As a public accountant advising personal tax clients and corporate tax clients, one of the most common questions i am asked is whether the vehicle should be leased or purchased.
This answer can be simple and complicated at the same time. There are many things to consider depending on the individual’s circumstances.
I prefer starting with the simpler approach to answering the question. For a non business owner, for the typical family member it’s about getting the best car to match your life style for the best price.
Cash flow is often a primary factor as many individuals don’t necessarily have the surplus cash to go out and buy the car they want. So often i start with the question, is the monthly payment a main concern, and usually the answer is yes. The client usually is restricted by what they can afford monthly. If that is the case then leasing is more often than not the easier route to go from a cash flow basis and our discussion is over.
As long as the interest rate implicit in leasing is not too much different from the rate in financing, then again leasing is easier on the wallet per month.
Remember with leasing you don’t own the car, you are really just renting it and that’s why your monthly payment is less than if you were financing the purchase. The lease is based on value of the vehicle less the trade in value and the financing is based on the value of the vehicle.
Many people, like myself get bored of cars quickly. If you like something different every couple of years then a lease makes more sense, since you can theoretically just walk away from the car once the lease term is complete. If you enjoy keeping a car for a long time, leasing can also still be your preferred method, as you know the state of the vehicle, that it was cared for and looked after, so that when you buy it out at the end of the lease you have comfort in the quality of vehicle you are getting. If you decide to sell after that, there is a good chance you could get more for the sale than what you paid the leasing company for the buyout. For those that like to keep the car for a very long period, then often after you crunch the numbers, purchasing can often be better.
With leasing you are responsible for regular maintenance and the vehicle will be inspected when turned in. You should make yourself aware of the repair and kilometre allowances allowed under the terms of your contract, as this will keep the surprises to a minimum at the end of the lease. If you put a lot of kms on a car then purchasing may be the way to go, as you won’t be subject to the mileage penalty.
This article purposely excluded tax aspects of the lease vs buy decision. Suffice it to say, for the most part, CRA has written the rules in such a way that at the end of the day, taxpayers should be indifferent to the tax impact of leasing or buying. If one was much better than the other you would find the public gravitating to the more tax preferred or beneficial method, of obtaining a car and that’s just not the case.
This article is not meant to replace professional advice and i encourage you to do so to help you with your purchase decisions.
- Nick Sawrantschuk, CPA, CA, LPA.