Purchasing a car in Ontario involves several considerations, including car insurance costs and potential taxes you must pay on your vehicle. But do you need to pay tax when buying a used vehicle? Understanding taxes is crucial for budgeting and making informed decisions. Thus, this article will guide you through the intricacies of taxes on used vehicles in Ontario, offering insights and tips to navigate this aspect of car ownership.
Used Vehicles Market in Canada
The used vehicles market in Canada is growing. Between 2018 and 2023, the Canadian Used Car Dealers industry experienced an average annual growth rate of 2.1% in market size. A possible explanation for the increasing demand might be the price difference between new and used cars. During the initial quarter of 2023, the average price for a new vehicle was $61,000, while a used vehicle typically costs around $39,000. That’s up from about $45,000 and $26,000 in the first quarter of 2021. It’s no wonder that many Canadians consider purchasing a used vehicle as a more affordable option.
Do I Need to Pay Taxes on a Used Vehicle in Ontario?
The answer is yes. As a resident of Ontario, you’re likely accustomed to the reality of sales tax on a wide range of items and services you use daily. This tax applies to almost everything you buy, from your daily meals to your vehicles, including used ones. When you buy a used car in Ontario, you’re subject to a 13% tax. This tax is a combination of the Goods and Services Tax (GST) and the Provincial Sales Tax (PST), collectively known as the Harmonized Sales Tax (HST). HST is generally imposed on various goods and services, with vehicles being no exception.
Dealer vs. Private Sales: A Tax Perspective
Tax consequences vary a bit based on whether your vehicle is acquired from a dealer or a private sale.
- Dealership Purchases: When buying from a registered dealer, the 13% HST is applied directly to the vehicle’s sale price. Dealers are required to collect and remit this tax to the Canada Revenue Agency (CRA).
- Private Sales: In private transactions, the tax is paid when you register the vehicle at a Service Ontario centre. Tax calculation hinges on whichever is higher: the vehicle’s sale price or its wholesale value, as listed in the Canadian Red Book. Should you believe the vehicle’s worth is less than its listed value in the Red Book, you have the option to get a professional appraisal. Following this appraisal, you will be charged based on the lesser value, and the Retail Sales Tax (RST) will be calculated on this lower amount.
How to Avoid Paying Taxes on a Used Car
While taxes are generally unavoidable, there are specific scenarios where you might not have to pay them:
- Gifts and Inheritances: If a used car is gifted or left to you in a will, you may be exempt from paying the tax.
- Status Indians: Status Indians may not be required to pay sales tax when purchasing a used car in Ontario.
- Diplomats: Foreign diplomats representing their country are exempt.
- Moving from Another Province: If you’re relocating from another province, you might be exempt from paying RST upon registering your vehicle.
Gifting a Vehicle to a Family Member: Tax Exemptions
As we said, transferring a vehicle to a family member as a gift in Ontario can be tax-exempt. This is facilitated through a “Sworn Statement for a Family Gift of a Used Motor Vehicle,” available online at ServiceOntario.ca or their offices. It allows for a tax-free transfer of a used vehicle between family members. For the Sworn Statement, you’ll need certain vehicle details like make, model, year, and VIN, as well as information about the donor (current owner) and recipient (family member) and signatures from both parties.
Do I Need to Pay Tax If I Buy a Used Car from Another Province?’
If you purchase a vehicle from outside your province, you must pay the sales tax applicable in your home province. Therefore, if you live in Ontario and buy a car in Manitoba, you must pay Ontario’s sales tax rate of 13%.
How to Calculate the Tax: A Closer Look
Calculating the tax on a used car can be complex. Here’s a simplified breakdown:
- Retail Sales Tax (RST): For private transactions, Retail Sales Tax (RST) is determined by the higher of two values – the purchase price or the vehicle’s wholesale value. If the vehicle is valued under $1,000, the tax is calculated on the purchase price.
- Special Cases: For vehicles deemed “severely damaged” or “excessively used,” you might need an appraisal to determine the tax base. If a vehicle’s appraised and purchase prices are below the Red Book value, RST is charged on the higher of the two. For cars bought out-of-province and brought to Ontario, RST is applied to the purchase price.
For example, you purchase a pre-owned vehicle for $10,000. The tax on the vehicle is 13%. The total cost would be $10,000 + 13% = $11,300.
Tips for Potential Buyers
- Research Thoroughly: Understand the tax implications before making a purchase.
- Consider Total Costs: Factor in taxes when budgeting for your vehicle.
- Seek Professional Advice: For precise and reliable tax details, it’s advisable to seek guidance from a tax expert or an informed vehicle dealer.
How do you minimize tax on a used vehicle purchase?
While it’s impossible to evade taxes on used car purchases completely, there are ways to lessen them. One method is to trade in your current vehicle when buying a new one, which can lead to tax savings. However, if your car has negative equity, trading it in might not be advantageous. Alternatives like taking over a lease or exchanging your vehicle for a leased one could be more beneficial.
Is Sales Tax Applicable to Car Insurance in Ontario?
In Ontario, car insurance is exempt from the Harmonized Sales Tax (HST) as it falls under the category of “financial services.” Consequently, you are not required to pay HST on auto insurance in this province.
The Bottom Line
Paying tax on a used car in Ontario is an integral part of the purchasing process. By understanding these taxes and knowing when they apply, you can make more informed decisions and budget accordingly for your next vehicle.