By Brenda Bouw
The Liberal government’s plan to tax expensive cars, yachts, and private aircraft introduced in this year’s federal budget has prompted many wealthy clients to check in with their financial advisors and see if they should consider buying these luxury items before the new charge is expected to take effect on Jan. 1, 2022.
It’s not just a tax-planning decision; advisors say Canadians buying these high-end vehicles could end up paying a scarcity premium given the rush to buy before year-end. That’s if they can even get their hands on a luxury car, yacht, or personal plane in the months ahead, given the reported spike in demand and limited supply.
“Even though you might want to do it this year, you might not be able to,” says Janine Guenther, president of Dixon Mitchell Investment Counsel in Vancouver.
The federal government is proposing a tax on the sale or lease of new luxury cars and personal aircraft that cost more than $100,000, and personal-use boats that cost more than $250,000. The tax would be calculated at the lesser of 20 per cent of the value above the thresholds or 10 per cent of the full value of the luxury car, boat, or personal aircraft. (Motorcycles and certain off-road vehicles and recreational vehicles aren’t included in the proposed tax.) The tax would also be on the qualifying items imported from other countries.
The federal tax would apply regardless of whether the good was purchased outright, financed, or leased over a period of time, the budget states. Citing vehicle retail sales data from Statistics Canada, the government says those most affected by the luxury tax would be high-income people (mostly men) between the ages of 30 and 60 in Ontario, Alberta, Quebec, and British Columbia, the latter of which already has a luxury tax on cars over $125,000.
“The first decision that has to be made is, are you going to be buying this anyway?” says Silvia Jacinto, a partner at accounting firm Crowe Soberman LLP in Toronto. “If you are, and you have a choice to buy it today versus a year from now, I think it’s safe to say that you want to buy it today and avoid the potential 20-per-cent tax.”
Regardless of the purchase date, advisors should also work with their client’s tax professionals, as needed, to ensure it’s tax-effective and aligned with other wealth management goals, says Sophia Ito, senior financial advisor with Nicola Wealth Management Ltd. in Vancouver.
“The source the capital is coming from – especially when you’re talking about this amount of money – is important,” Ms. Ito says. “Taking a withdrawal of a significant size like this, depending on what stage you are at in life, has an impact on your future cash flows.”
She says buyers should consider all their options, including purchasing the luxury product outright – using after-tax cash on hand or pulling from investments – financing or leasing it.
For example, the option to finance might be a good idea given the current low-interest-rate environment.
“You have to look at what it’s going to cost you to take that capital out of investments that could potentially earn more than what that debt is going to cost you,” she says.
Investors who don’t want to borrow to buy the luxury item need to figure out the best place to pull the funds.
Ms. Guenther says a good option could be the tax-free savings account (TFSA) in order to minimize the tax impact of the withdrawal.
“I encourage people to use their tax-free savings account as their piggy bank because you can replace it,” she says.
If the value of the luxury car, aircraft, or boat exceeds the value of the TFSA, or if the investor doesn’t want the account depleted, Ms. Guenther suggests using a combination of non-registered accounts and TFSAs to fund the purchase, especially if it means selling investments that trigger a capital gains tax.
“Whenever there are capital gains involved, we try to split it up the best that we can,” she says.
If an investor is taking money out of a TFSA and plans to replace it soon after, Ms. Ito suggests doing it as late in the year as possible so that it can be re-contributed as quickly as possible the following year.
Some investors looking to take money out of the markets, now that they are trading around record highs, might choose to pull only from their investment accounts, Ms. Ito says.
“Some assets have had a nice appreciation,” she says, “so, you may wish to take some risk off the table [to buy the luxury product.] That could work out well.”
Ms. Jacinto says business owners who have a corporation might consider using dividend payments from the corporation toward the purchase of the luxury item given that these dividends may be taxed at a lower rate. There are also income-splitting strategies that could help lower taxes and help fund the purchase.
Small business owners could also use funds from their corporation’s capital dividend account (if applicable), in which tax-free surpluses are built up by the corporation. In addition, the corporation may have borrowed from the shareholder in the past. These loans can be repaid to the shareholder in a tax-free manner.
“If you’re a business owner, you have more flexibility,” Ms. Jacinto says.
Regardless of how or when a luxury car, aircraft, or boat is purchased, Ms. Guenther says Canadians who can afford to do so shouldn’t be overly concerned about the new tax.
“The bottom line is that you should never feel bad about being successful,” she says. “It would be a lot worse if you didn’t have the money to buy it.”