Lease or Buy: Which Option is Better?

I get asked this question many times, at least once a month, clients need to know:

“Should I buy or lease a car? What’s better on my taxes? Is it better to buy or lease on my taxes?”

As a business owner, you will ask yourself this question at one point in time. The purpose of this article is to look into the tax implications of both those options with an example so you can make an informed decision when the time comes.

I don’t tell my clients what to do; I advise them on what’s best for their personal situation and lifestyle. Anyone else who gives a blanket response, I disagree with.

Tax Implications of Buying

In the case of buying, the tax savings come from the depreciation of the vehicle over time, also known in Canada as “capital cost allowance (CCA),” and deducting the interest charges on the car loan.

Tax Implications of Leasing

For leasing, the tax savings are in the form of the lease payments that could be deducted each year.

However, the Income Tax Act and Regulations provide specific calculations for both items. For instance, it sets limits on the value of the vehicle that could be amortized, with a maximum limit of $37,000. Any vehicle purchase above this limit will be included in Class 10.1 instead of Class 10. The depreciation rate remains the same in both cases, i.e., 30%.

For leased cars, the maximum amount deductible is the lesser of:

• Actual lease payments
• The lesser of:
  • ($1,050 + Sales taxes × number of days vehicle was leased) – lease payments deducted in prior years) ÷ 30
  • ($37,000 + Sales taxes) × total lease payments ÷ 85% (list price or $35,294 + sales tax, whichever is more)

Comparison Example

Now, let’s compare the tax implications for both options. The example below assumes that the vehicle is used primarily for business purposes, is new, and has a cost of $50,000.

Factors	Lease	Purchase
List price	$50,000	$50,000
Lease term	48 months	N/A
Estimated lease payments over 12 months	$804.84 × 12 = $9,658	N/A
Tax deduction – Year 1	$9,501	$18,815
Tax deduction – Year 2	$9,501	$6,899
Tax deduction – Year 3	$9,501	$4,829
Tax deduction – Year 4	$9,501	$3,380
Total deductions at 4 years	$38,004	$33,922

There are unique cases for electric vehicles and certain hybrids, which I advise clients on many times, but I won’t discuss in this article.

From the above case, while purchasing gives rise to a significantly higher CCA (tax depreciation) up front, it gets surpassed by the leasing option by year 4.

This might be enough for many clients to see and go lease a vehicle right away.

Remember, just because the tax analysis favors a lease, don’t forget, you’re still giving out the cash, without owning anything at the end of the 4 years.

So, ask yourself, what’s better for your personal budget, the short lease, or to buy and own long term?

This is not legally binding tax advice. This is educational analysis. Say hello if you need help.

Email: hello@taxesmadesimple.ca

WhatsApp: 613.600.4194