Canada’s new federal luxurious tax took impact Sept. 1, and auto sellers proceed to face challenges understanding the nuances of how and when the tax is calculated in addition to the way it impacts their closing sale value to the shopper. Getting it flawed may be pricey as a result of the tax is levied on the vendor, and it’s tough if not unimaginable to alter the worth after the sale has been closed. BDO’s Nationwide Oblique Tax Follow chief, Brian Morcombe, and Director Bruce Goudy assist purchasers be sure that their invoicing and reporting methods correctly account for the luxurious tax and that their groups perceive the nuances to keep away from pricey errors.

Q: Do you anticipate that dealerships should confront new administrative challenges to assist the implementation of the luxurious tax? Brian Morcombe and Bruce Goudy:

Brian Morcombe and Bruce Goudy: Sellers already face many indirect-tax compliance challenges in addressing the complexities of tax therapies for reductions, producer promotional allowances, rebates, coupons and trade-ins. If they don’t get it proper, it may end up in pricey audit assessments from tax authorities. This new luxurious tax is yet another duty added to dealerships’ burden. It requires cautious planning to make sure the tax is correctly calculated and contemplated for gross sales of topic automobiles of greater than $100,000, together with any enhancements forming a part of that sale. A topic automobile is a motorized vehicle with 4 or extra wheels, designed primarily to hold people, with a seating capability of no more than 10 people and a weight not exceeding 3,856 kilograms. Sellers must know what varieties of automobiles are caught within the luxurious tax and what should not. For instance, along with value, the gross-vehicle-weight score should be thought of along with the variety of passengers, and the invoicing system ought to replicate that for every sale. Luxurious tax might also be payable by the vendor on sure service automobiles and courtesy automobiles on the time they’re licensed with a provincial tax authority. This implies a course of would should be applied to trace and report the luxurious tax payable on these automobiles within the acceptable reporting interval.

Q: Customers usually discover loopholes to keep away from paying taxes, so isn’t this legislation inclined to those loopholes? What would possibly these be?

Morcombe and Goudy: The intent of the luxurious tax is to tax automobiles (together with enhancements) valued at greater than $100,000. If a vendor prices a payment for a automobile and a separate payment for a number of different provides, the laws requires that the costs attributed to these provides be affordable (i.e., to not attempt to preserve the worth unreasonably low to keep away from luxurious tax). Additionally, administrative charges or different related prices should be included within the base on which luxurious tax is set. Whereas acknowledging that which may be subjective, the intent is clearly to supply an equitable outcome to competing sellers making the same sale.

Q: Are any enhancements that consumers make to their automobiles topic to luxurious tax?

Morcombe and Goudy: Purchasers aspiring to make enhancements don’t must self-assess and remit luxurious tax on enhancements if their authentic buy of the automobile didn’t appeal to luxurious tax. Nonetheless, if enhancements valued at greater than $5,000 are made inside the first yr after the sale to a automobile that was topic to luxurious tax, the proprietor is required to self-assess and remit the relevant tax on the enhancements.

Q: On condition that some provinces—British Columbia and Quebec, particularly—additionally impose automobile taxes, doesn’t that create an inherently unfair tax construction? What may be carried out to treatment that?

Morcombe and Goudy: Provinces are accountable for levying their very own taxes on automobile transactions, so the tax prices varies from province to province even earlier than the introduction of the federal luxurious tax. It’s not anticipated that the introduction of the luxurious tax will trigger the provinces to revisit their current tax construction.

Q: What is going to the influence of the luxurious tax be on total gross sales? What about its impact on the used-vehicle market?

Morcombe and Goudy: The place a automobile was beforehand licensed with a provincial or federal authorities to be used on public roads, the gross sales of such used automobiles will typically not be topic to luxurious tax, even when the sale value exceeds $100,000. Presently, the demand for used automobiles is excessive because of the provide chain challenges for brand new automobiles, and it’s unclear whether or not the applying of luxurious tax to new automobiles promoting for greater than $100,000 will probably be massive sufficient to discourage a possible purchaser.

Q: Contemplating that automobile demand is excessive and provide low, is that this a great time to impose a luxurious tax?

Morcombe and Goudy: Many sellers and purchasers would possible argue that it isn’t a great time to impose the tax. If the sale value of a brand new automobile is increased on account of the luxurious tax, that automobile could also be considerably much less engaging to purchasers, however it isn’t clear whether or not it could be adequate to trigger purchasers to not make that buy.

For extra details about the brand new luxurious tax and the way it will have an effect on auto sellers, go to our web site: https://www.bdo.ca/LuxuryTaxAutodealers

ABOUT THE PANELISTS

BRIAN MORCOMBE
Oblique Tax Follow Chief
Brian is the Oblique Tax Follow Chief in Canada. He has greater than 20 years’ expertise offering GST/HST, QST and PST options to nonresident and resident producers, distributors, charities, monetary establishments, municipalities, universities/schools, faculties and hospitals, to call just a few.

BRUCE GOUDY
Director, Oblique Tax Follow
Bruce is a director inside the Oblique Tax Follow in BDO’s Markham, Ont., workplace, with greater than 25 years of expertise offering recommendation on indirect-tax points, together with help with tough audits, figuring out and securing refunds of overpaid taxes, compliance and reporting, and accounting for indirect-tax contingencies.