Buying vs Leasing a Car - Tax Implications

Basic Rules

The cost of purchased vehicles is expensed on the income tax return through depreciation, under two specific CCA classes, class 10 [ITR 1000(a)(x)] and 10.1 [ITR 1000(a)(x.1)]. This can be done as an employee  or a self-employed individual. The prescribed depreciation rate, on a declining balance method, for both of these classes is 30% [ITR 1000(a)(x) & ITR 1000(a)(x.1)]. The ITA sets the limit on the value of the vehicle you can amortize to $30,000 plus applicable sales taxes [ITA 13(7)(g)]. Vehicles purchased above this $30,000 limit are classified in class 10.1 [ITR 1000(a)(x.1)].

For leased vehicles, the amount deductible is determined by the following [ITA 67.3]:

Lesser of:

a)      Actual lease payments

b)     Lesser of:

($800 + Sales taxes X number of days vehicle was leased) – lease payments deducted in prior years  

30

Or

($30,000 + Sales taxes) X total lease payments

85% (list price or $35,294 + sales tax, whichever is more)

As with a purchased vehicle, lease payments are also capped to the equivalent of a lease payment for a $30,000 vehicle.

Comparison Through a Case Study

To compare the deductibility of purchasing vs leasing a car, we will look at a case study. The basic assumptions we will make are that the vehicle will be new, and the list price will be around the Canadian average price for new vehicles sold, which is $40,000, no down payment for either a purchase or a lease, and the vehicle will be used entirely for the business.

Note 1: Assumptions – 50% residual, Ontario lease, 3% interest. Computed at: http://www.apa.ca/LeaseCalculator.asp

Note 2 - Lease (Ontario): [($30,000 + $3,900) x $8,543] / 85%($40,000)  = $8,518

Purchase: Class 10.1 – [3 X ½($30,000 + $3,900)] X 30% = $15,255  

Note 3 - Lease (Ontario): [($30,000 + $3,900) x $8,543] / 85%($40,000)  = $8,518

Purchase: Class 10.1 - $18,465 X 30% = $5,594

Note 4 - Lease (Ontario): [($30,000 + $3,900) x $8,543] / 85%($40,000)  = $8,518

Purchase: Class 10.1 - $13,012 X 30% = $3,915

From the case study above, we see that, as far as the expense deduction goes, a car lease slightly edges a purchase over 36 months. For the purchased vehicle, we see in the first year that the deduction is high due to the Accelerated Investment Incentive , which triples the depreciation rate in the first year. However, in the following two years, the lease expense deduction catches up and surpasses the purchase expense deduction cumulatively.

Would the findings above tip the scale as far as the leasing vs buying debate? Not likely when you consider the exhaustive research that shows that in the long term, buying is the much better financial option. The tax advantage of leasing will not likely make up the difference in overall long-term cost advantage of buying the car.