I am frequently asked to consider whether a client is better off buying or leasing an automobile, taking into consideration tax implications.
Lease Cost:
For accounting purposes, lease costs are expensed to the extent an automobile is used for business purposes; however, CRA limits lease payments of the vehicle which may be claimed as an expense for income tax and HST purposes: $800.00 + HST = $904 monthly.
Purchase Cost:
For accounting purposes, an automobile is usually amortized at the same rate as allowed for income tax purposes: 30%, which is reduced to 15% in the year of purchase. Subsequent years, an automobile is amortized at 30% of the previous year’s balance – cost less accumulated amortization. The exact same calculation is used for income tax purposes except CRA limits the purchase price of an automobile to $30,000 plus HST. Amortization is called CCA (Capital Cost Allowance) for income tax purposes. The cost of an automobile greater than $30,000 cannot be deducted as an expense for income tax and HST purposes.
I believe the answer is a business decision, without considering taxes; because there is not much difference, for income tax purposes, between leasing and buying an automobile over time are.
With interest rates so low it is my opinion to negotiate your best deal and buy a vehicle, as generally there are additional costs associated with leasing. However, if the vehicle is purchased for a business which requires keeping cash resources available for business development, leasing is probably the better way to go.
The main reason for clients to ask this question is their concern about not recovering HST – ITS if they were not to register an automobile in their corporation.
My concern with an automobile owned by a corporation is it is required to annually calculate a Standby Charge for the automobile. This is treated as a taxable benefit, just for being available to an employee, and is added to the employee’s T4 slip. The Standby Charge calculation is based upon the purchase price. Therefore, theoretically an employee has to add to his/her income a fixed taxable benefit, many years after the market value of the automobile may be next to $nil.
Because of the Standby Charge issue I recommend clients who own their own business to own their automobile, and not have it registered in their corporation. If a client insists on registering an automobile in their corporation, I recommend ownership being transferred to personal ownership say after 3 years when the market value of the vehicle has significantly reduced, so HST loss is a less of an issue.
Note, some vehicles may be considered wholly used for business purposes. The automobile is not made available to an employee because it is returned to the company’s premises at the end of each business day.
For other practical considerations read this article “Tips For Financing Your New Vehicle” provided by The Chartered Professional Accounts of Ontario.