Leasing and buying a vehicle both come with different advantages and disadvantages when it comes to considering taxation. The right decision is based on your personal needs and your personal situation.
Whether leasing or buying, you are entitled to the same expense deductions for fuel, repairs & maintenance, licensing, and insurance. These are based on actual expenses pro-rated for business versus personal use or using a km per diem rate as provided by the Canada Revenue Agency each year (the methods available will be determined by type of business and ownership of the vehicle – this gets complex – so best to seek advice here).
The biggest difference in tax deductions in leasing vs purchasing is the deduction of the lease payments versus interest & capital cost allowance.. So, if you decide to purchase your business vehicle, what you spend on the cost of your car is deducted at a rate decided upon by the CRA. This deduction is called Capital Cost Allowance, or depreciation. Currently this is 30% per year. This rate is normally cut in half the first year, however there is an investment incentive that actually INCREASES the first year deduction!. However there are restrictions on the CCA (not just the 30% CCA Rate) – but the maximum value that can be used is based on if the vehicle is deemed a luxury vehicle or not. If the vehicle is deemed to be a luxury vehicle, the maximum claim is $30K. So for example, say you purchase a Ford Explorer Platinum for $90K. Only $30K of this is eligible for the CCA allowance – the other $60K is essentially a lost deduction. Interest on financing may also be limited for passenger vehicles. On the other hand, if you opt to lease your business vehicle, you are not entitled to the CCA but instead allowed to deduct the lease payments. However, these are also limited to $800/month. So either way, there are limitations involved and depending on the type of vehicle, either option could be good …. Or maybe not so good..
Timing matters! When leasing, a contract started earlier in the year will result in more payments and therefore a higher deduction for the year, versus a car leased in December will have no deductions for that year as no payments were made, versus purchasing where you would be eligible for ½ year CCA (or as mentioned above a higher rate if purchased within the timeframe of the investment incentives)..
The disposition fees can also be pricey if you choose to purchase a new vehicle versus leasing. When you dispose of a vehicle that your business owns, there may be a taxable gain (50%) or a recapture of CCA claim (100%), however, capital gains/recaptures on vehicles are VERY rare given the high rate of depreciation in value the moment you drive your car off the lot. On the flip side, capital losses cannot be claimed on the disposal of depreciable personal use assets like vehicles, but a terminal loss may be applied. This is quite the opposite of returning a leased car to the dealer with no taxable gain or loss, but this is offset by potential extra fees charged for items like kilometer overage or additional maintenance. Also, if you’re buying out a leased vehicle, the overall price paid between the lease payments and the buyout can be higher than just purchasing – this is more of a financial planning consideration than a tax planning one – but very important to consider.
To help figure out which option is preferable to you consider the following:
- How many kilometers do you drive on average each year?
- Do you replace your car every few years or keep it as long as possible?
- What type of vehicle are you in the market for?
- Is it more important for you to have lower monthly payments OR pay a lower amount overall?
If you commute a fair distance to work or take a lot of road trips, the typical 25km/year limit might make leasing a poor option for you. If you enjoy getting a new model with a new warranty every few years, leasing might be the choice for you.
With everything there is to consider, it’s no wonder the discussion of lease vs buy is one of the most debated topics in the accounting and tax field! Don’t make the decision alone. Talk to your accountant or your financial advisor before you buy or lease. There may be some important factors you are missing. Not sure who to talk to? We would be happy to discuss your vehicle needs for your unique situation! Contact us here.
There are also penalties that go along with either option.
As mentioned above, there are penalties for wear & tear or going over the allotted mileage when you lease. There are also early termination penalties with most leases. When you finance, your vehicle is used as collateral. Any missed payments can result in heavy penalties or fees, or even repossession or credit score damage. If you get stuck in a long contract, you could end up owing more than the vehicle is worth. Ensure your financing payment fits into your budget before signing!
In general, buying is more cost-effective for many Canadians, but the best choice for you depends on your personal circumstances. Keep in mind potential deductions, fees, and penalties when choosing which option is the best fit for you.