We are often asked by clients whether they should lease or purchase their vehicles (either outright or using a loan). We have tried to distill the decision down to a few rules of thumb.
In general, leasing is more expensive than buying because the leasing company accepts a portion of the depreciation risk.
The advantages of leasing are:
1. Short term cash flow is easier as you can load up the back end of the lease.
2. No worries about selling the vehicle at the end of the lease.
3. Higher tax deductions in the first year of the lease.
The advantages of owning are:
1. You get the benefit of the vehicle after it had been paid for. So if you tend to own vehicles for more than about 3 years, you get a longer benefit than with a lease.
2. The Interest rate tends to be lower (although this is fact specific to each situation).
3. You can borrow the full price of the vehicle and get the GST input credit refunded.
So if you only want to own the vehicle for a relatively short term and don’t mind paying a bit of a premium for this privilege, then leasing is the way to go. If you want to own the vehicle for a longer period of time and don’t mind having to figure out how to dispose of it at the end, then you should buy.
Leasing companies often brag about the tax advantages of leasing but we think the advantages are exaggerated. If you lease, you deduct the lease payments. If you borrow, you deduct the loan interest and the depreciation. So the pattern of deductions is different but the cumulative deductions should be about the same. In general, we find that you deduct more in the first year of a lease, less in the second and third years and more in the fourth and fifth years. But, at the end of the day you deduct what you pay and you wouldn’t take on a more expensive lease just to get a higher tax deduction.
Experience shows that clients (and car dealers) often overstate the tax aspects of leasing rather than focusing on the more important economic and practical aspects.
Ask us for help next time you are faced with this decision. We can summarize the financial aspects for you in a format that is understandable and objective.
Written by: Doug Johnstone, CA