[aspiring335]

I know it's always a controversial topic, but people always seem to be asking about it, so here's some info. on the tax benefits / implications of leasing, specifically for Canadians... Note that this is not intended to be financial advice of any kind and I'm certainly not a financial professional; I simply thought it might come in handy. Feel free to add / correct in the thread.

The Basics

The maximum deductible payment for a lease is $800 per month, before GST and Provincial taxes.

The maximum value of a vehicle you can claim depreciation for is $30,000, again before taxes.

You can of course lease or buy a more expensive vehicle, but you will only be able to deduct a percentage of the first $800 / month of the lease payment, or a percentage of the depreciation of the first $30,000 of the price of the car you buy.

You cannot count kms driven to and from work as "business use".

If you receive a mileage allowance, car allowance or other direct compensation from your employer for your vehicle, then that will reduce the amount of your allowable deduction.

Lease vs. Buy?

People seem to get really riled up about this, so I thought it would be helpful to provide the numbers based on the following scenario:

30,000 kms total per year
15,000 kms (50%) business use
$800 / month lease payment vs. $30,000 purchased vehicle, bought over 36 months with a loan at 5.9% interest. That rate seems to be fairly representative of what's available for a typical car loan, although obviously there are much better deals to be had from particular manufacturers subsidizing used car finance rates
Individual taxed at the highest rate (46%)

Over 36 months, the leased vehicle will cost $28,800, and your deduction will be $14,400. At 46% that translates to tax savings of $6,624.

Here you've spent $28,800 and saved $6,624, for a net outlay of $22,176.

The purchased vehicle will cost $32,814, and your deduction will be calculated by the depreciated amount of the capital cost of the vehicle attributed to business use. In this case, we're talking about 30% depreciation calculated using the declining balance method:

Year 1: $30,000 * 0.30 = $9,000
Year 2: $21,000 * 0.30 = $6,300
Year 3: $14,700 * 0.30 = $4,410

You can deduct 50% of this depreciation, for a total deduction of $9,855. At a 46% tax rate you're talking about savings of $4,533.30 over three years.

So obviously by leasing in the above scenario you have a larger possible deduction for a smaller cash outlay and you've been able to drive a much nicer vehicle over the course of the 36-month term (most likely a car that would sell for well over $50k, depending on the residual). But by buying you still have an asset that even assuming it really has depreciated 30% annually, is worth over $10k. Most $30k cars don't lose $20k in value over three years.

By buying you've spent $32,814, recouped $4,533.30 in tax savings and have an asset worth at least $10,290. That puts you at a net position of $17,990.70.

Through this comparison, you're just over $4k ahead by buying, probably more if as is likely the vehicle is actually worth more than the $10,290. In turn, you now own the vehicle outright, but can continue to deduct its depreciation until its value using the DBM is effectively zero. On the downside you have driven a pretty mediocre car and had the life sucked out of you as a consequence. Well, I'm kidding about that last part, sort of...

Final Thoughts

You can certainly reduce the amount of tax you owe more by leasing than by buying, over the three years of a lease vs. a car loan, at least in the simple scenario outlined above. However, it will probably cost you more overall.

For most of us, the decision is a lot more about what car we want to drive and how much we're comfortable paying each month.

Very few people actually drive more than 50% of their kms for what the CRA would truly consider "business use", with no compensation from their employer. Falsely claiming that you do and getting found out is just not worth it.

At a minimum, you have to keep good documentation, including a mileage log showing all trips with distances, date and time, and at least some basic context (e.g. the client you visited). If you get audited and can't produce a mileage log or other strong evidence of your business kms, it will really hurt your chances of having the CRA accept your deductions.

What I Would Actually Do

If you are able to do so, it is imho much better to have your business pay you a mileage allowance for every business km, which is then (a) not taxable income and (b) not related to the car you drive -- you can have the worst beater in the world that costs you nothing in payments and still receive a non-taxable mileage allowance.

