Leasing vs. Financing a Car for Your Business in Canada

The decision on whether leasing or financing a car is better for you is dependent on your priorities. What is the right decision for one person may be the wrong decision for another if careful consideration is not taken when making this decision. Typically when leasing a car vs financing, you would be paying lower monthly payments, with the additional benefit of enjoying a new car every set number of years, typically 3 – 5. On the other hand, financing has its share of advantages as well.

Leasing a Car vs Financing for Individuals

On the surface, leasing would be ideal if you desire to utilize a new car every few years, have a lower monthly payment and have a warranty covering the vehicle and its features for the duration you use it. Additionally, leasing would avoid the challenges of privately selling and trading in cars that have been used. When your lease term is up, simply return the vehicle to the dealership and move on. Furthermore, leasing a car is practical for those who may have future lifestyle changes, drive an average number of miles, and maintain cars well.

Alternatively, financing would be the ideal option if you want the vehicle’s ownership in your name. With a financed vehicle, you can look forward to paying off the car’s debt eventually and, in the long term, not having monthly payments. Additionally, since there are no conditions with ownership as under leasing, you can personalize your car and drive the vehicle for as many kilometres as you desire. Unfortunately, financing may entail unanticipated costs for repairs after the warranty’s expiry and potentially higher monthly payments, affecting cash flow. Contrary to leasing a car, financing a car is ideal for those who usually drive more miles than the average, generally enjoy keeping cars longer-term, prefer to pay off their purchase in full, and typically have more stable vehicle needs for their lifestyles.

Leasing a Car vs Financing – Comparison of Relative Costs

In the short run, on average, given all things equal, monthly payments for leasing a car are usually 30% – 60% lower than that of financing monthly payments. However, in some comparisons, financing as a whole may cost lower than leasing due to fewer fees and no monthly payments in the long term. Moreover, in the long run, leasing costs will always be higher than the finance costs, assuming that the buyer decides to keep the car after the finance contract ends. In this scenario, it is suggested that the vehicle be used until the end of its life or until repair and maintenance exceed a replacement vehicle’s cost.Car Leasing vs Financing – How it Affects Your Insurance

There is no difference between leasing or financing in terms of insurance – your insurance costs will not be affected. Your insurance cost is based on the following factors: an individual’s driving history, where the vehicle is driven, how long the car has been in use by the individual, and the type of vehicle. However, note that the leasing or financing company will be listed on the insurance policy to ensure that the car’s investment is protected. Naturally, when an accident involving the vehicle occurs, the insurance company will primarily pay the amount owing to the financing or leasing company. If the car is worth more than the amount owed, you will receive the remainder. However, if it is worth less than the amount owed, gap insurance will cover the costs.

Owners must indicate that their vehicles are for business purposes, although the insurance premiums may be higher in this case. Suppose an individual fails to inform the insurance company that the vehicle is for business use. In that case, the insurance company may refuse to cover the costs in the event of a claim.

Leasing a Car vs Financing for Business Owners

Business owners are exposed to various tax advantages, including the tax benefits of using your vehicle for business purposes. As such, this plays an essential factor in deciding whether to finance or lease a vehicle. There are strict guidelines outlined by the Canada Revenue Agency (CRA) that must be ensured before deducing any vehicle expenses.

Car Leasing vs Financing – Tax Benefits in Canada

When leasing a car, the amount of tax deduction that can be made is directly related to its proportional use for its business to generate income. For example, if the vehicle is being used 40% to generate income, then only 40% of the lease cost can be claimed. Additional expenses related to using a car that can be claimed, up to the proportion of vehicle usage, are insurance premiums, gas, repairs and maintenance, and licensing fees. The type of vehicle used affects the amount of tax deduction that can be made; in particular, there is a maximum amount to how much lease costs can be deducted per month (currently capped at $800 + HST in Ontario). For any down payment related to a leased vehicle, it is not recommended to make a large down payment since you may not be able to deduct the full amount within the first year. Rather the down payment would be considered a periodic expense over the term of the lease.

When financing a vehicle, the tax claims differ from that of leasing. When purchasing a vehicle, the tax deductions depend on the amount paid at the time of the acquisition, whether the car was paid in full at the time of the acquisition, and whether the vehicle is financed or not. With no financing, when the car is purchased in full, the entire amount paid cannot be claimed, but rather it would be spread over the useful life of the vehicle. The amount claimable is based on a depreciation mechanism referred to as Capital Cost Allowance (CCA). The vehicle’s value goes into a CCA pool and gets reduced by a CRA determined percentage every year. Your prior year ending pool balance is the current year pool balance eligible for CCA in the subsequent year. In effect, over several years, the pool gets reduced. Note that the vehicle’s proportion for business purposes is also a factor for the vehicle’s depreciation calculation. To avoid situations where luxury vehicles are used for business purposes, generally, the maximum cost of a car eligible for tax deductions is up to $30,000; any excess about this amount cannot be claimed towards your CCA pool balance. In certain cases however, the government has introduced new incentives for businesses that are buying/financing energy efficient vehicles like electric vehicles or hybrid vehicles.  In such cases, the maximum amount that a business can add to the CCA pool for such qualifying energy efficient vehicles would be up to a base price of $55,000.

