I tackled the lease versus buy conundrum that many business owners face when getting a new vehicle. The answer might surprise you.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.
After speaking to many clients in my role as their Chartered Professional Accountant, I’ve gotten the impression that most believe one option is significantly better than the other.
I was curious as well so I dove into a few case studies.
Well, after much research the answer is clear.
And the answer is… it depends.
Despite this less than satisfying result, there are a few generalizations we can make.
The Tax Advantage... Or Not?
To dispel some myths. Let’s start off with what’s the same. Both purchasing and leasing have tax-deductible components.
If purchasing, the cost of the vehicle (called depreciation) along with interest can be deducted.
If leasing, the monthly payments are a write-off.
Repairs, maintenance, and insurance can be claimed for either leasing or purchasing.
Another similarity, both have deductibility caps which can come into effect depending on the type of vehicle you are driving and the percentage of business versus personal use.
What are these potential limitations?
If purchasing a passenger vehicle, up to $30,000 of the vehicle cost can be written off and interest is limited to $300 per month.
If leasing a passenger vehicle, up to $800 per month can be claimed although deductibility and can be restricted further based on personal versus business usage.
Although not applicable to every vehicle, these limitations are in place to ensure that leases versus purchase decisions are relatively the same in terms of tax treatment.
CRA does not intend one option to be better than the other.
To see if this intention worked out in real life, we reviewed multiple lease verse buy calculations and found that there is a slight advantage when leasing a vehicle, but only by about 2 or 3%.
"CRA does not intend one option to be better than the other." – Jillian Battaglio, CPA, CA
However, to come to these conclusions many, many assumptions had to be made:
the terms of the lease
personal versus business usage of the vehicles
time of year the lease was undertaken
how long the vehicle was kept for
interest rates in effect
and the vehicle’s value
Each vehicle situation surrounding a lease or buy decision can flip back and forth depending on the terms offered and the usage of the vehicle.
To be certain as to which option is the most optimal tax decision, you’d need to do a complex tax calculation forecasted over several years.
Because the potential spread between these two is often quite small (again 2 or 3%). You are better off making your decision on other factors.
The Financial Advantage
Research shows that buying a vehicle is usually best in the long term and is a better financial decision in most cases.
Most of the time, the tax advantage of leasing will not make up for the difference in the overall long-term cost advantage of buying.
This is especially true if you plan to hold the vehicle for an extended period or spend a lot of time driving.
On the other hand, if you enjoy driving a new vehicle, are looking for lower monthly payments and don’t have a far commute then leasing may be a better financial decision.
Whether buying or leasing is a better financial decision is going to depend on your particular situation and how you use your vehicle.
How To Decide
When deciding whether to lease or buy consider factors other than tax considerations when making your final decision.
One client chose to lease their vehicle because:
They wanted a newer automobile that was reliable.
They enjoy the latest technology
Their anticipated kilometre usage was relatively low
They appreciated the slightly lower monthly payments that can occur with leasing.
These factors meant that choosing to lease a vehicle was the right choice for them.
I personally choose to buy vehicles because:
I enjoy driving the same vehicle for many, many years
I have a great mechanic which means vehicle reliability is less of a concern
I don’t want to be constrained to the kilometres I drive.
These factors mean purchasing a vehicle is a better decision for me.
Buying also makes more sense if you need to modify your vehicle for your work situation.
Not Satisfied?
I know I haven’t given you a super satisfying answer today.
The lease versus buy decision is a personal one.
Tax deductibility should likely not be a major factor in your decision.
Instead, consider the big-picture financial aspects and your personal preferences when deciding.
"You are better off making your decision on other factors besides tax." – Jillian Battaglio, CPA, CA
Now a better tax question with many more implications is whether your corporation should hold the vehicle or whether the vehicle should be acquired in your personal name.
To learn about these important tax implications be sure to check out our other videos on vehicle deductions available in our membership platform.
All right, that is all I have for today. I hope you found this article helpful when making a lease versus buy decision.
If this topic has interested you, be sure to check out our other blog articles and consider subscribing to one of our membership plans so you can be a well-informed business owner.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.