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Lease or Buy a Vehicle?

CONSULTING

Many soon-to-be owners of a new vehicle often have the question should I buy or lease? Both have their benefits and drawbacks depending on your individual situation. I always inform my clients that it comes down to three key points: intent of use, cash-flow and tax treatment.

If you intend to use your new vehicle for business purposes it makes sense to purchase if you have the cash available, as you would not be subject to any kilometer restrictions on the lease and your company gains an asset, increasing leverage. If you do not have the means to purchase immediately and must use financing, be aware of the impact to your credit score and borrowing power. In situations like this sometimes leasing may be more attractive. Keep in mind, any corporately owned vehicle not used 100% for business and that does not qualify as a “business use” vehicle under CRA guidelines can create a taxable benefit for yourself.

Cash-flow is another issue, as it may be beneficial to lease so that you are not tying up liquid cash which could be invested elsewhere. When purchasing compared to leasing, owners should consider that over time once the vehicle is no longer under warranty repairs can become very costly. The benefits of leasing is usually lower monthly payments as they are based on the price of the vehicle minus the residual value, amortized over the length of the lease. However, leasing has its fair share of drawbacks with pricey consequences for going over mileage limits, and significant penalties for early exits.

A basic highlight of tax considerations when leasing or buying is that if financing to purchase, the interest deduction is limited to $300 a month. Deductions for lease payments are restricted to $800 a month, plus GST and PST. The depreciation rate allowed for business deductibility is 15% in the year you acquire the vehicle, followed by 30% in each subsequent year. The cost of the vehicle available for depreciation is usually capped at $30,000 with exceptions for specific non-passenger and working vehicles.

As always, cash is king, if you have the cash then purchasing makes sense, only consider leasing when you don’t have the cash, are a low-mileage driver and don’t want the hassle of reselling. In the end, consult a Chartered Accountant as they will help clarify the decision of leasing, financing or buying a vehicle.