DA40 NG Delivery - Taxable in Canada?

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ScottOHare
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DA40 NG Delivery - Taxable in Canada?

Post by ScottOHare »

Greetings!

I'm taking delivery of a new DA40 NG in the next few weeks and my tax folks are saying that if I take delivery in Ontario that it will be subject to their 13% sales tax since I'm not a dealer. Has anybody run into this issue and found a workaround?

Any thing I should know about the delivery process?

Thanks! Scott
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Re: DA40 NG Delivery - Taxable in Canada?

Post by Steve »

Scott:

The general theme with the purchase of a new aircraft is that you will pay the tax somewhere. You would wind up paying tax either in Canada, or Idaho. I would assume that Idaho sales tax is less than 13% (online says 6% plus up to 3% levied by the city), so it could make more sense to have it delivered and complete the transaction in your home state (or even another state in the US). 4% or more on the purchase of a $400K airplane is $16K, and it would cost only a fraction of that in delivery fees to your (local) Diamond dealer. I also recall, somewhat hazily, that US citizens can get a partial refund of Canadian GST/HST taxes on certain items. My recollection that is mainly for tourists (airplane buying vacation trip?). Not sure of the details, but you could find out by a quick Google search if that program would apply to an aircraft purchase.

I was originally going to take delivery of my 2001 Star at the London factory (it was built in Austria, shipped across the Atlantic, and reassembled in Canada). But that was October, 2001, right after 9/11, and I didn't want to deal with all of the issues.

I am not a tax accountant, so take my advice for what it is worth...

Enjoy your new airplane!

Steve
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Re: DA40 NG Delivery - Taxable in Canada?

Post by MarkA »

Scott:

I purchased a 2010 DA40 XLS from an owner in Scottsdale, AZ earlier this year. I took delivery of the plane in Scottsdale and flew it back to Oregon, my home state. Oregon has no sales tax and even though the transaction closed in AZ, no AZ sales taxes were due since I submitted an Arizona "Form 5000AC - Transaction Privilege Tax Aircraft Exemption Certificate".

The AZ exemption certificate indicates basically that you're not a resident, don't own other property, and will not be using the property being purchased for any purpose in that state other than removing it.

It certainly would be worth asking Diamond to see if Canada has a similar arrangement for US sales.
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Re: DA40 NG Delivery - Taxable in Canada?

Post by CFIDave »

If it's a new N-registered aircraft being imported into the US, then there's no reason you can't pick it up in London (I just did that for a US customer 2 weeks ago). You will have to deal with the US CBP commercial import process at the US border PoE where you first land (e.g., Port Huron, MI), but Diamond can help with some of the paperwork to do that. (Too bad the Diamond distributor you bought your plane from doesn't do this for you.) There are NO Canadian or US sales taxes.

Later you pay state sales tax in whichever US state you plan on registering the aircraft.
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Re: DA40 NG Delivery - Taxable in Canada?

Post by ScottOHare »

CFIDave wrote: Wed Oct 23, 2019 5:16 pm If it's a new N-registered aircraft being imported into the US, then there's no reason you can't pick it up in London (I just did that for a US customer 2 weeks ago). You will have to deal with the US CBP commercial import process at the US border PoE where you first land (e.g., Port Huron, MI), but Diamond can help with some of the paperwork to do that. (Too bad the Diamond distributor you bought your plane from doesn't do this for you.) There are NO Canadian or US sales taxes.

Later you pay state sales tax in whichever US state you plan on registering the aircraft.
So did you take delivery in London as a distributor or in the name of the owner? I know I'll eventually pay sales tax in Idaho where it will be hangared but don't want to pay twice! Scott
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Re: DA40 NG Delivery - Taxable in Canada?

Post by Rich »

When we picked up our DA40 at the factory in '02, the import paperwork was already set up by the dealer/Diamond. We paid no Canadian sales tax and stopped at Port Huron as US POE. We later dealt with Washington State's sales/use tax.
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Re: DA40 NG Delivery - Taxable in Canada?

Post by shorton »

CFIDave wrote: Wed Oct 23, 2019 5:16 pm Later you pay state sales tax in whichever US state you plan on registering the aircraft.
In the case of a Canadian delivery, the tax imposed by a state will be use tax, which is a tax triggered by the use of the plane in the state rather than the sale. The use tax is imposed at the same rate as the sales tax. It was designed, in part, to protect in-state retailers from residents going outside the state to buy something potentially tax-free and avoiding the sales tax.

