Do I pay sales tax on a car loan?

In Canada, you do not pay sales tax directly on the interest portion of your car loan. Instead, sales tax is applied upfront to the total purchase price of the vehicle itself, along with any taxable accessories or fees, at the time of sale. This tax is a mandatory component of the vehicle's cost, regardless of whether you pay cash or finance the purchase.

The specific sales tax rate depends entirely on your province or territory of residence. This typically involves the 5% federal Goods and Services Tax (GST) combined with a provincial sales tax (PST) or a Harmonized Sales Tax (HST). For instance, provinces like Ontario, New Brunswick, Nova Scotia, Newfoundland and Labrador, and Prince Edward Island charge a single HST rate (e.g., 13% or 15%), which includes the federal portion. In contrast, provinces like British Columbia, Saskatchewan, Manitoba, and Quebec apply the 5% GST separately alongside their own provincial sales tax (PST or QST). Alberta and the territories generally only charge the 5% GST on vehicle purchases.

Why this matters to you as a consumer is critical: while you don't pay tax on the *interest*, the sales tax amount *is typically rolled into the principal of your car loan* if you choose to finance. This means you are effectively paying interest *on the sales tax itself* over the entire term of your loan. This significantly increases your total financed amount, leading to higher monthly payments and a greater overall cost of the vehicle by the time your loan is repaid. Understanding this distinction is crucial for accurate budgeting and comparing the true cost of vehicle ownership in the Canadian market, especially when considering the evolving vehicle prices and financing rates anticipated into 2025.