Canada resurrects ‘luxury’ tax on private aircraft

The Canadian government has resurrected the notion of a “luxury” tax on new private aircraft stickered at $100,000 or more, expecting 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, and cars worth more than $100,000.

The business and general aviation communities wasted no time in hitting back at the proposal in Finance Minister Chrystia Freeland’s April 19 budget, slamming it as counterproductive at a time when the government is struggling to reboot the economy.

The Liberals first floated the additional tax during the 2019 election campaign promise, but never followed through. But in a lengthy foreword to the government’s 739-page main budget document, Freeland says that reviving it is simply a matter of fairness as the country continues to grapple with COVID-19.

“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!” she writes. “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. This budget lives up to our promise to do whatever it takes to support Canadians in the fight against COVID.” 

Neither Freeland’s budget speech to the House of Commons nor a Finance Department press release mentioned the revived tax plan, which would take effect in January 2022. This assumes the budget is approved by Parliament – which seems assured with the New Democratic Party already having said it would support the minority Liberal government. 

The details don’t appear until nearly halfway through the main budget document.

Calculated at the lesser of 20 percent of the value above $100,000, or 10 percent of the full value of the aircraft, the tax would apply to the sale for personal use of aircraft retailing for more than $100,000. That would have a severe impact because even a new Cessna 172 — the backbone of flight training in Canada — costs around $500,000. 

Some 355 pages later, the document goes on to explain that the tax would apply to fixed-wing aircraft, helicopters, and gliders.

 “As a general rule,” it states, commercial aircraft with at least a 40-passenger capacity would not be subject to the “luxury” tax. Nor would “smaller aircraft used in certain commercial (such as public transportation) and public sector (police, military and rescue aircraft, air ambulances) activities.” 

If the budget is approved by Parliament as expected, the tax would apply at the final point of purchase in Canada. As for imports, it would apply at the time of importation or at the time of the final point of sale if imported for that reason.

“Upon purchase or lease, the seller or lessor would be responsible for remitting the full amount of the federal tax owing, regardless of whether the good was purchased outright, financed, or leased over a period of time,” the budget document explains, adding that the GST/HST would apply to the final sale price, inclusive of the proposed tax. 

The government is promising more detail “in the coming months,” but the Canadian Business Aviation Association (CBAA) and the Canadian Owners and Pilots Association (COPA) don’t like what they’ve seen so far.

CBAA president Anthony Norejko told Skies that the service his members provide is far from a luxury. “They are a critical part of the economy’s engine,” and the tax would be hugely counterproductive in that its project revenue generation could be offset by lost jobs and, hence, reduced income taxes.

“This tax as proposed will have a punitive and disproportionate impact on the aviation industry and, by extension, the almost 50,000 people employed directly and indirectly by business aviation in Canada,” Norejko said, pointing out that GST/HST is already applied to new aircraft.

“The possibility of a new tax is not only unfair, but can have the perverse effect of stifling an area of economic growth and reduce the ability of Canadians to conduct business” in an environment where commercial airline services have been severely constrained by COVID-19.

Norejko said that in the immediate aftermath of the budget tabling, he had discussions not only with his own constituents, but also original equipment manufacturers (OEMs) whose sales could be affected. He said the CBAA hopes to form a coalition with other aviation groups such as COPA, the Aerospace Industry Association of Canada, and aircraft sales and leasing companies to present a united front when the budget bill goes before the parliamentary Finance, Transport, and other committees.

It’s another opportunity, he said, “to educate the government” on the issues facing the industry overall.

“It’s a low-revenue generation measure,” he said, referring to the government’s expectation that it would generate an annual average of just under $130 million in tax revenues over the first five years. “On balance, you’re just hurting the businesses and the industry with no real benefit.”

One potential industry response, he said, is that “you could see a rush of aircraft purchases between now and next January by folks who are sitting on undeployed capital.

There also is the possibility that Canadian owners and operators could take a cue from their counterparts in the shipping industry by choosing to register their aircraft in other jurisdictions with friendlier tax policies. Setting the economic impact aside, Norejko said that kind of “extreme” response could mean “Transport will have less oversight over air traffic in Canada.”

Christine Gervais, his counterpart at COPA, told Skies that the government’s plan was simply “ridiculous” from many viewpoints.

“For one thing, the government hasn’t defined what ‘new’ means,” she said. Was it “new” to the owner, new from the OEM, new from the showroom, or even just a new registration with Transport Canada? “It’s really hard to formulate a proper response without having that information, which won’t be made available for a couple of months while they develop the details.”

Nor had the government defined what it meant by “personal” for tax purposes. “I’m assuming it’s not registered to a company but if it is, why does the tax not apply to that?

“If it’s a new airplane, it’s a new airplane; it shouldn’t matter who owns it. The only people being penalized are the ones who can’t push the costs off to somebody else; they have to soak it up themselves.”

Gervais also said that when the government proposed a $100,000 threshold, it clearly was ignoring the fact that a new aircraft can’t be priced that low, with the possible exception of ultralights or some smaller kits. “There are none; they don’t exist and never mind helicopters because they’re even more expensive.”

She cited Diamond Aircraft Industries of London, Ontario, the only domestic OEM of smaller aircraft. She said even it sells only about five percent of its output to Canadians; losing those sales would have obviously financial consequences.

“It would mean those aircraft would not be in Canada, not doing cross-countries or flight training, not paying landing fees, not contributing to the economic development of the communities they would fly into, etc.”

As for the Finance Minister’s statement that the aircraft tax would contribute to Canada’s overall economic recovery, Gervais predicted that “this is a no-go” because “it’s going to have exactly the opposite effect.”