As a business owner, have you ever wondered whether it’s more tax efficient to lease or buy an automobile? Seeing that an automobile is one of the biggest purchases that you’ll make, it’s important to get this decision right.
As an Accountant Toronto, I will discuss the tax consequences of leasing vs. buying an automobile for business purposes in Canada.
Leasing an automobile
The maximum tax deductible amount for an automobile lease is $800 / month + taxes. While this sounds like a very generous limit, there’s a catch. The $800 limit is reduced (through a complex formula) if the manufacturer’s suggested retail price (MSRP) for the automobile is in excess of $40,000 (approximately).
Let’s assume that you have entered into a five year lease for an automobile having a MSRP of $30,000 with a monthly lease amount of $350, including taxes. Therefore, each year you would be entitled to a deduction of $4,200 (i.e. $350 x 12).
Purchasing an automobile
When purchasing an automobile, the deductible amount (a.k.a. capital cost allowance or CCA) is computed as 30% of the cost of the automobile, on a declining balance scale. In the year of acquisition, only half of the CCA can be claimed.
The cost of the automobile on which CCA is claimed is limited to $30,000 + taxes. Therefore, if you purchase a luxury automobile, for example for $50,000, only $30,000 can be depreciated for tax purposes.
Now, let’s assume you purchase an automobile having a MSRP of $30,000. The CCA (tax deduction) allowed in each years is as follows:
Year 1 $4,500
Year 2 $7,650
Year 3 $5,355
Year 4 $3,749
Year 5 $2,624
Leasing vs. Purchasing
In the first few years, the tax deductions are greater for purchasing an automobile as compared to leasing an automobile. However, in the later years leasing an automobile is more advantageous. This is clearly illustrated in the examples provided above.
As such, the answer as to whether buying or leasing an automobile is better must be determined on a case-by-case basis, and cannot be generalized.
To assist in your decision process, I recommend that you compute the total tax deduction over the term of the lease and compare that to the total CCA deductions over the same time period. This direct comparison will allow you to assess whether leasing or buying is more advantageous.
As an Accountant Toronto, I can tell you that non-tax factors that should also be considered when comparing buying vs. leasing an automobile:
1. The residual value expected on the sale of a purchased automobile
2. The maximum number of KM allowed per year under the lease contract and any surcharges for exceeding the maximum.
3. The interest rate implicit in the lease and the interest rate when financing a vehicle purchase
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.