It’s the same in the corporate world, he said.
“Business aircraft allow Canadian businesses to be competitive on a national and global scale, and to conduct business efficiently. For the government to treat these business tools as ‘luxuries’ and to impose a ‘luxury tax’ on them is not only hypocritical, but an irresponsible action. A government that considers business aircraft to be luxuries does not understand how business works, and how vital a tool aircraft are to many Canadian companies.”
He reiterated that it will encourage buyers to purchase older, less efficient aircraft that are exempt from the tax.
“Sustainability goals are real for Canadian corporations, yet the older aircraft that the government is encouraging people and companies to purchase will likely have a larger carbon footprint, making it harder for businesses to achieve their sustainability goals.”
Kuliavas also expects the luxury tax to dampen the demand for Canadian-made aircraft, as well as aircraft sold by Canadian dealers and brokers. In turn, this will negatively affect aviation and aerospace employment.
Bombardier, the Montreal-based manufacturer of world-class business jets, agreed. In a written statement to Skies, spokesperson Matthew Nicholls said Canada is well known for building the best aircraft.
While most of Bombardier’s jets are sold to international buyers who are not affected by Canada’s luxury tax, Nicholls said its implementation is “deeply troubling” for those who rely on the domestic industry.
“People around the world see this and wonder why the Canadian government wants to penalize Canadians for buying leading world-class products designed and manufactured by Canadians; and, why there is domestically a hindrance to what’s recognized as the best products in the industry.”
Bombardier expects the tax to have the greatest impact on businesses in remote communities, including those who support business jet operations.
“We express our concern for the thousands of jobs that support our customers and jets based in Canada if growth is stunted domestically,” concluded Nicholls.
Unfair and Unjust
Some in the aviation industry feel that aircraft, boats, and motor vehicles were selected arbitrarily, while other so-called “luxury” items — expensive RVs, for example — remain unscathed.
“The lawmakers have decided that they are going to target aviation, luxury autos, and boats,” said Isaac Capua, vice president of Oshawa, Ontario-based Aviation Unlimited, which sells new Piper, Diamond, and Kodiak planes, as well as all makes of pre-owned aircraft.
“Even as a group of three, those are arbitrary. Aviation was specifically targeted with this $100,000 limit as opposed to $250,000 for boats. But we are assuming the value of an aircraft is as high as it is because it represents a luxury item. That is misaligned. Aircraft are expensive because of the technology that goes into them and the certification costs. If we want to target ostentatious purchases, perhaps we should be taxing luxury jewellery, country club memberships, or RVs.”
Capua said the tax is unfair and unjust. In the short term, he’s already seen it deter people from purchasing a new aircraft.
“In the longer term, buyers will simply find tax efficiencies by different methods — whether that is foreign registration or keeping an aircraft out of the country. They will find efficiencies by taking the aircraft out of the Canadian economy.”
The origins of the luxury tax are mired in “political strategy” and not sound decision-making, believes Capua. Newer aircraft offer a myriad of safety benefits as well as better environmental performance. Yet, the luxury tax only serves to deter those who seek to make a responsible decision when it comes to aviation safety and greener operations.
“This is a tax on safety,” he emphasized. “The alternative decision will be to opt for an older, less safe aircraft. Then, there is the environment piece. The tax should consider relieving environmentally friendly aircraft, [as is the case] with cars.”
Like COPA, Capua pointed out that most people do not drive cars priced over $100,000. Many less expensive options are available.
“For aviation, I think you should come up with an average number that is in line and logical. A brand-new Cessna 172 or Diamond DA40 (entry-level aircraft used for flight training) costs $500,000+ for the base model. If you want to go after the luxury end of the [aircraft] market, you should raise the limit.”
As well, Capua suggested the luxury tax should be capped at a maximum amount, as it is a “rare example of a completely open-ended tax with no limit.”
For buyers who take their business outside Canada and choose to register aircraft elsewhere, Capua lamented the economic impact: “They won’t be insuring the aircraft in Canada. They cannot employ a Canadian-licensed pilot or mechanic. They wouldn’t be able to finance the aircraft in Canada. From a legislative point of view, those aircraft would not be beholden to Transport Canada regulations. The effect is far-reaching.”
While the luxury tax became a reality on Sept. 1, the CBAA’s Norejko said the fight is not over.
“Now that the federal government has returned from summer break, our efforts will be to widen the lanes on the luxury tax,” he said.
“We’ll keep pressing on issues like the $100,000 price threshold, the environment, and the 90 percent usage threshold. Frankly, a government’s job is to create incentives to do the right thing. Creating a disincentive to acquire a cleaner, greener, and safer aircraft doesn’t make sense.”
Meanwhile, industry remains deeply concerned about the legislation’s economic impact.
“The business aviation sector contributes more than $12 billion annually to the Canadian economy,” noted Levaero’s Kuliavas. “The people this tax will hurt are the hard-working and highly skilled 47,000+ Canadians employed in the sector.”
Although this legislation is now enacted, there are still opportunities to create positive change to ensure Canada does not lose jobs. Contact your local MP to express your stance on this topic: https://www.ourcommons.ca/members/en.