When leasing a car, the amount of tax deduction that can be made is directly related to its proportional use for its business to generate income. For example, if the vehicle is being used 40% to generate income, then only 40% of the lease cost can be claimed. Additional expenses related to using a car that can be claimed, up to the proportion of vehicle usage, are insurance premiums, gas, repairs and maintenance, and licensing fees. The type of vehicle used affects the amount of tax deduction that can be made; in particular, there is a maximum amount to how much lease costs can be deducted per month (currently capped at $800 + HST in Ontario). For any down payment related to a leased vehicle, it is not recommended to make a large down payment since you may not be able to deduct the full amount within the first year. Rather the down payment would be considered a periodic expense over the term of the lease.
When financing a vehicle, the tax claims differ from that of leasing. When purchasing a vehicle, the tax deductions depend on the amount paid at the time of the acquisition, whether the car was paid in full at the time of the acquisition, and whether the vehicle is financed or not. With no financing, when the car is purchased in full, the entire amount paid cannot be claimed, but rather it would be spread over the useful life of the vehicle. The amount claimable is based on a depreciation mechanism referred to as Capital Cost Allowance (CCA). The vehicle’s value goes into a CCA pool and gets reduced by a CRA determined percentage every year. Your prior year ending pool balance is the current year pool balance eligible for CCA in the subsequent year. In effect, over several years, the pool gets reduced. Note that the vehicle’s proportion for business purposes is also a factor for the vehicle’s depreciation calculation. To avoid situations where luxury vehicles are used for business purposes, generally, the maximum cost of a car eligible for tax deductions is up to $30,000; any excess about this amount cannot be claimed towards your CCA pool balance. In certain cases however, the government has introduced new incentives for businesses that are buying/financing energy efficient vehicles like electric vehicles or hybrid vehicles. In such cases, the maximum amount that a business can add to the CCA pool for such qualifying energy efficient vehicles would be up to a base price of $55,000.
Apart from depreciation, when financing the vehicle, the portion of interest paid on loan is eligible for tax deductions – to a maximum per month. Similar to leasing, up to the proportion of vehicle usage, insurance premiums, gas, repairs and maintenance and any licensing fees may be claimed when financing a vehicle.
Leasing a Car for Business – Non-Tax Costs
When leasing a car for business, it is crucial to consider the related costs associated, unrelated to taxes.
At the time when the car is to be returned to the dealership at the end of the lease term, it is required by you to ensure that the car is in stable condition by performing the necessary repairs. Typically, the amount of kilometres available on a leased car is limited, and there are charges on additional kilometres used. Lastly, an essential cost factor to consider is the interest rate stated in the lease and billed on the car loan.
Lease a Car vs Financing in Canada with Bad Credit
Bad credit will result in a more complicated process, regardless of whether you decide to lease or finance a vehicle. With poor credit history, the monthly payment amounts and rate will be relatively higher than those with a better Tax credit.
Compared to financing, a low credit score would be more detrimental to a person who wants to lease a car. This is because you would be unable to use the car as collateral for the contract since you do not own it. As a result, it is highly recommended to maintain a good credit history as it is vital in leasing a car to ensure lower monthly payments and smaller down payments would be required.
However, with financing, it would be difficult to qualify for a loan with a poor credit history, but the option to use the car as collateral is an option that can help in appealing the loan. As such, with regards to bad credit and car leasing vs financing, it is suggested that you go with financing. Although this is the pricier alternative, it is the more viable option in both the short and long term.
The decision on which method of purchasing a car is better, as mentioned above, depends on the individual as both options have their advantages.