In Canada you can receive 52 cents / km for the first 5,000 kms and 46 cents / km thereafter as a "win / win" -- i.e. not taxable income to you and directly deductible for the business. The business can choose to pay you any amount as a mileage allowance without it being taxable income to the individual, but it can only deduct up to these limits. For 15,000 business kms you can therefore have the business pay you $7,200 / year, whether you lease, finance or own your car outright

[doctor_vino]

wow.......thats unbelievable...... this information is golden!

i'm assuming you used some sort of financial analysis tool to come up with these calculations? or did you use an excel sheet? if its the latter, do you mind posting the excel file?

[aspiring335]

Originally Posted by doctor_vino

wow.......thats unbelievable...... this information is golden!

i'm assuming you used some sort of financial analysis tool to come up with these calculations? or did you use an excel sheet? if its the latter, do you mind posting the excel file?

No excel spreadsheet, but that is a good idea. Would allow people to have it reflect their tax band, and play with kms / business use percentage.

[Kelvin_mu]

great analysis asprings

[Alex_bm]

Compensating for mileage based on 15000 km/year equals to 7,200 based on your calculations, which translates to 600$ a month.

Leasing a car as per your example, equals 6600$ in tax savings. That's roughly 550$ a month.

Using the lease method you are also deducting unsurance, gas, maintenance and other related car ownership costs at 50% rate. Obviously these costs will vary. I would average the actual savings to 250$ a months.

Overall you got 800$ vs. 600$ in after tax savings. Running an old car would probably mean more maintenance and repair costs that would come out of your pocket and minimize the 600$ saving even more. Plus it would take more of your time to take care of it. Leasing a new car on the other side would provide you with a warranty and a piece of mind for your lease term.

I believe that in this specific case paying for mileage would not be the most effective way. With higher business related mileage the sutiation might change. But then again, if you are actually using the car for business purposese, you probably don't want to deal with it as less as possible from the first place.

Originally Posted by aspiring335

I know it's always a controversial topic, but people always seem to be asking about it, so here's some info. on the tax benefits / implications of leasing, specifically for Canadians... Note that this is not intended to be financial advice of any kind and I'm certainly not a financial professional; I simply thought it might come in handy. Feel free to add / correct in the thread.

The Basics

The maximum deductible payment for a lease is $800 per month, before GST and Provincial taxes.

The maximum value of a vehicle you can claim depreciation for is $30,000, again before taxes.

You can of course lease or buy a more expensive vehicle, but you will only be able to deduct a percentage of the first $800 / month of the lease payment, or a percentage of the depreciation of the first $30,000 of the price of the car you buy.

You cannot count kms driven to and from work as "business use".

If you receive a mileage allowance, car allowance or other direct compensation from your employer for your vehicle, then that will reduce the amount of your allowable deduction.

Lease vs. Buy?

People seem to get really riled up about this, so I thought it would be helpful to provide the numbers based on the following scenario:

30,000 kms total per year
15,000 kms (50%) business use
$800 / month lease payment vs. $30,000 purchased vehicle, bought over 36 months with a loan at 5.9% interest. That rate seems to be fairly representative of what's available for a typical car loan, although obviously there are much better deals to be had from particular manufacturers subsidizing used car finance rates
Individual taxed at the highest rate (46%)

Over 36 months, the leased vehicle will cost $28,800, and your deduction will be $14,400. At 46% that translates to tax savings of $6,624.

Here you've spent $28,800 and saved $6,624, for a net outlay of $22,176.

The purchased vehicle will cost $32,814, and your deduction will be calculated by the depreciated amount of the capital cost of the vehicle attributed to business use. In this case, we're talking about 30% depreciation calculated using the declining balance method:

Year 1: $30,000 * 0.30 = $9,000
Year 2: $21,000 * 0.30 = $6,300
Year 3: $14,700 * 0.30 = $4,410

You can deduct 50% of this depreciation, for a total deduction of $9,855. At a 46% tax rate you're talking about savings of $4,533.30 over three years.

