In the spring of 2021, the Canadian federal government announced a proposed luxury tax on certain aircraft, vehicles and boats (the Luxury Tax). Much to the critics' dismay, the Luxury Tax came into force on September 1, 2022, under the Select Luxury Items Tax Act (Canada) as part of the Budget Implementation Act, 2022, No.1 (Canada). The following is an overview of the Luxury Tax as it pertains to aviation.

Specified Aircraft

The Luxury Tax applies to sales or leases of aircraft (airplanes, helicopters and gliders) priced or valued over C$100,000 and manufactured after 2018 that meet any of the following conditions (Specified Aircraft):

  • is equipped only with one or more pilot seats and cannot have any other seating configuration;
  • is equipped only with one or more pilot seats, or is not equipped with any seats, and cannot have a seating configuration of 40 seats or greater (excluding pilot seats); or
  • is equipped with one or more pilot seats and one or more passenger seats and has a seating configuration of 39 seats or fewer (excluding pilot seats).

A Specified Aircraft could be exempt from the Luxury Tax if (i) it is sold to a registered vendor (ii) it is designed for military activities, equipped for cargo only, or is registered with a government and the user has possession prior to September 2022, or (iii) the purchaser or importer certifies that "all or substantially all" of the aircraft's use will be a "qualifying exempt activity", which includes commercial passenger service to the general public, flights to and from remote, fly-in communities, cargo flights, air ambulance service, aerial fire-fighting service, flight training service and certain other specified aerial services. Further, if a Subject Aircraft was imported solely for maintenance, overhaul or repair and then immediately exported, then generally the Luxury Tax will not be applicable.

Calculation of Tax

The Luxury Tax is calculated as the lesser of:

  • 20% of the total price or import value of the Specified Aircraft that is above C$100,000; and
  • 10% of the sale price or import value of the Specified Aircraft.

Obligation to Pay

In general, it is the vendor or importer that is liable to pay the Luxury Tax. This differs from general sales taxes in which the purchaser is generally liable to pay, and the vendor is merely obligated to collect such tax. Nonetheless, the Luxury Tax is still generally passed on to the purchaser and itemized on an invoice as a pass-through cost. In order to process such Luxury Tax, the vendor/importer is required to be registered with the Canada Revenue Agency and, on a given applicable transaction, must apply for a "tax certificate" which then confirms that the Luxury Tax has been paid. This is an important piece of evidence given that the Luxury Tax only applies to a Specified Aircraft once – it does not reoccur upon subsequent sales. Notwithstanding the foregoing, if the sale was previously exempt by virtue of qualifying for an exempt activity, then, the Luxury Tax would be applicable on a subsequent sale to the extent that such future activity was not exempt.

Failure to Comply

An importer or vendor's failure to make a return as required in respect of the Luxury Tax could render them liable on summary conviction to a fine of not less than C$2,000 and not more than C$40,000 or to imprisonment for a term not exceeding 12 months, or both.

Given the above is a new regime that will have economic and compliance impacts on vendors, purchasers, importers and financiers, the impacts on the luxury aircraft market are yet to be determined.

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