The real cost of riding in style: How does the new Select Luxury Items Tax impact vehicles?

In our previous article The Real Cost of Buying Luxury Cars in B.C., we explained how the true cost of purchasing a luxury car in BC can be up to 3 times the purchase price of the car once personal income tax, PST, GST/HST, and the proposed Federal luxury tax are factored in.

Well, the Select Luxury Items Tax came into effect on September 1, 2022, and with it came quite a few surprises. Let’s take a look at some of the common questions we get about this tax, and some of the nitty gritty details to keep in mind when that shiny new ride seems to be calling your name.

What is the luxury tax on cars?

The Select Luxury Items Tax Act requires tax to be paid when a car costing more than $100,000 is purchased or leased, except where the car was previously registered with the Federal government or a provincial government for use on public roads in Canada. Generally, this means that the tax is only payable the first time that a car is purchased or leased.

How much is the tax?

The tax is the lesser of: 

• 10% of the taxable amount of the car; and,
• 20% of the amount by which the taxable amount of the car exceeds $100,000

The taxable amount of the car includes:

• In the case of a purchase, the selling price of the car;
• In the case of a lease, the fair market value of the car[1];
• Fees, taxes and levies in respect of the car or the sale of the car (e.g. freight, pre-delivery inspection, tire levies, a/c levies, etc.); and,
• The price of any improvements to the car provided by the seller of the car in connection with the sale

The taxable amount of the car does not include GST/HST or BC PST.

Who is required to pay the tax?

In most cases, the tax is payable by the seller of the car and not by the purchaser. Sellers will presumably seek to recover the tax they are required to pay by adjusting the price of the vehicle, charging a fee, etc. This means purchasers should understand how the seller is recovering the tax so that they can verify that any adjustments to price or fees are fair.

Which cars are subject to the luxury tax?

The tax applies to most standard motor vehicles manufactured after 2018 that have a seating capacity of up to 10 individuals and a Gross Vehicle Weight of up to 3,856kg. Certain motor vehicles are exempt from the tax, such as an ambulance, a hearse, police cars[2], and vehicles that are clearly marked and equipped for emergency medical response activities or emergency fire response activities.

How does the tax apply to recreational vehicles?

The tax may apply to an RV where that vehicle is a “motor vehicle”, which effectively limits the application of the tax to RV’s that are motorhomes or are otherwise capable of being driven on roads under their own power. RV’s with a GVW in excess of 3,856kg are not subject to the tax, while RV’s with a GVW of 3,856kg or less are not subject to the tax if they are designed to provide temporary residential accommodation and they are equipped with four or more of the following:

• Cooking facilities;
• A refrigerator or ice box;
• A self-contained toilet;
• A heating or air-conditioning system that can function independently of the vehicle engine;
• A potable water supply system that includes a faucet and sink; and,
• A 110-V to 125-V electric power supply, or a liquefied petroleum gas supply, that can function independently of the vehicle engine

How does the tax apply to used cars?

The tax is generally not payable where the vehicle being purchased was previously registered with the Federal government or a Provincial government for the purpose of allowing the vehicle to be used on public roads. Additionally, motor vehicles manufactured before 2019 are not subject to the tax.

How does the tax apply to improvements to the car?

The tax may be payable on improvements to the car such as tangible goods that are installed in or on the vehicle (e.g. a car stereo) or are attached to the vehicle (e.g. a light bar). If the improvements to the car are provided by the seller of the car in connection with the sale, then the cost of the improvements is factored into determining the tax payable on the sale or lease of the car (see the above section on how the tax is calculated).

If the tax was payable on the purchase of a vehicle and the purchaser makes improvements to the car with a total cost of $5,000 or more in the first year of ownership, then tax is payable by the purchaser of the vehicle in respect of the improvements. The purchaser is required to self-assess the tax, so make sure you contact your DMCL advisor to ensure you’re calculating it correctly.

Is the tax subject to BC PST or GST/HST?

BC PST is not payable on the amount of luxury tax payable in respect of the sale or lease.

GST/HST is payable by the purchaser or lessee on the amount of luxury tax payable in respect of the sale or lease. Furthermore, GST is payable by the purchaser or lessee on the amount of BC PST payable in respect of the sale or lease if the value of the car is $55,000 or more.

What could happen if I try to avoid the tax?

The legislation contains number of anti-avoidance rules which address common tax avoidance strategies. In addition, failure to comply with the legislation may be considered a criminal offence and upon conviction could result in substantial financial penalties and/or incarceration. See the CRA website for more information.

If you’re looking to reward yourself or a loved one with a new (or new-to-you) vehicle in the near future, it’s important to consider the heavy tax implications that come with purchasing a luxury vehicle in BC. Thankfully, your DMCL advisor will be able to walk you through exactly what taxes will apply so you have all the information you need before making a purchase.

Article written by Stewart Bullard, CPA, CA

[1] The tax is payable by the dealer on the entire value of the car the first time the car is leased. This is very different from GST/HST and BC PST where those taxes are payable by the lessee and are effectively based on the depreciation of the car over the term of the lease. The first lessee of a car should understand how the dealer is recovering the luxury tax from the lessee to ensure that a fair portion of the tax is being passed on to them.

2 The vehicle must be clearly marked for policing activities, which suggests that unmarked police cars or “ghost cars” would be subject to the tax.