So obviously by leasing in the above scenario you have a larger possible deduction for a smaller cash outlay and you've been able to drive a much nicer vehicle over the course of the 36-month term (most likely a car that would sell for well over $50k, depending on the residual). But by buying you still have an asset that even assuming it really has depreciated 30% annually, is worth over $10k. Most $30k cars don't lose $20k in value over three years.

By buying you've spent $32,814, recouped $4,533.30 in tax savings and have an asset worth at least $10,290. That puts you at a net position of $17,990.70.

Through this comparison, you're just over $4k ahead by buying, probably more if as is likely the vehicle is actually worth more than the $10,290. In turn, you now own the vehicle outright, but can continue to deduct its depreciation until its value using the DBM is effectively zero. On the downside you have driven a pretty mediocre car and had the life sucked out of you as a consequence. Well, I'm kidding about that last part, sort of...

Final Thoughts

You can certainly reduce the amount of tax you owe more by leasing than by buying, over the three years of a lease vs. a car loan, at least in the simple scenario outlined above. However, it will probably cost you more overall.

For most of us, the decision is a lot more about what car we want to drive and how much we're comfortable paying each month.

Very few people actually drive more than 50% of their kms for what the CRA would truly consider "business use", with no compensation from their employer. Falsely claiming that you do and getting found out is just not worth it.

At a minimum, you have to keep good documentation, including a mileage log showing all trips with distances, date and time, and at least some basic context (e.g. the client you visited). If you get audited and can't produce a mileage log or other strong evidence of your business kms, it will really hurt your chances of having the CRA accept your deductions.

What I Would Actually Do

If you are able to do so, it is imho much better to have your business pay you a mileage allowance for every business km, which is then (a) not taxable income and (b) not related to the car you drive -- you can have the worst beater in the world that costs you nothing in payments and still receive a non-taxable mileage allowance.

In Canada you can receive 52 cents / km for the first 5,000 kms and 46 cents / km thereafter as a "win / win" -- i.e. not taxable income to you and directly deductible for the business. The business can choose to pay you any amount as a mileage allowance without it being taxable income to the individual, but it can only deduct up to these limits. For 15,000 business kms you can therefore have the business pay you $7,200 / year, whether you lease, finance or own your car outright

[aspiring335]

Originally Posted by Alex_bm

Compensating for mileage based on 15000 km/year equals to 7,200 based on your calculations, which translates to 600$ a month.

Leasing a car as per your example, equals 6600$ in tax savings. That's roughly 550$ a month.

No, the tax saving of $6,624 is over the term of the lease (36 months), not annually.

[Alex_bm]

My bad.

And also 7200$/year is an actual after tax saving. It would be around 3000$.What's the monthly lease payment?

Originally Posted by aspiring335

No, the tax saving of $6,624 is over the term of the lease (36 months), not annually.

[aspiring335]

Originally Posted by Alex_bm

My bad.

And also 7200$/year is an actual after tax saving. It would be around 3000$.What's the monthly lease payment?

I don't understand what you mean? The $7,200 is not taxable income. You keep 100% of that. The monthly lease payment is also not relevant. You can pay yourself this allowance even if you have no car payment. It's simply a function of kms driven * rate per km.

[Alex_bm]

You get to keep $7,200 the same you get to keep $14,400. In terms of tax benefits it would be 46% of $7,200, the same way as $6,624 is 46% of 14,400.
I know that monthly payment does not affect your mileage allowance, just wanted to know for comparison between both options.

Originally Posted by aspiring335

I don't understand what you mean? The $7,200 is not taxable income. You keep 100% of that. The monthly lease payment is also not relevant. You can pay yourself this allowance even if you have no car payment. It's simply a function of kms driven * rate per km.

[alanchan]

Great write up
If you buy the car as oppose to lease, there is no mileage restriction.

