How to Calculate Luxury Tax on Vehicles in Canada (2026 Guide)

If you're purchasing or leasing fleet vehicles priced at $100,000 or more, you need to understand Canada's federal luxury tax and how it affects your bottom line. Since September 1, 2022, the Select Luxury Items Tax Act has added a significant cost layer to higher-end vehicle purchases, and it's not going away anytime soon.

In this guide, we'll walk you through how the luxury tax works, show you exactly how to calculate it at different price points, explain how it interacts with provincial taxes, and cover the key exceptions you should know about. Whether you're a fleet manager budgeting for new vehicle acquisitions or a business owner evaluating lease vs. purchase options, here is what you need to know for 2026.

What Changed In The 2025 Federal Budget

Before we get into the calculation, here's the most important update for 2026: the federal luxury tax on vehicles is here to stay.
The 2025 federal budget, tabled on November 4, 2025, eliminated the luxury tax on aircraft and vessels (those priced over $250,000), calling them "inefficient and costly to administer." However, the government specifically maintained the luxury tax on automobiles priced over $100,000. That means if you're acquiring vehicles above the threshold, you're still paying the tax in 2026 and beyond.

The Canadian Automobile Dealers Association (CADA) has been actively lobbying for the removal of the vehicle portion of the tax, arguing that average vehicle prices have risen significantly and many work vehicles now exceed the $100,000 mark. As of early 2026, the government has not signalled any plans to adjust the threshold or remove the tax for vehicles.

What this means for your fleet: If you're ordering vehicles that approach or exceed the $100,000 threshold, the luxury tax needs to be factored into your total cost of ownership calculations. Your Foss account manager can help you model this into your fleet budget.

What Qualifies As A "Subject Vehicle"

Not every vehicle over $100,000 triggers the luxury tax. Under subsection 2(1) of the Select Luxury Items Tax Act, a "subject vehicle" must meet all of the following conditions:

• It is designed or adapted primarily to carry individuals on highways and streets
• It has a seating capacity of no more than 10 individuals
• It has a gross vehicle weight rating (GVWR) of 3,856 kg or less
• It has a date of manufacture after 2018
• It is designed to travel with four or more wheels in contact with the ground

In practice, subject vehicles include sedans, coupes, hatchbacks, convertibles, SUVs, and light-duty pickup trucks. Some specific vehicles that might surprise you: the GMC Hummer EV, for example, is actually exempt because its GVWR exceeds 3,856 kg. Every vehicle is different, so always check the GVWR on the vehicle spec sheet.

Vehicles That Are Excluded

The following vehicle types are not considered subject vehicles and are exempt from the luxury tax:

• Emergency and policing vehicles
• Medical service vehicles and hearses
• Recreational vehicles (motorhomes) designed to provide temporary residential accommodations and equipped with at least four of: cooking facilities, a refrigerator or ice box, a self-contained toilet, a heating or air conditioning system that can function independently of the vehicle engine, a potable water supply system with a faucet and sink, and a 110-V to 125-V electric power supply or liquefied petroleum gas supply that can function independently of the vehicle engine
• Vehicles with a GVWR exceeding 3,856 kg (including many heavy-duty pickup trucks and commercial vehicles)
• Vehicles manufactured before 2019
• Used vehicles that have previously been registered in Canada

For a complete list of exclusions, visit the CRA's Luxury Tax Notice LTN2.

How is the luxury tax calculated?

Here's where it gets practical. The luxury tax uses a two-part formula, and you always pay the lower of the two amounts:

Method A: 20% of the retail sale price above the $100,000 threshold

Method B: 10% of the full retail sale price

The "retail sale price" includes the vehicle price, any dealer fees, freight charges, regulatory fees (like OMVIC in Ontario or AMVIC in Alberta), and any duties or taxes other than GST/HST or provincial sales tax. It does not include GST/HST, PST, or the cost of extended warranties or insurance purchased separately.

Calculation examples at different price points

The $200,000 crossover point

A useful rule of thumb: for vehicles priced between $100,001 and $199,999, Method A (20% of the amount over $100,000) will always produce the lower number. Once you cross $200,000, Method B (10% of the full price) takes over. At exactly $200,000, both methods produce the same result: $20,000.

So, in simple terms: for every $1,000 your vehicle costs above $100,000 (up to $200,000), expect roughly $200 in luxury tax. Above $200,000, it's a flat 10% of the full price.

How Does The Luxury Tax Apply To Leases?

This is a question we get asked frequently, especially from fleet managers. Here's the key distinction:

A lease of a subject vehicle is not considered a sale under the luxury tax regime. That means if you're a lessee (the person or company leasing the vehicle), you do not directly pay the luxury tax.

