More people than ever are driving around this country in Rolls-Royces, Lamborghinis, Ferraris, McLarens, Aston Martins and the like. Improbably, given our wintry climate and pothole-ridden roads, sales of super-luxury cars boomed in Canada over the past decade.
If you can afford a car like that – or any car over $100,000 – you can also afford to pay a little more tax on it, which is exactly what the federal government’s 2021 budget has proposed. The luxury tax also targets yachts and private planes, but for vehicles, it will amount to the lesser of either 10 per cent of its full value or 20 per cent of the value above $100,000. It seems the tax will apply whether you purchase, finance or lease a vehicle.
“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,” Finance Minister Chrystia Freeland wrote in the budget’s foreword.
It’s a real crowd-pleaser of a tax. Of all the things in the massive 700-page budget document, the luxury tax on yachts and cars grabbed headlines right alongside news of the $10-a-day child-care plan.
The problem here is not that taxing these expensive toys is a bad idea – quite the opposite. It’s a good idea that simply doesn’t go far enough. It’s more symbolic than impactful, or, more cynically, a smokescreen for the fact the Liberals have once again failed to take more ambitious measures aimed at reducing extreme wealth inequality.
As The Globe’s personal finance columnist Rob Carrick notes, “Unmentioned in the budget are tax measures that have been talked about for months – a wealth tax, a heavier tax load on capital gains from the sale of financial assets such as stocks and, more recently, an end or changes to the capital-gains exemption on principal residences.”
The luxury tax’s narrow focus on cars, yachts and planes will raise a relatively small amount of revenue: $604-million over five years, according to the government. It’s a drop in the bucket. By comparison, the Office of the Parliamentary Budget Officer estimated last year that a wealth tax on 1 per cent of net wealth above $20-million would raise $5.6-billion in 2020-21.
That wealth tax, by the way, is also a crowd-pleaser. An Abacus poll conducted last year found 79 per cent of Canadians supported it, including 73 per cent of households in the top income bracket.
The stated goal of the luxury tax, indeed of the entire budget, is not simply to raise revenue, though. At Prime Minister Justin Trudeau’s behest, the budget was meant to address wealth inequality, one of his favourite talking points.
A narrow luxury tax on fancy cars and yachts isn’t going to make much of dent on that front either. If the shock of paying an extra 10-per-cent tax on a new full-size Range Rover, Cadillac Escalade or Mercedes G-Wagon is too much, wealthy buyers may very well take that money and spend it on some other luxury toy not covered by the new tax.
That appears to be what happened in 2018 in British Columbia, at least initially. When the provincial government raised taxes on vehicles over $125,000, sales declined, according to a Scotiabank analysis. On message boards including Reddit, luxury-car shoppers shared ways to avoid paying B.C.’s tax. The extent of the sales hit is hard to quantify since it coincided with a market-wide downturn after years of record highs and also a glut of used cars hitting the market. In some high-end dealerships, sales did rebound after an initial drop. Nevertheless, there were job losses at some dealers, which is not an outcome anyone wants to see.
In B.C.’s case, the tax may be acting like a “sin” tax in that it curbs consumption, which is what you want for cigarettes but not necessarily for fancy cars.
A broader tax, such as the aforementioned wealth tax, wouldn’t necessarily have such a pointed impact on luxury-car sales and would be vastly more effective in achieving the government’s stated goals of raising revenue and reducing the extreme wealth inequality that plagues this country.
But a niche tax on yachts and supercars is easier, and it makes for better headlines. It’s a good start, but it’s only a start.
The luxury-car tax comes into force on January 1, 2022. Expect lineups out the door at your local supercar dealer until then.