[Alex_bm]

The more you drive the more of car value drops even when owned. Which eventually translates into more spending for you.
If you plan to keep the car for 6 years and more, buying it would be most probably the better way to go. 3 years or less, definetely leasing. 3 - 5 years, depends on all the factors.

Originally Posted by alanchan

Great write up
If you buy the car as oppose to lease, there is no mileage restriction.

[alanchan]

isn't it leasing is the same way as renting a condo or apartment?
you never get to own the item, you just paying for the use of it.
if you bought it then you are in control of the ownership.
I mean you can trade in or sell it anytime without the binding of a contract.
I wonder what percentage of the people here do? buy or lease?

[aspiring335]

That logic doesn't really make sense, in many ways.

Buying a new car is in no way a good investment because it's a depreciating asset. Nor is leasing, but either way you are paying for the depreciation. If you change cars every three years or so, then buying is unlikely to be any wiser an investment than leasing. The best thing to do is buy a two-year-old car and keep it for a decade. But most of us like shiny new things so we don't do that...

If you buy a new BMW with zero down or anything other than a very large downpayment, how are you in control? The second you drive it off the lot, the loan is more than the car is worth. That situation will probably stay the same for most of the term of the loan. Sure you can sell, but you'll be upside down.

And then the other thing to think about, related to your comment about buying real estate... Most people who "buy" real estate in Canada now are putting down virtually no money and amortizing over 35 years. They are paying down virtually no principal over the initial term of their mortgage (assuming it's five years), and buying at the very top of the market, a market that's in many ways driven by low interest rates, not by solid fundamentals.

Then you've got the woeful state of new condo construction, which will almost certainly lead to a lifetime of special assessments. Property taxes will be going up because all levels of government, including municipalities, seem to be so deep in debt they need some kind of reality TV-style intervention.

And of course interest rates will rise over the next few years. Anyone who can just afford his mortgage at 2.3% will find his payments very difficult at 6%. Low down payments = minimal / no equity in the property, and the potential for negative equity with just a modest softening in the market. Explain to me again how this is "buying" rather than "renting"? Isn't it just renting money for five years?

The really bad news? One of the reasons people talk about how stable the Canadian banks are is because virtually all of the risk in the mortgage market is offloaded to the taxpayer via CMHC insurance. Our current government wants the real estate bubble to continue no matter what, since it's what's making people feel better about the economy right now. They have no incentive to impose financial common sense at CMHC any time soon.

Who will be on the hook for this recklessness? Responsible, high-earning professionals like me!

Off topic rant over.

Originally Posted by alanchan

isn't it leasing is the same way as renting a condo or apartment?
you never get to own the item, you just paying for the use of it.
if you bought it then you are in control of the ownership.
I mean you can trade in or sell it anytime without the binding of a contract.
I wonder what percentage of the people here do? buy or lease?

[dpwr]

Originally Posted by alanchan

isn't it leasing is the same way as renting a condo or apartment?
you never get to own the item, you just paying for the use of it.
if you bought it then you are in control of the ownership.
I mean you can trade in or sell it anytime without the binding of a contract.
I wonder what percentage of the people here do? buy or lease?

tell that to people who used that money to invest into stocks back in march instead of buying car "cash"... they can buy 3+ bmws now because they had access to that buying power... not saying everyone did that that though but many

[OTK_KART]

Originally Posted by dpwr

tell that to people who used that money to invest into stocks back in march instead of buying car "cash"... they can buy 3+ bmws now because they had access to that buying power... not saying everyone did that that though but many

What about the people who invested into stocks last year before Sepetember instead of Buying car "cash" How many BMWs can those people buy now????

No one will be poor if people can make their investment based on History.

[dpwr]

Originally Posted by joech

What about the people who invested into stocks last year before Sepetember instead of Buying car "cash" How many BMWs can those people buy now????

No one will be poor if people can make their investment based on History.

true

[ians]

Originally Posted by joech

What about the people who invested into stocks last year before Sepetember instead of Buying car "cash" How many BMWs can those people buy now????

