Tax Breaks: Lease Early Buy Late

Couple with Bills

The decision to lease or buy is important and often misunderstood, not to mention swirling with math, terminologies and misconceptions. Some consumers discount the idea of leasing right from the get-go, while others find it to be the most worry-free and confident way to get behind the wheel.

Buying is good, and so is leasing. It all depends on a long list of factors and considerations.

Business owners may now have another factor to consider in the debate between buying and leasing a car: the time of year they decide to bring that gleaming new ride into action. Because of the intricacies of Canadian tax law, certain times of year may be easier on your tax bill for leasing, and others, for buying.

Laurie Rossignol, owner of Rozzi Consulting, explains, “Where a leasing arrangement has a down payment, timing should be considered depending on the amount of the monthly lease. You would want to make sure that you make as much of the down payment deductible as possible.”

The maximum claim for a leased vehicle, according to Canadian tax law, is $800 per month – so starting a lease late in the year may limit the portion of the down payment a business owner can expense.

“If the lease payment is $500/month and the down payment is, say, $3,000, you wouldn’t want to start this deal in December. That’s because all you could claim of the $3,000 down payment is $300 ($500 + $300 to monthly max at $800). If this deal started in, say, March, you would have 10 months × $300 + 10 months × $500 to expense. This way the whole down payment could be expensed.”

But what if you’re buying?

The “buy late” theory is based on the CRA’s policy regarding depreciation. In simple terms, when claiming depreciation (the folk at the CRA call it Capital Cost Allowance), 30 percent per year depreciation is typically used, but only half of that depreciation is available in the year you buy the vehicle. That’s because of a CRA policy to treat every vehicle purchase as if it occurred mid-year.

“If you were to buy a vehicle on Dec 31st for say $20,000, your expense for the first year would be $3,000 ($20,000 × 30% × 0.5). The next year, you would get $30,000 − $3,000 = $27,000 × 30% = $8,100. If you were to buy the same vehicle on Jan third, you would still get the same deduction. Ultimately, it’s much better to buy late in the year, and get the benefit right away.”

So – new rule of thumb? It’s Lease Early, Buy Late.

Note that, according to Rossignol, the examples above are for a business with a December 31 year-end, and that they may vary between businesses and corporations, or based on other factors. Business owners are advised to double check their decision with their accountant or tax advisor.

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Justin Pritchard
Justin Pritchard is a native of Windsor, Ontario – though he’s called Sudbury his home for the past 20 years. Justin is a full-time auto writer, consultant and presenter of EastLink TV’s AutoPilot. His work can be seen weekly in numerous outlets across the country. When not writing about the latest new models and industry trends, you’ll probably find him fixing his 1993 Toyota MR2 GTS.
Justin Pritchard

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