An aircraft owner will be liable for use tax in any state where they have a substantial connection which gives the state jurisdiction to impose the tax on the aircraft. Certainly, that will include your home state where the aircraft is based. Since aircraft are highly visible and mobile assets, a particular owner may have use tax issues in states other than their home state as well, which makes sales/use tax planning for aircraft owners challenging at times.

There are significant benefits to planning an aircraft ownership and operating structure in advance of delivery as use tax can be avoided or greatly mitigated utilizing exemptions provided by state law. Almost every state has an exemption that will reduce if not eliminate use tax, but all the exemptions have formal requirements that must be met precisely or the exemption will not apply and the state will impose the full use tax on the aircraft owner.

As an example, say someone is buying a DA62 for $1,400,000. If that person brought the aircraft back to a state such as Idaho, the state would impose the full state use tax of 6.0%. Meaning the owner would write a check to the state for $84,000 after entry to the state.

However, Idaho, like most states, has a purchase for lease exemption which would allow a buyer to avoid the imposition of use tax on the purchase price, and instead pay use tax on the revenue received from a lease payment. In effect, you are spreading the use tax over the life of the asset. You pay the tax periodically (quarterly or annually depending on volume) little by little each hour you use the plane rather than all at once upfront. This solution is particularly valuable if you will only own the plane a few years.

In our Idaho DA62 example, say the plane was owned for 4 years and he/she flew 150 hours/year and the lease rate on the DA62 was $200/hr. (triple net-type lease). That person would pay $12/hour in tax ($200 x.06). 150 hours per year is $1800 per year. So, using this strategy, the total use tax the owner would pay on the aircraft is $7200 for 4 years of ownership ($1800 x 4), rather than $84.000 upfront if this strategy was not used.

Of course, there are lots of details that must be followed and each state has different requirements. But the above is a common example of good use tax planning that is available to just about any aircraft owner in the United States.
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Re: DA40 NG Delivery - Taxable in Canada?

Post by CFIDave »

ScottOHare wrote: Wed Oct 23, 2019 5:32 pm
CFIDave wrote: Wed Oct 23, 2019 5:16 pm If it's a new N-registered aircraft being imported into the US, then there's no reason you can't pick it up in London (I just did that for a US customer 2 weeks ago). You will have to deal with the US CBP commercial import process at the US border PoE where you first land (e.g., Port Huron, MI), but Diamond can help with some of the paperwork to do that. (Too bad the Diamond distributor you bought your plane from doesn't do this for you.) There are NO Canadian or US sales taxes.

Later you pay state sales tax in whichever US state you plan on registering the aircraft.
So did you take delivery in London as a distributor or in the name of the owner? I know I'll eventually pay sales tax in Idaho where it will be hangared but don't want to pay twice! Scott
Name of the owner.
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Re: DA40 NG Delivery - Taxable in Canada?

Post by Colin »

With my DA40 I made a LOT of effort to deal with the sales tax because the cost of the plane already seemed like a stretch and the California sales tax was $20k or so. I found out about "safe harbor" protection which meant that if in the first year the plane spent more than 50% of it's hours flying outside of, or to points outside of, California, then I owed no sales tax. I had Advocate Tax Consultants helping me with this. I was flying a LOT to Las Vegas because I had an architecture project there. I still had to fly a bit additionally, but all of it was fun.
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Re: DA40 NG Delivery - Taxable in Canada?

Post by shorton »

Colin wrote: Fri Oct 25, 2019 1:27 pm With my DA40 I made a LOT of effort to deal with the sales tax because the cost of the plane already seemed like a stretch and the California sales tax was $20k or so. I found out about "safe harbor" protection which meant that if in the first year the plane spent more than 50% of it's hours flying outside of, or to points outside of, California, then I owed no sales tax.
Yep, that’s the California Interstate Commerce Exemption. It’s a bit ironic that California has one of the best use tax exemptions for aircraft.

There are 3 requirements: 1) buy the plane outside CA, 2) fly it on at least one business trip before entering California, 3) during the 6 month period following entry to CA, the plane must fly at least 50% of its flight hours in “interstate commerce”. Meaning the flight must have a business purpose and be conducted totally outside of CA or across CA state line.

Record keeping is key. The state audits the flight log and all the documentation supporting the business purpose of each flight. Assuming all goes well, zero tax due.
Scott Horton, JD CPA
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