One of the most common questions for self-employed individuals (including owner operator truck drivers) is whether to lease or buy a vehicle.
In this review, we will provide you with facts you need to be aware of in order to make the most appropriate decision given your distinct case.
As a self-employed individual, you incur expenses on your vehicle for business related matters such as visiting your clients or delivering goods, etc. But the question is, are you better off taking a finance or a lease? M7 Tax will help you understand both options through the following summary.
Whether you are leasing or financing (buying), you can deduct the business percentage of your gas, oil, insurance, parking fees, registration fees, repairs, tires, loan interest, etc. for both leased and purchased vehicles. Simply because you are using your vehicle for business related matters.
As for leasing, you can deduct the business percentage of your lease payments. For leased vehicles, the limit on the monthly lease payment that you can deduct is $800 per month plus HST, which works out to a maximum of $9,600 in expenses that are tax-deductible annually. You should definitely consider this when choosing to either buy or lease your business vehicle.
Buying a Vehicle on the other hand, and in the case of paying you vehicle's price upfront, you do not pay interest. Therefore, CRA would be looking at your car’s depreciation cost at a rate decided by the CRA. This is different from leasing because when you’re leasing a car you don’t own it. So, you can’t depreciate its worth and claim any Capital Cost Allowance or what we all refer to as depreciation.
It is important to note that depreciation rate varies depending on many factors from one vehicle to another. There are also different classes for different kind of vehicles. Our experts are ready to review your specific case and provide you with analysis of the best case scenario for your specific case inline with CRA regulations.
Finally, what if you took out a loan in order to buy the car? In this case, you will be eligible to deduct the interest paid on the loan to a maximum of $300 per month of interest charges, the amount decided upon by the CRA.
In the following section, we will review other factors that are to be taken into consideration in the decision making process. Such as:
The number of miles you drive each year. Leased cars are often charged extra fees for kilometers driven over 20,000 per year.
How long you keep a car. If you like to get a new car every 2 to 4 years, choose lease. If you prefer to keep the car till it dies, then choosing buying.
How much do you want to spend on your monthly payments? Compare the option to lease and the option to finance.
Plan your timing to buy or lease carefully: If you buy your business vehicle on 31 December of any given year, it will result in the same deduction available as a purchase on 01 January of the same year.
That said, you may be better off leasing or maybe better off buying depending on the variables mentioned earlier.
M7 Tax is offering a free consultation session to help you decide whether to lease or buy, please connect with us to claim your free session.