Ottawa’s Luxury Tax on Aircraft May Backfire

The 10 percent luxury tax that the federal government imposed this year on aircraft purchases over $100,000 may actually lead to a drop in tax revenue by almost $430 million, according to a recently released report prepared by Professor Jacques Roy of HEC Montréal for the Aerospace Industries Association of Canada (AIAC). Professor Roy, whose institution is the business school associated with the University of Montreal, based his conclusion on economic modelling and interviews with numerous industry leaders.

In the current market there are 10 business jets in Canada with sales pending, and the report states that completion of these sales contacts is at risk due to the tax, representing a potential loss of $540 million for the companies trying to dispose of them.

“The loss of 10 aircraft sold so far this year may seem like a small number but it is significant and so are the lost revenues,” the report states. Reasons for the stalled sales include purchasers waiting to see if the tax will be altered or removed, or deciding to register and/or base their aircraft in the U.S. Prof. Roy pointed out that the U.S. also introduced a similar tax in 1993 but then repealed it shortly thereafter. Roy says that Canada remains the only country in the world with such a tax.

The report goes on to state that a conservative estimate of the potential loss of 2,071 jobs representing $149 million in lost salaries would translate to the loss of $29.9 million in federal income tax revenue.

AIAC CEO Mike Mueller said his organization commissioned the study partly because officials from the federal government’s finance department told MPs that they had not conducted an economic impact analysis of the luxury tax. Mueller said the amounts in the report were worse than he expected.

“Canadians twice re-elected our government on a platform that included a luxury tax on yachts, private jets and luxury cars, finance ministry spokesperson Adrienne Vaupshas said when questioned about the report. “It is only right and fair that the very wealthiest are asked to pay their fair share.”