No Credit Leasing Canada

One of the most common questions I get from clients is on the subject of buying or leasing their next car. The simple answer is “it depends”.

From an income tax perspective, if you are eligible to deduct automobile expenses from either your business or employment income the deductions available over time are the same.

What you spend on the cost of your car is deducted at a rate decided upon by the Canada Revenue Agency (CRA). The deduction is called Capital Cost Allowance or you may know it better as depreciation. So long as you purchase a car, new or used, for $30,000 or less before PST and GST, you can deduct 15% of the cost in the year you buy the car and 30% of the declining balance for every year after that. Based on this formula, eventually, you will claim 100% of the cost of your car. If you purchase a car for more than $30,000 you will not be able to make a claim on any excess amount paid. However, if you have a loan on the car purchased, you will be eligible to deduct the interest paid on the loan to a maximum of $300 per month of interest charges.

If you lease your car, you are able to deduct the monthly lease payments so long as they do not exceed $800 per month plus PST and GST. In rare cases it may be lower but in general, CRA sets the limits ensure that the level of deductions for leased automobiles is similar to that for purchased ones. The detriment in a lease is that the initial down payment many people make, or are required to make, is not deductible at all for this calculation.

The above being the case, the benefit of one over the other hinges on the timing of your purchase, the type of car owner you are or would like to be, and your overall financial circumstances.

The timing of the purchase is important, as a purchase on December 31 of a year will result in the same deduction available as a purchase on January 1 of the same year. On the other hand, a lease entered into earlier in the year will result in more months of payments and thus a higher deduction for the year versus a lease entered into in December will result in no deduction as no payments have been made on the lease for the year.

The type of car owner that you are is important because you may be a person who drives few kilometres in a year and enjoys driving a new car. Why not then lease a car and in effect rent a new car all the time! However, if you drive a car until it’s dead, you should always buy your car as your cost of leasing will far outweigh your borrowing costs in the long run. Let’s take the example of a car that costs you $500 per month on a lease, no down payment and a buy out after 3 years of $10,000. If you can buy this same car for $25,000 with 0% financing, you would save yourself $3,000 and that is assuming, you don’t drive over the allowable kilometres in the year and have the $10,000 sitting in the bank in 3 years!

Finally, you’re over all financial circumstances may dictate what you should do. Using the above example, if your 0% financing is only for 3 years, your monthly payments would be $694 per month. If you do not have the extra $194 to spend on a car payment, then your only option is to lease.

Now that you know if you should buy or lease your car and what portion of those costs you can use for your deduction calculation, keep in mind that the final tax write off will be limited to the business use of the vehicle versus the personal use. If you use your car 80% of the time for business, only 80% of your monthly lease payments or your annual depreciation plus interest is deductible for tax purposes

For more information about Car Leasing for New Immigrants or Foreign Students in Canada visit www.autosourcefinancial.com. Auto Source specializes in all make leasing and Car, Truck and SUV loans for people with No Credit, Bad Credit too!