Luxury tax on aircraft to reduce tax revenue by $29.9-million, cost more than 2,000 direct jobs, report warns

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Rather than raising revenue, a new report warns that Ottawa’s luxury tax on aircraft will reduce federal income by $29.9-million a year and cause the loss of at least 2,000 direct jobs.

The research report on the economic impact of the tax was prepared by HEC Montréal business school Professor Jacques Roy for the Aerospace Industries Association of Canada (AIAC), which strongly opposes the tax.

Prof. Roy’s research involved economic modelling and confidential interviews with more than a dozen industry leaders who shared specific examples of how the luxury tax is already influencing client decisions.

Prof. Roy, who is with the business school’s department of logistics and operations management, was one of three members of a 2012 federal advisory panel that reviewed Canada’s aerospace and space programs. He said that while he was paid by the AIAC to produce the report, his research was conducted independently.

The report says the sale of 10 business jets are currently at risk this year because of the tax, which would amount to a loss of nearly $540-million for the companies. Reasons invoked by potential buyers include looking at alternatives such as basing aircraft in the U.S. or waiting to see if details of the law’s application are changed.

“The loss of 10 aircraft sold so far this year may seem like a small number but it is significant and so are the lost revenues,” the report states.

In what is described as a conservative estimate, the report concludes that 2,071 direct jobs will be lost in aviation sectors, including business jets, helicopters and business-jet suppliers because of the tax. That translates into $149.3-million in lost salaries and $29.9-million in lost federal tax revenue.

The report says these numbers would be much higher if they were to include the spinoff impacts on other sectors of the economy.

In an interview, Prof. Roy said Canada appears to be the only country in the world with such a tax. The U.S. introduced a similar tax and quickly abandoned it in 1993. In a sector where government incentives weigh heavily on where international aviation companies will invest, he said the tax runs counter to Canada’s efforts to attract investment.

“The message that it sends to the industry and foreign investors is very negative,” he said.

The luxury tax was first announced in Finance Minister Chrystia Freeland’s 2021 budget and it took effect on Sept. 1 of this year. It applies to certain vehicles and aircraft priced above $100,000 and on certain vessels priced above $250,000.

Industry groups representing affected businesses had lobbied hard earlier this year to soften the tax, which was approved by Parliament as part of Bill C-19, a budget bill. Ms. Freeland strongly defended the tax during committee hearings on the legislation.

Adrienne Vaupshas, a spokesperson for the minister, said the Finance Department’s recent analysis “does not in any way support” the numbers in Prof. Roy’s report.

“The reality is that private-jet sales have increased significantly since the pandemic,” she said. “Canadians twice re-elected our government on a platform that included a luxury tax on yachts, private jets and luxury cars. … It is only right and fair that the very wealthiest are asked to pay their fair share.”

Montreal-based private- and business-jet manufacturer Bombardier BBD-B-T released third-quarter results in November that described the company’s fundamentals as “very strong.”

The luxury tax for aircraft is calculated as 20 per cent of the amount above the $100,000 price threshold or 10 per cent of the taxable amount, whichever is lower. There is an exemption for cases in which the buyer uses the aircraft for business at least 90 per cent of the time, but the report said this could be “quite challenging, if not impossible” to determine.

A May report by the Parliamentary Budget Officer (PBO) found that the tax will reduce sales of autos, boats and planes by more than $600-million a year. That PBO report also estimated that the tax would raise $163-million in 2023-24, of which only $9-million would come from the aviation sector. Most of the new revenue – $120-million – would come from auto sales, the PBO said.

The PBO’s estimate of $163-million in new revenue from the full luxury tax was higher than the updated 2022 budget estimate of $140-million. The budget did not break down the government’s estimate by sector.

Mike Mueller, president and chief executive of the Aerospace Industries Association of Canada, said the study was commissioned in part because Finance Department officials told MPs earlier this year that they had not conducted an economic impact of the luxury tax.

He said Prof. Roy’s job-loss estimates are worse than he would have thought. Mr. Mueller said he questions why the government is going ahead with a tax that will lower, rather than raise, tax revenue and cost Canadian jobs.

“From a math perspective, this is just not adding up to us at all,” he said. “And then we need to remember that that tax revenue represents people, families, high-skilled, highly paid workers in the aerospace industry.”