Should I Buy or Lease a Car?

A Detailed Analysis of the Numbers

Denise Batac and Ragu Rajaratnam
Article
| 1/5/2021
One of the first things that comes to mind for self-employed individuals is, “What can I write-off as an expense for my business?” Owner-managers who require a vehicle to carry on their operations can benefit from a tax deduction relating to the business use of their cars but the tax rules for deducting vehicle expenses are complex. Deciding whether to buy or lease a car may seem like a daunting decision but our experts, Denise Batac, CPA, CA and Ragu Rajaratnam, CPA, CA, breakdown the numbers to provide some clarity in the decision-making process and explain the tax implications that need to be taken into consideration.

Initial Factors to Consider

When determining whether to buy a lease a car, there are a few important aspects to first take into consideration before making your decision:

Typical Mileage
In a lease agreement, if you already know that you won’t meet the mileage limits set out in the lease terms, consider the fact that you would likely end up paying for mileage you won't ever use. If that’s the case, financing would be the more fiscally responsible decision.

Warranty
Typically, during the lease or finance term of a vehicle, the car is covered through a warranty. Some individuals prefer to have a car that is always under warranty, so in case something goes wrong, the car is always covered under the agreement. If you purchase a vehicle, you’re generally only able to get a three to four-year warranty, so for the latter half of the life of the vehicle, the owner will be the one responsible for any unforeseen issues, usually out of their own pocket.

For those who want to avoid the risk of dealing with and paying out of pocket for any future vehicle issues, leasing would be the ideal option since the vehicle would remain under warranty for the duration of your lease.

Personal Preference
Some people love to have the latest and greatest when it comes to their vehicle and flip their cars every few years. Others enjoy not having the responsibility of negotiating a trade-in or resale of their car. If that’s the case for you, then leasing is certainly going to be your best option. If you’re the type of individual who likes to own a car for a longer duration and not constantly be negotiating terms of leases, then purchasing or financing the vehicle would make sense for your situation.

Fig. 1 – Overview of Buy vs. Lease Analysis

buy or lease

Notes

  • Assuming the company is registered for GST/HST, input tax credits ("ITC") could be claimed on the cost of the vehicle. Therefore, GST/HST on the vehicle is not included as part of the additions to the CCA class.
  • The corporation pays a reasonable allowance to the owner-manager for the business-use of the vehicle. This amount is deductible for the corporation but not taxable to the owner-manager.

Calculations and Assumptions

  • Our calculations are based on the following figures:
    • Manufacturer Suggested Retail Price (“MSRP”) of the vehicle is $48,495;
    • Lease rate is 1.98 per cent APR and finance rate is 0.98 per cent APR;
    • Lease kilometer allowance is 16,000 km annually;
    • Lease down payment is $5,000, with monthly payments of $430 over a lease term of 48 months;
    • There are two identical leases signed consecutively with the same lease terms;
    • Financing down payment is $5,000, with monthly payments of $924 over a lease term of 48 months;
    • Total km driven in a year is 16,000 km, with 10,000 km driven for business purposes; and
    • Annual operating expenses of the vehicle are $5,000.
  • It is assumed that the corporate income is subject to the current enacted corporate general rate of 26.5 per cent, and that personal income is subject to the highest rate of 53.53 per cent.
  • It is assumed that the corporation is registered for GST/HST purposes.
  • It is assumed the corporation is required to pay an additional salary to the owner-manager to pay the taxes on the taxable benefits received from the personal-use of the vehicle where the vehicle is either financed or leased by the corporation.
  • It is assumed the corporation will need to pay a salary to the owner-manager to cover the operating costs of the vehicle.

Which Option Is Right For Me?

As shown in the analysis, regardless of whether you are going to lease or purchase a vehicle, doing it through a corporation is much better than paying out a salary to do it personally.

The differences between leasing and purchasing within a corporation are insignificant and ultimately come down to the three key considerations discussed above (typical mileage, warranty, and personal preference).

The analysis also shows financing a car personally is much better than leasing personally if using corporate funds to do so. The difference between the two depends on the resale or trade-in value of the purchased vehicle.

The decision to buy or lease a car, and whether to do it personally or through a corporation, may seem overwhelming but our team of tax and advisory professionals are ready to help you every step of the way. Our experts will provide strategically tailored advice so that you’re confident in making the right choice for your specific situation.

Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Contact your Crowe Soberman advisor for more information.

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Denise Batac
Denise Batac
Partner, Tax
Denise Batac Professional Corporation
Ragu Rajaratnam Crowe Soberman
Ragu Rajaratnam
Partner, Audit & Advisory
Ragu Rajaratnam Professional Corporation