Buy or Lease a Vehicle?

Now that you've decided it's time for a new vehicle, should you buy or lease?

"The one big advantage of buying a vehicle is that you can say, ‘this is my asset', says Chartered Accountant Anil Chawla, a Partner with Deloitte & Touche LLP in Mississauga. "The value of the vehicle becomes part of your net worth."

While buying a vehicle does give you an asset, it's one that can depreciate by up to 30 per cent during the first year of ownership.

"When you buy, you are using a liquid asset to buy a long-term asset, so you have lost the opportunity to use that money for something else," says Chartered Accountant Rick Gargarella, a Partner with Collins Barrow LLP in Vaughan. "You are also buying an asset that is going down in value."

Depending on the type of vehicle, buying can often be more expensive than leasing. And over time, once the vehicle is no longer under warranty, repairs can be very costly.

"One benefit of leasing is that it usually means lower monthly payments, because they are based on the original price of the vehicle minus the residual value, amortized over the length of the lease," says Chawla. If you use the vehicle for business, you may also be able to deduct lease payments, subject to limits set out by the Canada Revenue Agency (CRA)."

Another important benefit of leasing is that the vehicle is usually covered by a warranty for the duration of the lease. "In addition, you don't have to worry about selling it—you can walk away at the end of the lease," adds Gargarella.

But leasing has its drawbacks, as well. "If you lease, you can drive a car for 30 years and have no equity," says Chawla. "Leases come with mileage limits, that if you exceed, can be very expensive, and if you want to get out of the lease before its scheduled end, there are significant penalties."

Gargarella points out that lease costs, "may be higher than traditional financing, but it's best to shop around because of the deals being offered these days."

When deciding whether to buy or lease you should also consider how you will use the vehicle.

"If you want to drive a higher-end vehicle, use it for business purposes and put lots of kilometres on it, then owning is the way to go," suggests Gargarella. "That way you don't have to worry about a lease's mileage limit."

If your company is buying a vehicle for you to drive, keep in mind that you will be subject to a significant taxable benefit, based on the vehicle's original price. "So if you are going to drive a company-owned vehicle, make sure it is a new one, because the taxable benefit added to your income will be based on its original cost," says Chawla.

If you take out a loan to buy a vehicle for business purposes, any interest on that loan can be deducted within prescribed limits set out by the CRA.

So who should buy and who should lease?

"If you have the cash and don't have to worry about bank financing, you should buy," advises Gargarella. "You will own the asset and can put a lot of kilometres on it."

Consider leasing if you don't have the cash to buy up front but can handle monthly payments. "If you want lower monthly payments, are a low-mileage driver and don't want to worry about reselling the car, go ahead and lease," says Chawla.

Before making a final decision, consult a Chartered Accountant.

"A CA will understand your financial commitments and help you calculate the true costs of the purchase versus financing, versus lease options," says Gargarella.

Chawla adds that you can always negotiate some of the terms of your purchase or lease, particularly if the vendor has excess inventory.

"You can negotiate lease terms and penalties and buyout options," he says. "But be sure to shop around and compare, whether you lease or buy."



Brought to you by the Institute of Chartered Accountants of Ontario.