The federal government says it will soon introduce a special luxury sales tax on high-priced cars, boats and planes, despite domestic manufacturers’ concerns that their customers are already cancelling orders to avoid the new surcharge.
The Liberals proposed the tax in the 2021 budget as a way to raise further revenue from wealthy Canadian residents, along with previous hikes in the top income brackets. The levy, of either 10 per cent or 20 per cent depending on the value of the purchase, applies on cars and aircraft worth more than $100,000 and boats priced at more than $250,000.
The luxury tax was to take effect on Jan. 1, 2022, but that date passed without notice. Adrienne Vaupshas, a spokesperson for Finance Minister Chrystia Freeland, said on Wednesday that draft legislation to implement the tax will be introduced in the coming weeks. The government projects that it would raise about $150-million a year.
But boat, plane and car makers say their customers have started to cancel orders because they don’t want to pay the tax – a result that means a steep drop in business for the manufacturing industry, and likely less tax revenue than the government expects.
Industry groups have asked Ottawa to abandon plans for the tax or to limit its effects, for example, by raising the threshold for aircraft to $5-million.
Anthony Norejko, president of the Canadian Business Aviation Association, said his group estimates $900-million worth of orders have been cancelled or postponed because of the tax, based on what companies, including Bombardier Inc. and Diamond Aircraft Industries, have told him.
He said that could lead to hundreds of job losses in the sector.
“It’s everything from the folks on the floor, to the engineers designing the aircraft, to the teams that support it,” Mr. Norejko said.
Jan Willem De Jong, managing director of Neptunus Yachts in St. Catharines, Ont., said he could lose the next year’s worth of work if the tax comes into effect. His team of up to 50 people produces two or three yachts a year priced at more than $4-million each.
The next two sales agreements he has lined up each contain a clause at the customers’ request that allows them to back out of the deals with full refunds if the federal luxury tax comes into effect.
“If you want to tax the wealthy, don’t tax just one industry, put it across everybody that’s worth more than $10-million, or whatever the threshold you’re setting,” Mr. De Jong said. “You can’t just pick one industry and say, ‘We’re just going to go after planes and yachts.’”
Research, including from the Parliamentary Budget Office, suggest wealthy customers are highly sensitive to taxes on luxury goods and may shift their dollars to other products to avoid them.
Fred O’Riordan, EY Canada’s national leader on tax policy and a former executive at Canada Revenue Agency, studied the issue with public-policy professor Jack Mintz last year at the request of the National Marine Manufacturers Association Canada.
He said boats were particularly sensitive to changes in customer behaviour because they can be bought and docked in other jurisdictions, such as the United States, as one method of avoiding the levy.
“Typically, you see a greater response for luxury goods than for basic goods or essentials,” Mr. O’Riordan said. “Even if prices increase, you’re not going to scale back your purchasing if it’s a basic necessity. Luxuries are very different. There are all kinds of opportunities to substitute. Nobody needs to buy a yacht.”
His study of the boat industry estimated that, without any behavioural effects, the government could raise about $37-million from the luxury tax on sales of high-end seacraft – which would decrease to $29-million if behavioural effects were taken into account.
That estimate would also mean a loss of $90-million in annual revenue to the boating industry, which could translate into a reduction of 900 jobs.
“It’s going to hit the industry,” Mr. O’Riordan said. “It’s only going to raise a fairly marginal amount of revenue on the high-wealth individuals.”
In her budget speech last year, Ms. Freeland said the luxury tax was a matter of fairness.
“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!” Ms. Freeland said. “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.”
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