To lease or buy your next car?

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I dare say one of the most common questions we address is whether to lease or buy a new vehicle and the question usually comes from a place wanting to save the most in taxes.  First and foremost, taxes should not be the only factor considered in this decision, one should consider the interest rate, the residual value, and the overall out of pocket cost.  But seeing as how we are accountants, I will run through the our analysis and discuss the tax treatment for each.

Deciding to Purchase

When a vehicle is purchased, the value of the vehicle is depreciated over a period of years and the annual deprecation is a tax deduction (only the business or employment portion).  First and foremost, the tax value for most vehicles is capped at $30,000 + HST.  Under limited circumstances the CRA will allow the value to be greater than $30,000; typically only in cases when the vehicles is used to transport good or equipment.  The rate of deprecation is 15% in the year of acquisition and 30% every year after.  The value of the vehicle for tax purposes starts at $30,000+HST and is reduced annually.  Your deduction therefore is much higher in the first few years and tapers off pretty quickly around year 5.

Another factor to consider is the interest paid.  It seems these days dealers (using banks) will extend finance terms to 60/72/84 months and of course charge interest over the term.  The interest paid annually is deductible and is an important consideration.

Lastly, with respect to purchasing a vehicle vs. leasing, you will very likely run into higher maintenance costs as the vehicle ages.  In our example below we compare the tax deductions over an 8 year period and the unknown is what the maintenance costs will be in the final couple years.  In our example we have assumed maintenance costs will be roughly $6,000 in the final 4 years.

Deciding to Lease

When a vehicle is leased, the lessee is required to make monthly payments for the leasing the vehicle.  The monthly payment will be less than if you financed because at the end of the lease term (we’ve assumed four years) the vehicle will be returned to the dealer or can be purchased outright at the stated residual value; point being the vehicle retains a portion of its original value at the end of the lease term.  If the value of the vehicle (MSRP) is at or even slightly above $30,000+HST, the tax deduction works out to be the annual lease payments made.  As the MSRP increases well above $30,000+HST the allowable lease cost decreases but not to the level of the $30,000 vehicle.    For this specific reason, if you are considering a vehicle valued well in excess of $30,000 you would be better off leasing.

In our example below we assumed the same vehicle was leased and financed.  Further we assumed the leased vehicle could be lease for two separate 48 month terms, meaning once the first lease finished a similar vehicle at the same cost could be leased for the second lease term.  The results are as follows:

The conclusion is quite clear, over an 8 year period the lease comes out ahead in terms of tax deductions.  Its worth making note of several assumptions made; the interest rate was 50 basis points higher on the finance option, $6,000 increase to maintenance cost is a pure estimate, the maintenance cost would be virtually the same under both scenarios except for years 5-8 on the financed vehicle and the leased vehicle did not go over the term limit for kilometers driven.  It is interesting to note in our example above the actual out of pocket costs were less for the finance option but only by $300.

No two situations are the same when it comes to deciding on a new vehicle and a variety of factors are always changing , whether it be interest/lease rates, MSRPs, residual values and maintenance costs.   If you can deduct business/employment use of your vehicle, let us assist you in arriving at the right decision.