Buy or Lease a Car?

Should I buy or lease a car is the question.

Is it better to buy a car under your name personally, or through a corporation? And is it better to lease – or borrow money to acquire a vehicle?

These are the two most common questions we hear from small businesses and independent consultants all the time – here at ca4it – when it comes to buying a car.

So, if you’re among those who are wondering what the answer to those questions might be, let me help you out.

First, let’s address the question about whether it’s best to lease or buy. While most people believe this to be an accounting question, there are other factors that have a greater impact on your decision, like for example: do you want a brand new car or would you be a happy with a car that’s is a few years old?  And what are the current finance and lease rates? How many kilometres will you drive? And finally, are you the type of person that will drive the same car for twelve years – or do you want a new car every few years?

These are the questions that should ultimately affect your decision. With regards to the tax deduction, there are two methods for calculating the automobile expense: One: mileage – and two: actual expenses. In most situations the mileage usually nets a higher deduction.  If you use the mileage rate the deductions is the exact same whether you lease or buy. However, if you have an expensive lease – or simply don’t drive much – then using actual expenses may result in a greater deduction. So lets evaluate the differences in deductions if use the actual method.

With leases you can deduct the total amount of the lease – up to a maximum of $800 a month (assuming you are based Toronto as an example) . With a purchase, you can deduct a percentage of  the purchase price of the vehicle each year due to the vehicle’s depreciation in value.  The maximum amount that can be depreciated for a passenger vehicle is $30,000. The vehicle can be depreciated at a rate of 15% in the first year, and 30% of the remaining balance for each subsequent year.  While there is a difference between these two methods the bottom line savings is marginal.

If you’re going to buy or lease a car, we usually recommend that you do so under your own name and have your corporation reimburse you for its use of the vehicle.  If the car is in a company name – and you use the car personally – you must reimburse the company for your personal use percentage of expenses – or take a taxable benefit into your personal income. You’ll also need to calculate a gain or loss when you sell the vehicle: this means more paperwork for your accountant and higher accounting fees for you. One of the great benefits of a corporation is limited liability. However, if your assets are owned by the corporation, you’ve limited the liability to all of your assets – which defeats the purpose.

When you’re making major life decisions such as purchasing or leasing a vehicle, we highly recommend you contact your accountant to ensure you’re making the best decision. If you have any questions about automobile expenses – or are considering the lease or purchase of a new car – please feel free to contact me directly so we can discuss your particular situation, and assist you in making the right decision – for you.

Andrew Wall

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