Canada’s “Luxury Tax” implemented under the Select Luxury Items Tax Act (“SLITA”) has been a significant development for vendors, importers and buyers of high-priced vehicles, aircraft and vessels.  As we have previously discussed here, the SLITA imposes tax obligations that require careful compliance, including registration and record keeping.

Recently, the CRA released a new guidance document clarifying how third-party rebates impact the calculation of tax owing under the SLITA.  The main message is straightforward but significant – rebates from manufacturers or other third parties do not reduce the taxable value of luxury items and do not lower the amount of tax vendors and importers must pay!

Background

Since September 1, 2022, the SLITA has imposed a Luxury Tax on certain vehicles and aircraft priced over $100,000 and vessels priced over $250,000 (with many exceptions).  The tax is calculated as the lesser of 10% of the taxable amount of the item or 20% of the item’s taxable amount exceeding the relevant threshold. 

The tax payment obligation falls on vendors, which can include retailers, as well as wholesalers, manufacturers and dealers.  These persons must register with the CRA according to vehicles, aircraft or vessels in respect of which they make qualifying sales or imports.

The Role of Third-Party Rebates

A point of confusion with respect to the calculation of the Luxury Tax has been the application of third-party rebates, which generally fall into two main categories:

1. Mail-in Rebates (e.g., a manufacturer providing a rebate application for the customer to fill out and return to them after a purchase from a retailer); and
2. Point of Sale Rebates (e.g., a manufacturer paying the rebate amount to a retailer who transfers it to the consumer as a reduction in the retail price).

The CRA has clarified that these rebates, while financially beneficial to the consumer, do not reduce the value of consideration received by the vendor for the purpose of the Luxury Tax.  In other words, the taxable amount does not change as a result of the rebate.

For example, for a $5,000 point-of-sale rebate applied on a vehicle having an all-inclusive price of $120,000, the Luxury Tax amount is calculated based on the $120,000 amount and not $115,000 (in this case resulting in a Luxury Tax of $4,000 – being the lesser of: (1) 10% of $120,000; and (2) 20% of ($120,000 - $100,000)).

Legally, the payment of the rebate is treated as a separate transaction from the sale, involving a third-party and the consumer and not involving the vendor. 

In practice, vendors should also bear in mind that a rebate which seemingly reduces the purchase price of a luxury item below the relevant SLITA threshold may not in fact do so!

Takeaways

CRA has clarified that third-party rebates do not affect the taxable value of luxury items for SLITA purposes.  Vendors and importers should take this into account when calculating the Luxury Tax.

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