The rush to buy luxury items can lead to unintended consequences
The Liberal government’s plan to tax expensive cars, yachts and private aircraft introduced in this year’s federal budget has prompted many high net worth clients to check with their financial advisors and see if they should consider purchasing these. luxury items before the new charge is scheduled. effective January 1, 2022.
It’s not just a tax planning decision; advisers say Canadians who buy these premium vehicles could end up paying a scarcity premium given the rush to buy before the end of the year. That is if they can even get their hands on a luxury car, yacht, or personal plane in the coming months, given the reported surge in demand and limited supply.
“While you might want to do it this year, you might not be able to do it,” 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 planes that cost over $ 100,000 and personal boats that cost over $ 250,000. The tax would be calculated at the lesser of 20 percent of the value above the thresholds or 10 percent of the total value of the luxury car, boat or personal aircraft. (Motorcycles and certain off-road vehicles and recreational vehicles are not included in the proposed tax.) The tax would also apply to qualifying items imported from other countries.
The federal tax would apply regardless of whether the property was purchased directly, financed or leased over a period of time, the budget says. Citing data on retail vehicle sales from Statistics Canada, the government says those most affected by the luxury tax would be high-income people (mostly men) aged 30 to 60 in Ontario, in Alberta, Quebec and British Columbia, the latter of which already has a luxury car tax of over $ 125,000.
“The first decision to make is, are you going to buy it anyway?” says Silvia Jacinto, partner at the accounting firm Crowe Soberman LLP in Toronto. “If you are, and have a choice to buy it today rather than a year from now, I think it’s safe to say that you want to buy it today and avoid the potential tax of 20 percent.”
Regardless of the date of purchase, advisors should also work with their clients’ tax professionals, as needed, to ensure that it is tax-efficient and aligned with other wealth management goals, says Sophia Ito, advisor. Senior Financial Officer at Nicola Wealth Management Ltd. in Vancouver.
“Where the capital comes from – especially when you talk about that 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 flow.”
She says buyers should consider all of their options, including buying the luxury good outright – using after-tax cash or leveraging investments – financing or leasing it.
For example, the finance option might be a good idea given the current low interest rate environment.
“You have to look at what it will cost you to withdraw that capital from investments that could potentially earn more than what this debt is going to cost you,” she says.
Investors who do not want to borrow to purchase the luxury item must find the best place to withdraw the funds.
Ms. Guenther says a good option could be the Tax Free Savings Account (TFSA) 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, plane or boat exceeds the value of the TFSA, or if the investor does not want the account to be depleted, Ms. Guenther suggests using a combination of non-registered accounts and TFSA to finance the purchase, especially if it is to sell investments that trigger a capital gains tax.
“Whenever there are capital gains, we try to divide them as best we can,” she says.
If an investor withdraws money from a TFSA and plans to replace it soon after, Ms. Ito suggests doing so as late as possible in the year so that it can be re-contributed as quickly as possible. ‘Next year.
Some investors looking to withdraw money from the markets, now that they are trading at record highs, might choose to withdraw only from their investment accounts, Ms. Ito says.
“Some assets have had a nice appreciation,” she says, “so you might want to take some risk off the table. [to buy the luxury product.] It might work well.
Ms. Jacinto says business owners who have a corporation might consider using the corporation’s dividend payments toward the purchase of the luxury item since those dividends may be taxed at a lower rate. There are also income splitting strategies that could help lower taxes and finance the purchase.
Small business owners could also use funds in their corporation’s capital dividend account (if applicable), in which tax-free surpluses are accumulated by the corporation. Additionally, the company may have borrowed from the shareholder in the past. These loans can be repaid to the shareholder on a tax-free basis.
“If you’re a business owner, you have more flexibility,” says Jacinto.
No matter how and when a luxury car, plane or boat is purchased, Guenther says Canadians who can afford it shouldn’t be too 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.”