Probably the single most-asked tax question I get from small business owners is this one:
Is it better to lease or buy a vehicle for my business?
At some point back in the day, business owners out there started talking about how they were getting better tax savings by leasing a vehicle than they were by buying it. Lease costs are fully deductible as paid, but the capital cost of a purchased vehicle is only deducible based on the percentage rate that CRA determines (up to a maximum) so you get a better deal, they said.
Apparently that rumor still circulates among new business owners today.
Lease vs. Buy Tax Deductions
In actual fact, leased vehicle costs are only deductible up to an annual maximum which is partly determined on percentage of business use. And in 2018 the government introduced the Accelerated Investment Incentive Program (AIIP), which was designed to make the purchase of capital equipment (including business-use vehicles) more attractive to buyers by ensuring that businesses can deduct a higher percentage of the cost upfront.
For this reason, there are a number of factors that go into determining whether it is better to buy or lease a vehicle for business purposes:
- Is your business incorporated? If not, then you are paying for your vehicle purchase with after-tax personal dollars (which are more expensive than after-tax corporate dollars), so it may make more sense to lease
- Does your vehicle cost more than $30,000? And if so, is it designed to transport passengers alone or does it transport equipment? Both of these questions can determine how much you are allowed to deduct if you purchase the vehicle.
- Is your vehicle used for business less than 90% of the time? If so, the percentage of personal vs. business use may determine whether it makes sense to have your corporation purchase or lease the vehicle. (And remember: driving to and from your primary place of work such as an office is considered personal driving for tax purposes, not business driving!)
In the end, the answer isn’t necessarily straightforward – and tax considerations should be secondary to cash flow.