The lease versus purchase decision usually shows up around vehicles but applies equally to major equipment. The wrong way to make it is to pick the option with the better tax write-off. The right way is to decide what suits the cash flow and operating needs of your business, then optimize the tax position around that decision.

Tax considerations

CRA caps the deductible portion of vehicle costs whether you purchase or lease. The caps are updated periodically. Always confirm current thresholds with us or check CRA: Automobile deduction limits.

At a high level, the rules work like this:

• Lease. Monthly lease payments are deductible subject to a CRA monthly cap (plus tax). Earlier in the year you enter the lease, the more payments fall in that fiscal year.
• Purchase. A vehicle is depreciated over time through capital cost allowance (CCA). The capital cost is capped at a CRA-set ceiling. Loan interest is deductible up to a per-month cap.
• Personal use eats both deductions. Whatever you use the vehicle for personally is not deductible. If business use is 80%, only 80% of the lease payment or CCA plus interest is deductible.
• Logbook is not optional. Without a kilometre logbook, CRA can deny the entire vehicle deduction. We see this happen in audits.
• Excess cost is excluded. If you spend more than the CRA capital cost ceiling on a vehicle, the excess is simply not deductible.
• Corporate-owned vehicles add a taxable benefit.A corporation can buy a vehicle and provide it to the owner, but the personal use creates a taxable benefit on the owner’s personal return. Run the math before you go this route.

Leasing

Leasing tends to suit businesses that do not have the cash for a purchase but can carry monthly payments. Lower monthly outlay, newer vehicle, repairs typically covered under warranty for the term, and no resale to manage at the end.

What you give up by leasing

• The leased vehicle is not an asset on your balance sheet.
• You pay forever (every month, for as long as you keep leasing).
• Mileage limits. Exceeding them costs.
• Excess wear and tear charges at lease end.
• Penalties if you cancel the lease early.

Purchasing

Purchasing suits businesses with the financing in place and a long-term need for the asset. Once the loan is paid, the vehicle is yours. You drive any number of kilometres without penalty, and the residual value belongs to you.

What you give up by purchasing

• Bigger monthly payments while financed.
• Repairs are on you once the warranty ends.
• You carry the resale risk when you eventually sell.

How to decide

Pretend, for one minute, that you live in a country with no taxes. Then ask:

• Financing. Can you finance a purchase at a lower rate than the implied lease rate? Can you afford the monthly payment either way?
• Length of need. Will you use the vehicle (or equipment) continually, for years? Or is the need temporary?
• Obsolescence. If the asset becomes outdated quickly (technology especially), leasing hedges against being stuck with something old.
• Experimental need. If you are not sure the asset will earn its keep, leasing reduces the cost of being wrong.

Then layer the tax rules on top of the answer. They will tilt the decision one way or the other, but they should not flip it.

Tax rules change. Confirm before you sign.

The CRA caps and rules around vehicle deductions are revised periodically. We always run a current analysis with the client before they commit. Bring us the lease quote or the purchase contract and we will walk through the after-tax cost on each path.