Apart from depreciation, when financing the vehicle, the portion of interest paid on loan is eligible for tax deductions – to a maximum per month. Similar to leasing, up to the proportion of vehicle usage, insurance premiums, gas, repairs and maintenance and any licensing fees may be claimed when financing a vehicle.

Leasing a Car for Business – Non-Tax Costs

When leasing a car for business, it is crucial to consider the related costs associated, unrelated to taxes.

At the time when the car is to be returned to the dealership at the end of the lease term, it is required by you to ensure that the car is in stable condition by performing the necessary repairs. Typically, the amount of kilometres available on a leased car is limited, and there are charges on additional kilometres used. Lastly, an essential cost factor to consider is the interest rate stated in the lease and billed on the car loan.

Lease a Car vs Financing in Canada with Bad Credit

Bad credit will result in a more complicated process, regardless of whether you decide to lease or finance a vehicle. With poor credit history, the monthly payment amounts and rate will be relatively higher than those with better credit.

Compared to financing, a low credit score would be more detrimental to a person who wants to lease a car. This is because you would be unable to use the car as collateral for the contract since you do not own it. As a result, it is highly recommended to maintain a good credit history as it is vital in leasing a car to ensure lower monthly payments and smaller down payments would be required.

However, with financing, it would be difficult to qualify for a loan with a poor credit history, but the option to use the car as collateral is an option that can help in appealing the loan. As such, with regards to bad credit and car leasing vs financing, it is suggested that you go with financing. Although this is the pricier alternative, it is the more viable option in both the short and long term.

The decision on which method of purchasing a car is better, as mentioned above, depends on the individual as both options have their advantages.

If you have any questions or want to connect with an Accountant at SRJ Chartered Accountants to discuss your particular circumstances, please feel free to contact our offices at info@srjca.com or by phone at 647-725-2537

FAQ’s

1. Is it a good idea to lease a car?

To determine whether leasing a car is a good idea depends on your situation and whether leasing would be suitable for you. Generally speaking, leasing would be ideal if you desire to drive a new car for a couple of years, have a lower monthly payment and prefer the peace of mind of a warranty covering the car and its features. However, with leasing, you are restricted in using the vehicle, how much you can drive it, and always have a monthly car payment.

2. What is the difference between leasing and financing a car?

There are differences between leasing and financing a car, which is thoroughly discussed throughout the article. On a high level, the main difference would be that you typically have lower monthly payments with leasing that never ends and exchange your car every couple of years.

On the other hand, with financing, the car’s ownership is in your name, and you typically pay higher monthly payments to pay off the debt of the car, then be payment-free, and can personalize the car as you own it.

One other noticeable difference in the tax benefits between leasing or financing is that when you are leasing a vehicle, you can expect a steady/recurring deductible amount over the course of the lease.  What you pay and deduct in year one will in most cases be the same amount that you pay and deduct in year four.  However, in the case of most vehicle purchases/financed, you would typically claim a higher amount of CCA in years one and two (as you would have a larger CCA pool to claim a percentage deduction from) as opposed to years three and four whereby there is less CCA left to claim.  As such, financing often provides more tax benefits in the first few years and then less in future years as opposed to a lease that normally provides the same amount of tax benefit over the course of the lease.

3. Is leasing a car a waste of money?

Leasing a car typically may involve lower monthly payments compared to financing as you are essentially paying to rent a vehicle as opposed to buying it. Reviewing the leasing features and your lifestyle will help you determine if this is a good option for you.

4. Is it easier to get a car loan or lease?

Both are equally attainable. However, accessibility is highly dependent on your credit score. Poor credit will result in a process with more difficulty, regardless of whether you decide to lease or finance a car. With a poor credit history, the monthly payment amounts and rate will be relatively higher than those with better credit. However, In comparison to financing (obtaining a car loan), a bad credit score would be more detrimental to a person who wants to lease a car.

5. Can you lease a car with a 550 credit score?

When leasing a car, there is no minimum requirement. Credit scores are checked as a precaution by dealerships. Generally, 700 is an ideal credit score when leasing a car, a credit score in the 600’s is also acceptable to receive a good leasing offer, and with a score below 600, you are still able to obtain a lease. However, the monthly payment amounts and rates will be relatively higher. But the lease can help you build your credit so long as you don’t miss a payment.

6. Does leasing a car build your credit?

Given you make the monthly payments on time regularly, leasing would build your credit.

7. What credit score do car dealerships use?

When leasing a car, there is no minimum requirement. Credit scores are checked as a precaution by dealerships but are used to determine terms of the leasing or financing agreement.

8. What credit score is needed for a car loan?

There is no specific score needed; however, a better score can help you obtain better financing agreement terms and newer cars. On the other hand, with a lower score, you can still attain a car loan. Similar to leasing; generally, 700 is an ideal credit score, a credit score in the 600’s is also acceptable to receive a good financing offer, and with a score below 600, you are still able to obtain a car loan, however, the monthly payment amounts and rate will be relatively higher.