A Finance Department report on the projected impact of the new federal luxury tax says it could lead to between 400 and 870 job losses – a finding auto, boating and aviation industry groups argue confirms their warning that the policy will hurt Canadian workers.
The federal government has imposed a tax on the sale of new luxury vehicles and aircraft priced at $100,000 and above and on new vessels selling for $250,000 or more. The luxury tax was first announced in the 2021 budget, and took effect Sept. 1, 2022.
Department officials told the House of Commons finance committee last year that they had not produced an assessment of the tax’s economic impact. The new report is dated March, 2023, and was provided to that committee, which has been studying the tax.
The analysis by the Finance Department, which provides research and policy support to Finance Minister Chrystia Freeland, also says the new tax could lower total Canadian GDP by between $58-million and $125-million. The report describes this as equivalent to up to 0.005 per cent of GDP, adding that is “a negligible share, although this entirely reflects the very narrow and specific base to which this tax is applied.”
Adrienne Vaupshas, a spokesperson for Ms. Freeland, noted that officials say in the report that their assumptions “likely lead to an overestimation” of the tax’s impact. Ms. Vaupshas said the luxury tax was a clear element of the past two Liberal election platforms.
“It is only right and fair that the very wealthiest are asked to pay their fair share,” she said.
The department’s estimate for job losses is lower than other reports presented by industry groups. Some involved with those reports took issue with a few of the department’s economic assumptions, but said its research nonetheless confirms their warning that the tax will cost jobs.
Throughout its report, the Finance Department cautions that estimating the potential impact of the luxury tax is challenging because of the limited available economic research on the topic.
Broken down by sector, the report says the vehicles market would be hardest hit in terms of reduced sales, with an impact of between $125.2-million and $210.2-million. Vessels would be next, with reduced sales of between $32.7-million and $102.9-million, followed by aircraft at between $13.5-milion and $28.7-million.
The Finance Department’s estimates for reduced sales by sector are roughly in line with projections released in May, 2022, by Parliamentary Budget Officer Yves Giroux.
Also, the report says the tax will raise $654-million in revenue over five years, which is slightly lower than the PBO’s estimate of $779-million.
Charles Bernard, lead economist with the Canadian Automobile Dealers Association, said the government report supports the industry’s concerns.
“The analysis provided by Finance Canada on the impact of the Federal Luxury Tax makes clear that automotive retailers and their employees will be hurt by the tax – not wealthy Canadians,” he said in a statement. “Even this report’s minimizing approach makes clear hundreds of local dealership jobs will be lost and tens of millions of economic growth will be lost.”
The National Marine Manufacturers Association Canada released a report in 2021 by economists Jack Mintz and Fred O’Riordan that concluded the tax would lead to $90.5-million in reduced vessel sales and the loss of 896 jobs, with the potential of as many as 3,670 lost jobs in the sector.
Jim Wielgosz, the association’s interim executive director, said the association is “deeply disappointed” that the department didn’t reach out to hear about the impact of the tax.
“We’re not surprised by the findings of the Finance study. It lines up with what we’ve been hearing from marine businesses across Canada, who have reported millions of dollars in sales losses and dozens of jobs destroyed. That’s just barely half a year after the tax was introduced,” he said in an e-mail.
The government projections for the impact on luxury aircraft sales are considerably lower than a report released last year by the Aerospace Industries Association of Canada, which warned the tax would cause at least 2,000 direct job losses in that sector alone.
The AIAC report was prepared by HEC Montréal business school professor Jacques Roy. Reached for comment, Prof. Roy defended his own findings and said he questions some of the Finance Department’s assumptions.
For instance, Prof. Roy said the department’s report appears to underestimate the degree to which consumers of luxury aircraft would divert their spending in response to the tax. He also questioned the department’s estimate of between 10 and 22 lost direct jobs in the sector, pointing out that it takes 75 full-time employees to build a single business jet.
The department’s report acknowledges that estimating a behavioural response is especially challenging when it comes to aircraft.
“To our knowledge, there is no empirical evidence on the potential behavioural response from the taxation of privately-owned aircraft,” the report states, adding that the department’s report relies on several assumptions and “should be interpreted with some caution.”
Mike Mueller, president and chief executive officer of the AIAC, said the government report “greatly minimizes” the impact on business jet sales.
“Our members are seeing orders cancelled, clearly showing this tax is counterproductive and harms the Canadian aerospace sector,” he said.