The Federal Government imposes a new luxury tax on aircrafts placing the health of the Canadian aeronautics industry at risk.
Earlier this year, the Liberal Government announced a new tax that would impact the aeronautics industry like never before. The already-fragile and beloved Canadian aeronautics industry is now responsible for bearing the impact of the new “Luxury Tax”, applicable to aircrafts with less than 40 seats in both the cabin and cockpit, and valued at $100,000 or more. Although at surface level it appears as if the new tax intends to tax the wealthy, the fine print alarmingly indicates otherwise.
Unlike, GST or PST, aircraft manufacturers are responsible for the entire amount of the sales tax regardless of the presence or absence of a buyer.
In the case of a buyer, no exceptions and or modifications to the sales tax payment are in place for buyers that have chosen to finance their purchase over time. Additionally, the tax will also be re-calculated to reflect value-increases as a result of improvements and or modifications made to the vessel at the time of sale.
As of September 1st, 2022, all airplanes manufactured after 2018 under the specifications stated above are subject to this tax. The luxury tax is to be 20% of the value over $100,000 or 10% of the total post-tax purchase price, whichever is less. The aircraft manufacturer is responsible for bearing this cost the moment that the aircraft is complete. This means that for a new jet, valued around $7.5 million, the manufacturer is now responsible for instantly covering $750,000 in sales tax whether there is a buyer or not – a tremendous pressure to bear.
Implemented to generate $779 million in tax revenue over the next 5 years, the luxury tax is on track to do more harm than good
Aside from generating revenue for the country, it is predicted that this new luxury tax will induce a cumulative $2.8 billion loss in sales across all luxury transportation domains, cost thousands their jobs, and place the permanence of the aeronautics industry in Canada at risk of extinction.
Crippled by the pandemic, the aeronautics industry is already experiencing a 20% decline in purchases of new private jets — yet the tax is only applicable to newly built aircrafts. Consequently, those that will see the heaviest impact are companies such as Bell Trexton Canada located in Mirabel, Diamond Aircraft in London, and Airbus Helicopters Canada in Fort Erie, which rely on the production of aircrafts.
Although sales of newly built aircrafts are still occurring, with this newly imposed luxury tax, consumers will be motivated to buy elsewhere, making it difficult for Canadian aeronautic companies to compete.
Canadian aeronautic companies urge the government to reassess their decision as: historical attempts by Canada and other countries to impose a luxury tax have not proven much success, no analysis was conducted to prove that this tax will meet the objective of addressing wealth inequality, and relevant stakeholders were not involved in the decision-making process. With aircraft production presenting a strength for Canada, the aeronautics industry worries that this effort to alleviate wealth inequality was misdirected and will result in the loss of business, employment, and growth for this already vulnerable industry and population.
Given that the global pandemic had already resulted in the loss of 30,000 jobs in the aerospace sector, the current luxury tax will only increase the burden to an industry once recognized as highly-valuable to the Canadian economy.
Some manufacturers have already reported order cancellations – With this new luxury tax in place, it is expected that luxury transportation sales will drop by 15% and countless jobs will be at stake. With push-back from the aerospace industry, some revisions were made to the taxation legislation, now excluding exportation of aircrafts, nonetheless as currently written the aeronautics industry should expect turbulence ahead.
With no end-date to this tax currently in sight, the aeronautics industry can seek financial refuge in the following programs:
- SR&ED: The Scientific Research Exploration and Development program is a tax credit available for Research and Development (R&D) projects. Given the highly technical nature of aeronautics, a high percentage of companies in this space can apply for this program.
- Government Grants: Government Grants provide businesses with capital to fund a variety of business areas including salaries, R&D, marketing and more.
Our consultants at Leyton are equipped to support you through this transition. Speak to one of our experts today to discover how you can maximize the success and longevity of your aeronautics business in Canada!
