Luxury Tax Shortfalls

In the highly anticipated federal budget of 2021, which was two years in the making, the Liberal government announced a plethora of old and new spending initiatives, all in the name of overcoming the impact of COVID-19. The anticipated spending is BIG!

Coming off a whopping $354 billion deficit in the last fiscal year, this federal government is still planning to spend more than $200 billion in excess of revenues over the next 24 months. The question we should all have on our minds, is how are they going to pay for this? While heavy on paper (724 pages to be exact), this budget had almost no mention of tax increases. Yet, Canadians are expected to buy into the idea that the budget will balance itself – remember that 2015 line?

There was one notable tax the government did announce, which has a sexy ring to it and might even perk a few ears - at least at the onset.

Titled the new Luxury Tax, the Liberal government stated “even as Canadians have sacrificed to keep our economy going through the pandemic, some of the wealthiest have done well. Those who can afford to buy luxury goods can afford to pay a bit more. To that end, the government is following through on its commitment to introduce a tax on select luxury goods”.

To paraphrase, budget 2021 proposes to introduce a tax on the sales of luxury cars and personal aircraft with a retail sales price of over $100,000. Additionally, the luxury tax would be extended to boats, for personal use, over $250,000. As it stands, the tax is estimated to be 20% in excess of these numbers.

Coming into effect on January 1st, 2022, the government has put forward the following estimates for tax collection:

Ø  2022: $34 million

Ø  2023-2026: approx. $142 million per year

Ø  Five Year Total: $604 million

On paper, the numbers outlined above look like something the majority of Canadians could get behind and even garner a few additional votes on election day. However, before we celebrate, we should ask ourselves whether the proposed tax works?

To see if a measure like this would work or yield as much revenue as estimated, let us use a live case study in British Columbia to see the impact of what one would call punitive “luxury taxes”.

Here are some compelling dates for you to digest. Prior to April 2018 in BC, taxes on passenger vehicles was a flat 10% regardless of the price of the vehicle. After April 1st, 2018 the BC NDP increased taxes on “luxury vehicles” as follows:

Ø  Vehicles sold for a value of $125,000 - $149,000 saw the PST rate go from 10% to 15%

Ø  Vehicles sold for a value of $150,000+ saw the PST double to 20%

It must be noted that this increase in tax did not include the addition 5% GST charged by the federal government.

You might ask what were the results of implementing such a tax? We’re glad you asked because we have the data. In 2017, one year prior to the tax, the BC government collected $288 million in “premium taxes” and $225 million in regular PST. The following year in 2018, they collected $244 million in “premium taxes” and $203 million in regular PST. If you do the simple math, that’s a combined loss of tax revenue equal to $67 million.

Three years following the implementation of the BC Luxury Vehicle Tax, the BC government still collects less in regular PST and Premium Taxes than before the tax was established. In fact, if you add up the deficit of lower taxes collected annually since this “tax the rich” policy was launched, the total loss of taxes collected is estimated to be -$126 million!

Now, if we fast forward to January 2022 and an individual in BC is looking to buy a vehicle in the $200K range, it will cost the consumer $60,000 or 30% more. We acknowledge the reality that this will not stop some of the Canada’s wealthiest from moving forward and buying that Porsche. However, it will stop a good number of wealthy individuals who are happy with their Model 3 Tesla’s. When this becomes the case, the estimated return expected by the federal government will be no where near the expected $142 million per year.

Moral of the story, before all we start applauding the federal government for a new tax targeting the rich and fabulous, just know that they can only collect this tax if people actually buy these targeted items.