"Automakers Can Avoid Charging Tax On Rebates - If They Want To", expert says

Published on Yahoo Finance, 2016-05-09

In recent CBC reports, Revenue Canada is forcing new car dealerships to charge and collect taxes from consumers based on amounts higher than what they are actually paying for their new cars. Most manufacturers offer rebates to new car buyers as a competitive tool and as an incentive to buy their brand. Dealers may also negotiate a further discount which comes out of their profit. Within the law, there is a provision that the tax must be paid on the full selling price before applying the rebate, however tax does not apply on the further negotiated discount. Until recently this has not been enforced. Apparently, the Canadian government is now going to start enforcing the collection and payment of tax on the rebate.

"Where there is no harmonized sales tax, once there is enforcement for the GST, the provincial governments will most likely follow suit for PST as well" says Viraf Baliwalla, President of Automall Network, a prominent national vehicle brokerage firm.

Manufacturers offer rebates in two forms - as a cash back which is an after tax refund or as a pre-tax credit that lowers the actual price of the vehicle. The latter is much more prevalent.

For example, if a minivan costs $35,000 and there is a $4,000 rebate, this means that the minivan actually costs $31,000. In Ontario, with a rate of 13%, consumers were paying $4,030 in sales tax. However, now the government is forcing dealers to charge 13% based on the original $35,000 price even though the vehicle only costs $31,000. This approach takes an extra $520 from consumers' pockets and adds it to government coffers.

"With the new government's commitment to spend our way out of a recession, the money has to come from somewhere" says Baliwalla. "With cars being the second biggest purchase we make, it makes sense that the government has targeted new cars to rake in large chunks of extra cash".

After polling several dealers, Automall Network has learned that different manufacturers are implementing these rules in different ways. Some manufacturers are simply making all rebates after tax while others are having their dealers charge and remit the tax. In either situation, it works out to the same result, an extra 13% on the rebate portion of the transaction. The dealer discount, though, is still not taxable.

Baliwalla says that manufacturers can easily put a stop to the extra taxation by simply leaving the rebates unpublished and letting the dealer offer it as part of their negotiated discount.

"The problem is in the way the rebates are marketed" says Baliwalla. "Every manufacturer wants to entice buyers by showing their best price. Hence, they publish prices before and after rebates. But this way of doing and showing the math opens the door for Revenue Canada to claim that the actual price of the vehicle is higher and dictate that tax must be charged accordingly.

"Several years ago, such rebates were typically offered as manufacturer to dealer credits, not published as direct to consumer rebates. Dealers had the ability to extend further discounts using these credits when negotiating with customers who were paying cash. In that form, these discounts are not taxable".

Some may say that such a move is a step backwards in transparency. "With the landscape being more competitive than ever, the use of vehicle buying services like Automall Network to watch the customer's back and the availability of information online, transparency need not be sacrificed while still getting the best deals" claims Baliwalla.

Automall Network is a vehicle brokering service. They have a dealer's license but do not operate like a traditional dealer – they negotiate prices and facilitate transactions for consumers on new and used vehicles. For media inquiries, contact Viraf Baliwalla at (647) 401-5474 or [email protected].