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“Cracking the Code: Understanding Canada’s Luxury Tax on Aircraft”
Recently, as I attended the annual National Business Aviation Association conference, I had the chance to pick the brains of non-Canadian contacts in business aviation. What stuck with me was a recurring sentiment I heard – “While I still don’t quite understand the luxury tax, it is already costing me a lot of my sales.” This tax has been a topic of concern for many since Canada’s federal Select Luxury Items Tax Act, also known as the “Luxury Tax”, came into effect on September 1, 2022.
What You Need to Know
The law imposes a tax of up to 10% of the value of certain passenger aircraft, automobiles over $100,000, and boats over $250,000, upon the sale, lease, or importation of such vehicles. The tax is not a burden on wealthy consumers, but rather on the vendors or lessors of aircraft sold or leased in Canada and importers of aircraft into Canada.
Lack of Understanding
Though over a year has passed since its implementation, the Luxury Tax is still not well understood, even by the agencies responsible for administering it. This lack of understanding can be attributed in large part to a lack of clear and timely guidance on how the tax is to be applied, as well as oversights or deficiencies in the legislation and regulations. In an attempt to address some of these deficiencies, draft regulations were released by the Department of Finance on August 4, 2023 – nearly a year after the implementation. The lack of understanding is compounded by the lack of clear and timely guidance on how the tax is to be applied, as well as oversights or deficiencies in the legislation and regulations.
Implications for Non-Canadian Parties
(1) Sales and importations of new aircraft
Aircraft purchased under an agreement entered into prior to January 1, 2022, are exempt from the application of the Luxury Tax.
(2) Sales and importations of pre-owned aircraft
Sales and importations of pre-owned aircraft are exempt from the Luxury Tax under specific conditions.
(3) Importations into Canada of aircraft which meet the exemption criteria
The Luxury Tax generally does not apply in respect of the sale or importation of a “qualifying subject aircraft”.
(4) Sales of aircraft in Canada involving non-Canadian buyers and sellers
It is important to note that even non-Canadian sellers may be subject to the Luxury Tax if the delivery takes place in Canada.
(5) Exports
One helpful change in the draft Regulations is the prescribed circumstances for the outright exemption of a purchase from a registered vendor of a subject aircraft exported from Canada.
Final Thoughts
One thing is clear – the Luxury Tax on aircraft in Canada is complex, and its impact on non-Canadian parties is significant. Understanding these implications is crucial for non-Canadian sellers, brokers, and other parties involved in aircraft transactions in Canada to avoid penalties and ensure compliance with the law. As it stands, clear guidance, further amendments, and timely support are necessary for an improved understanding and successful implementation of this tax.
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