Should You Lease or Buy a Car? How to Determine Which Approach Will Save You More in Taxes

Should You Lease or Buy a Car? How to Determine Which Approach Will Save You More in Taxes

Should you lease or buy a car?

Many people will justify purchasing a more expensive vehicle for the related tax deductions. But what they don’t realize is that this still results in more money out of their pockets. What we have to do is run the numbers to determine what the best option is when we consider the tax savings. My name is Shayan Rashid and I’m a partner at SRJ Chartered Accountants. In this video, we’re going to look at the options of whether to lease or to buy your next vehicle.


Should You Lease or Buy a Car? How to Determine Which Approach Will Save You More in Taxes

Let’s start off with leasing. The maximum benefit or deduction for income tax purposes is $800 per month. Even if your vehicle costs $1200, you can still only deduct $800 plus HST. When you’re looking at the net cost to you, it’ll be $800 less any tax savings that you’re going to receive based on your marginal rate. Now if we compare that to a buy scenario, you can deduct up to $30,000 for one vehicle on your tax return. No matter how long you own the vehicle, the maximum deduction is still only $30,000. As important to remember, that the rates the government uses are 30% in any given year of the remaining balance of what you haven’t deducted yet. And you’ll also want to consider the tax savings when you’re looking at the total cost of the vehicle. When you compare the lease versus buy option, you want to see on an annual basis what the lowest amount is and that’s going to be the option that’s best for you.

Other Costs

Now that’s it from a tax point of view but let’s discuss the other costs that you should consider or other items that are important in your decision. When you lease a vehicle, if anything happens to the car, you’ll have to fix it before you return it to the dealer. And also, there’s a limitation on kilometers so you want to make sure that you know exactly how many kilometers you can drive per year before getting into a lease agreement. For some people such as sales agents, realtors, they drive almost 30, 40,000 kilometers a year. If your maximum’s only 20,000, you’re going to get a big hit at the end of your lease because you may have to pay up to 15 to 20 cents a kilometer for each additional kilometer that you drive.

Pride of Ownership/Cash Flow

Income Splitting in Canada for 2018

Other items you want to consider may be the pride of ownership. I know for myself, I’m an economical guy. I’m all about the dollars and cents. But my brother, he loves his cars. He doesn’t care how much it costs, he’s going to get what he likes. Another factor you want to consider is cash flow. When you’re purchasing a vehicle, there may be a larger up-front cash flow or a larger deposit required. Whereas on a lease, it’s a monthly payment that’s divided over a long period of time which allows you to limit how much up-front cash you have to provide to the dealer. The number of factors and each one is going vary depending on your situation. You want to make sure you make the right decision for you and your business.

Further Information

If you’re still unsure if you should lease or buy, we can determine which option is best for you.