Buy or Lease a Vehicle for a Canadian Corporation?

Leasing Vs. Buying A New Car

As a chartered professional accountant (CPA), one of the most common questions from clients is whether they should buy or lease a car. Predictably, the answer is “it depends.” It depends on various qualitative and quantitative factors. Let’s explore these factors to help you, as a business owner, make the right decision about whether to lease or buy your vehicle.

What is Leasing, and What is Buying?

It may sound very naive to discuss what leasing and buying mean, but many business owners don’t understand the difference between leasing and buying. So, let’s discuss that first.

Leasing a car: Car leasing is a financial arrangement in which you rent someone else’s car and pay a monthly fee for its use for a predetermined period, usually 2-4 years. Simply speaking, you   rent the car for a fixed period, and the leasing company owns the vehicle’s title. After the end of the period, you can either buy the vehicle at an agreed-upon price or return it.

Buying a car: Buying a car means you own it, and the title is in your name. You pay the car’s price either upfront or in installments through financing options. In the case of financing, the monthly payment goes towards paying off the loan.

Now, both leasing and buying have their pros and cons. Let’s discuss these factors briefly.

Finance & Cash Flow Consideration

• Monthly payments: In almost all cases, lease monthly rental payments are lower than loan installments in case of financing. So, if you are tight on your cash flow, consider leasing.
• Lower upfront cost: In most cases, leasing requires a lower upfront cost, making it easier to get behind the wheel of a new vehicle. If you have a limited budget, leasing is a better option.
• Additional leasing costs or hidden fees: One needs to be aware of extra costs that one may face when leasing the vehicle. In case of wear and tear or mileage that is more than the allowed mileage, you will pay extra bills you did not forecast.
• Ownership status: When leasing, you are essentially using the car as a renter. You cannot make any modifications and must maintain the car in good condition. Otherwise, the leasing company will impose heavy penalties.
• Equity of the car: Ownership allows you to build equity as an asset that can be sold or traded in the future. In contrast, leasing involves paying “rent” for using someone else’s car, with no ownership at the end. While leasing may appear cheaper initially, it can lead to higher costs over time, making purchasing the vehicle more economically sensible.
• Interest rate: Given the current interest rate scenario, understanding the affordability of both financing options (lease and purchase) versus outright purchase is critical.
• Leasing as an option to avoid further liability on the balance sheet: For companies with high levels of borrowing or restricted by covenants (such as bank restrictions), leasing can be attractive. Leasing allows companies to acquire necessary assets without adding substantial liabilities to their balance sheets. This approach helps prevent violations of bank loan restrictions and maintains a stronger financial profile.

Tax Implication of Buying and Leasing a Vehicle

• Tax deductibility of lease: Tax deductibility of the Lease: When paying a lease, the total amount is tax-deductible, provided the monthly payment falls within the CRA’s prescribed limits. Conversely, with financing, only the interest portion of the installment payments is tax deductible.
• Ability to claim depreciation (capital cost allowance): When deciding between leasing and buying a car, another crucial factor is depreciation or capital cost allowance (CCA). In leasing, since you don’t own the vehicle, you cannot claim any depreciation or CCA. However, if you purchase or finance the car and own it, you can claim CCA, which allows you to deduct additional expenses not available with a lease.

So, while in a lease, you can claim the full payment of leasing expenses, whereas in finance, you can only claim the interest portion. However, by owning a vehicle through finance or purchase, you can additionally claim depreciation, which makes the overall tax deductibility more or less equal from a tax perspective. It’s important to note that there are various limitations imposed by CRA for both lease and purchase of vehicles such as the maximum lease amount per month, maximum price for passenger vehicle, limit on interest expense per month and the CCA rate varying by vehicle type. There are additional checks on vehicle expenses based on personal and business use. Therefore, consulting with a tax advisor is critical before making this decision.

Read here: Whether to buy a vehicle personally or in the corporation’s name, and what the maximum limits of car prices are, other limits on vehicle expenses, and CRA’s requirements for personal and business use of the car.

Non-financial Factors For Buying vs Leasing a Car

• Flexibility of lifestyle and flexibility of new models: If you enjoy driving the latest models, leasing is an excellent option. It allows you to upgrade your vehicle every 2-4 years, giving you access to new technology, and features, and maintaining your lifestyle.
• Mileage limitations: If you drive extensively, leasing may not be suitable due to mileage restrictions in most leasing contracts. Exceeding these limits can incur significant fees.
• Pride of ownership and equity: When you own the car, you have full control over its use and maintenance. Ownership instills pride and often results in better care of the vehicle.
• Customization freedom: Customization and Adaptability: If you prefer to customize or adapt a car to your preferences, buying is the optimal choice. Ownership allows you the freedom to personalize the vehicle according to your needs and desires.

There are pros and cons to both purchasing and leasing a vehicle, and the choice may come down to personal preferences, long-term priorities, and short-term cash-flow situations. It is crucial to evaluate all factors before making a decision.  

Many business owners often execute transactions first and seek professional advice later, which can be too late to optimize the situation.

Furthermore, every situation is unique; what works for one corporation may not be suitable for another. Therefore, it is essential to discuss your specific financial and tax circumstances with your tax or financial advisors before making any decisions.

Feel free to reach out to the Source Accounting Team, if you need further assistance in your tax planning questions by calling at 647-930-8130.

Source Accounting Professional Corporation (CPA) is a full-service accounting firm in Mississauga, dedicated to small and medium-sized businesses, providing tax preparation, corporate tax filing, accounting, bookkeeping services, payroll solutions, etc. If you are looking for an accountant near me (Mississauga, Brampton, Toronto, GTA) or an accountancy firm, you are in the right place. Please call for consultation or send us an email.

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.