However, the tax doesn't disappear. The lessor (the leasing company) is responsible for paying the luxury tax when they purchase the subject vehicle to add it to their lease fleet. Registered vendors that lease subject items must self-assess the tax when they move a vehicle from inventory to lease.

The practical impact? The luxury tax gets built into the economics of the lease. It affects the upfront charges and periodic lease payments. When you're comparing lease quotes for higher-end vehicles, make sure you understand how the luxury tax has been factored into the pricing.

At Foss National Leasing, we make this transparent. Your account manager can show you exactly how the luxury tax affects your lease payments and help you evaluate whether adjusting your vehicle selection can reduce the total cost.

After-sale Modifications Can Trigger Additional Luxury Tax

This is a detail that catches many people off guard. If you purchase a subject vehicle that was subject to the luxury tax, and then make modifications within 12 months of the purchase, those modifications can trigger additional luxury tax if:

• The total cost of the modifications equals or exceeds $5,000, AND
• Luxury tax was paid on the original purchase

The additional tax is calculated by comparing what the total luxury tax would have been if the modification costs had been included in the original purchase price, minus the luxury tax that was actually paid at the time of sale.

What counts as a modification: Vehicle wraps, stereo upgrades, camera systems, suspension modifications, remote starters, and other physical modifications to the vehicle.

What doesn't count: Safety and accessibility modifications (wheelchair lifts, child car seats, hand controls), maintenance, repairs, replacement of damaged parts, and paid subscription services like navigation or media.

For fleet managers who regularly upfit vehicles with work-related equipment, this is critical to plan for. Talk to your Foss account manager about how upfitting costs interact with the luxury tax threshold.

Provincial Tax Interactions: What You Actually Pay By Province

The federal luxury tax is just one layer. Depending on your province, additional taxes apply on top, and the total cost can vary significantly. Here's what you need to know.

The Stacking Effect

The luxury tax is charged to the dealer and typically passed through to the buyer as part of the purchase price. Because of this, the luxury tax amount itself becomes part of the base for calculating GST/HST, which means you're effectively paying tax on the tax. The federal government acknowledged this stacking effect but has not addressed it.

British Columbia: The Highest Total Tax Burden On Luxury Vehicles

BC deserves special mention because the province applies its own progressive PST surtax on passenger vehicles based on the purchase price:

• Up to $54,999.99: 7% PST
• $55,000 to $55,999.99: 8% PST
• $56,000 to $56,999.99: 9% PST
• $57,000 to $124,999.99: 10% PST
• $125,000 to $149,999.99: 15% PST
• $150,000 and above: 20% PST

On a $150,000 vehicle in BC, you could be looking at 20% PST ($30,000) plus 5% GST ($7,500) plus the federal luxury tax ($10,000), bringing total taxes well above 30% of the vehicle's base price. BC excluded the federal luxury tax from its PST calculation in late 2022, which helps, but the combined burden is still the highest in the country.

Note: BC has different (lower) PST thresholds for zero-emission vehicles, with the higher PST rates beginning at $75,000 instead of $55,000 for non-ZEV vehicles.

Ontario

Ontario charges 13% HST on the vehicle purchase price (including the luxury tax amount). There is no additional provincial luxury surcharge beyond the HST.

Alberta

Alberta has no provincial sales tax, so you only pay 5% GST on top of the federal luxury tax. This makes Alberta the province with the lowest overall tax burden on luxury vehicle purchases.

Quebec

Quebec charges 5% GST plus 9.975% QST. The QST is calculated on the price including the luxury tax, creating a stacking effect similar to other provinces.

Atlantic provinces

New Brunswick, Nova Scotia, Newfoundland and Labrador, and Prince Edward Island all charge 15% HST, the highest combined rate in the country. Combined with the luxury tax, these provinces see the largest total tax burden on vehicles priced above $100,000.

Do Electric Vehicles Get a Luxury Tax Exemption?

No. Electric vehicles are not automatically exempt from the federal luxury tax. If the purchase price of an EV exceeds $100,000, it is subject to the same luxury tax as any other vehicle, provided it meets the definition of a subject vehicle (GVWR of 3,856 kg or less, etc.).

Some EVs may qualify for federal or provincial incentive rebates, but these do not offset the luxury tax. This has drawn criticism because the luxury tax can work at cross-purposes with government incentives designed to promote zero-emission vehicle adoption. Several higher-end EVs from manufacturers like Tesla, BMW, Mercedes-Benz, and Porsche fall above the $100,000 threshold.

