11 January, 2024
Whether to Finance or lease a vehicle is a tricky question. Various factors need to be considered before you make the final decision
1. Leasing a Vehicle:
- Tax Deduction: Lease payments are tax deductible from business income. However, there are rules prescribed on how much lease payments can be deducted from taxable income. Canada Revenue Agency has limits for lease costs that can be deducted.
- Limit on Lease Cost Deduction: The Canada Revenue Agency prescribes a maximum amount that can be deducted. This limit is updated from time to time. The main purpose is to deny the deduction for luxury vehicles.
- GST/HST Implications: The monthly lease payments generally include Goods and Services Tax (GST) or Harmonized Sales Tax (HST). The businesses can claim an input tax credit if GST/HST if the businesses are registered for GST/HST.
- Flexibility: Leasing can offer flexibility to businesses especially if you like to use a new technology
2. Financing a Vehicle:
- Capital Cost Allowance (CCA): When you purchase a vehicle for business use, then the vehicle is considered a depreciable asset. For Tax purposes, the business is allowed to claim Capital Cost Allowance (CCA) based on the rates prescribed by CRA. The CCA allows a tax deduction and reduces taxable income resulting in reduced/low tax due to CCA.
- Interest Deductibility: If the Vehicle is purchased and financed, the monthly installment will include an interest portion which is tax deductible. The interest deductibility reduces the taxable income and reduces or saves taxes.
- Pride of Ownership: Owning a vehicle provides a sense of ownership, which you do not get in case of leasing.
3. Other Considerations:
- Business Use Percentage: Whether a business can use the whole amount of lease or finance cost. The answer is ‘no’. The businesses are allowed to deduct the percentage of the portion that belongs to business use. In order words, only a percentage of total use, i.e. business use, is allowed to be claimed.
- Luxury Vehicle Limits: Currently, there is a limit for both lease and financing regarding luxury vehicles. Without this limit, businesses would have claimed a higher amount. CRA prescribes a limit and updates regularly.
- Personal Use Implications: Only business use-related expenses can be claimed in business, so any portion that belongs to personal use will not be deductible. All of the expenses on lease payments, interest on financing, and Capital Cost Allowances needed to be separated for business and personal use. Expenses belonging to personal use are not allowed.
- Deposits: Leasing may require a deposit in the beginning to lower the monthly payments or a down payment affecting your cash flow.
In summary, your choice of leasing or financing has different tax implications. However, you should also consider cash flow, affordability, alternate use of capital, etc. before making a final decision. We recommend consulting a tax professional who can provide a piece of custom advice based on your specific situation.
We at Grover CPA Professional Corporation provide valuable Assurance, Tax, Accounting, and consulting services to our clients. Our Motto is to help our clients grow in their business.