In most Canadian provinces, when you trade in a vehicle at a licensed dealership towards the purchase of another vehicle, you are only required to pay provincial sales tax (PST) or the provincial portion of the Harmonized Sales Tax (HST) on the net difference between the new vehicle's purchase price and your trade-in allowance. This advantageous tax treatment applies in provinces such as Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Manitoba, Saskatchewan, and Alberta (where the trade-in reduces the GST taxable base). This policy is specifically designed to incentivize consumers to trade in their vehicles at dealerships, effectively reducing the overall tax burden on the transaction.

Conversely, in British Columbia and the Canadian territories (Yukon, Northwest Territories, Nunavut), the provincial sales tax (PST) or equivalent is typically calculated on the full purchase price of the new vehicle, irrespective of any trade-in value. This means the tax savings from a trade-in do not apply in these regions. Understanding this distinction is crucial for consumers, as the tax savings in provinces with the 'tax on the difference' rule can be substantial, especially with higher vehicle prices and strong trade-in values, which are anticipated to continue into 2025. This significantly lowers the out-of-pocket cost for the new vehicle.

It is vital to remember that this tax advantage generally applies only to dealership trade-ins. When selling your vehicle privately, you would typically pay tax on the full purchase price of your new vehicle, as there is no trade-in to offset the taxable amount.