If you're exploring electric vehicles for your fleet, Foss National Leasing can help you evaluate the total cost of ownership, including the luxury tax, available incentives, and long-term fuel and maintenance savings. Learn more about our ZEV program.

Does The Luxury Tax Apply To Used Vehicles?

No. The federal luxury tax applies only to new vehicles. Used vehicles that have been previously registered in Canada are not subject to the luxury tax, even if their current value exceeds $100,000.

The one exception: if a used vehicle is imported from another country and has never been registered in Canada, it can be subject to the luxury tax if its value exceeds the threshold.

Who Actually Pays The Luxury Tax?

In most cases, the registered vendor (typically the dealership) is legally responsible for paying the luxury tax to the CRA. However, the vendor almost always passes this cost on to the buyer as part of the final purchase price.

There are some exceptions where the purchaser is directly liable, such as when the vendor is not a registered vendor of subject vehicles or when the vehicle is imported directly by the buyer.

The luxury tax must be reported quarterly using CRA Form B500, and the penalty for late payment is 1% of the amount owing, plus an additional 0.25% of the amount owing for each full month it remains unpaid, up to 12 months.

How To Plan For The Luxury Tax In Your Fleet Budget

If your fleet includes vehicles that approach or exceed the $100,000 threshold, here are some practical strategies:

• Review your vehicle selectors. Can you meet your operational needs with a vehicle spec that comes in just under $100,000? Even small adjustments to trim levels or optional equipment can make a difference.

• Factor the tax into your total cost of ownership. The luxury tax is an upfront cost, but it also affects vehicles' resale value calculations, depreciation schedules, and lease economics. Make sure your fleet policy accounts for it.

• Consider the lease advantage. While the luxury tax still applies to leased vehicles (paid by the lessor), the way it's structured into lease payments can improve cash flow compared to an outright purchase. Your Foss account manager can model both scenarios for you.

• Watch the modification threshold. If you're upfitting vehicles that already triggered the luxury tax, keep track of modification costs. Staying below $5,000 in after-sale modifications within the first 12 months avoids additional luxury tax.

• Stay informed on policy changes. The CADA continues to lobby for changes to the luxury tax threshold, and with average vehicle prices rising, there's ongoing political pressure. We'll update this article as any changes are announced.

Frequently Asked Questions

How much is the luxury tax on a $120,000 vehicle in Canada? The luxury tax on a $120,000 vehicle is $4,000. This is calculated as 20% of the amount over $100,000 (20% × $20,000 = $4,000), which is less than 10% of the full price ($12,000). You always pay the lower amount.

Does the luxury tax apply to vehicles leased for business? The lease itself is not a "sale" under the luxury tax rules, so the lessee does not pay the tax directly. The lessor (leasing company) pays the luxury tax when acquiring the vehicle, and this cost is factored into your lease payments.

Are pickup trucks subject to the luxury tax? It depends on the truck's gross vehicle weight rating (GVWR). Light-duty pickup trucks with a GVWR of 3,856 kg or less are subject vehicles. Many heavy-duty trucks exceed this threshold and are exempt. Always check the GVWR specification for the exact model.

Is the $100,000 threshold indexed to inflation? No. The $100,000 threshold has not been adjusted for inflation since the tax was introduced in 2022. With rising vehicle prices, more vehicles are crossing the threshold each year. There is currently no announced plan to index it.

Does the luxury tax apply to used cars in Canada? No. Used vehicles that have been previously registered in Canada are exempt from the federal luxury tax, regardless of their current value. Provincial sales taxes still apply to used vehicle purchases.

Can I avoid the luxury tax by buying in a different province? No. The federal luxury tax is consistent across all provinces. However, provincial taxes on top of the luxury tax do vary significantly by province. The total tax burden is lowest in Alberta (no PST) and highest in BC and the Atlantic provinces.

What happens if I import a luxury vehicle into Canada? If you import a subject vehicle with a taxable amount above $100,000 that has never been registered in Canada, you'll be required to pay the luxury tax at the time of importation, in addition to any applicable customs duties and GST/HST.

Next Step

Need help understanding how the luxury tax affects your specific fleet? Your Foss account manager has the training and tools to walk you through the numbers. Contact us to discuss your fleet's vehicle acquisition strategy, or download our guide: Best Practices for Your Fleet: Policy Recommendations to Improve Performance.

Last updated: April 2026. This article provides general information about Canada's federal luxury tax on vehicles. It is not tax advice. For your specific situation, consult a qualified tax professional or contact the CRA directly. Sources: Select Luxury Items Tax Act, CRA Luxury Tax Notice LTN2, 2025 Federal Budget.