No one will be poor if people can make their investment based on History.

Yup, I have all my money sitting on side line and keep waiting the market crash for over 3yr but when it really happened! I have no gut to get into the market (actually, was too greddy... want it to drop more) on March, so end up I still have all my money sitting on the 2.5% GIC....

BTW, I lease my 335i because I dun trust the reliabilty of BMW. I dun mind to pay more to give myself a piece of mind that I can return the junk back to them. I learn my lesson on my E46. The own my E46 for 9yr, the total amount of ownership of it is more than leasing a new E46 every 3 yr!

[vantage_coupe]

Originally Posted by ians

Yup, I have all my money sitting on side line and keep waiting the market crash for over 3yr but when it really happened! I have no gut to get into the market (actually, was too greddy... want it to drop more) on March, so end up I still have all my money sitting on the 2.5% GIC....

BTW, I lease my 335i because I dun trust the reliabilty of BMW. I dun mind to pay more to give myself a piece of mind that I can return the junk back to them. I learn my lesson on my E46. The own my E46 for 9yr, the total amount of ownership of it is more than leasing a new E46 every 3 yr!

On the upside, 2.5% isn't that bad of a gic rate depending on how many yrs the gic is for nowadays.

[Bimmer Al]

Originally Posted by ians

Yup, I have all my money sitting on side line and keep waiting the market crash for over 3yr but when it really happened! I have no gut to get into the market (actually, was too greddy... want it to drop more) on March, so end up I still have all my money sitting on the 2.5% GIC....

BTW, I lease my 335i because I dun trust the reliabilty of BMW. I dun mind to pay more to give myself a piece of mind that I can return the junk back to them. I learn my lesson on my E46. The own my E46 for 9yr, the total amount of ownership of it is more than leasing a new E46 every 3 yr!

Interesting. You mention you are worried about reliability hence the desire to lease and remain in warranty. Leasing at 700-900/mth translates to $8400+ a year (not counting tax deductions) but you get the picture. I would seriously doubt maintenance would cost you $5-6k per year EVERY year. I used to think this way and realized I just liked new cars.......the maintenance reliability story over time does not hold water. I am certain keeping at BMW past warranty for say 5 additional years costs far less in maintenance than leasing a new one.

My 2 cents

[Alex_bm]

Not a fair comparison, sicne you only cover partial cost of the car during the lease period. It would probably take two 3 year lease periods to cover the full cost of the car.
In my opinion it's a bet. Owning a BMW for 9 years even at 20,000km per year, can mean very expensive repairs.

Originally Posted by Bimmer Al

Interesting. You mention you are worried about reliability hence the desire to lease and remain in warranty. Leasing at 700-900/mth translates to $8400+ a year (not counting tax deductions) but you get the picture. I would seriously doubt maintenance would cost you $5-6k per year EVERY year. I used to think this way and realized I just liked new cars.......the maintenance reliability story over time does not hold water. I am certain keeping at BMW past warranty for say 5 additional years costs far less in maintenance than leasing a new one.

My 2 cents

[Bimmer Al]

Originally Posted by Alex_bm

Not a fair comparison, sicne you only cover partial cost of the car during the lease period. It would probably take two 3 year lease periods to cover the full cost of the car.
In my opinion it's a bet. Owning a BMW for 9 years even at 20,000km per year, can mean very expensive repairs.

Hmmmm. Are you saying the average cost Year of Year, EVERY year to maintain a BMW is $5-7k per year? If that were true BMW would never sell another car.....All would be leased and the residuals would all plummet to near zero.

Taking year 5 through 10, that would suggest a cost of 5x $5000 or $25k in 5 years for repairs? Impossible for a 3 series. Let's just admit we like to drive new cars.......suggesting it would cost over $25k to maintain a 3 series is ridiculous.

[Alex_bm]

That's not what meant.

You are saying that keeping BMW for 5 additional years after warranty expires would be cheaper than leasing a new one every 3 - 4 years.

Let's take for example 328i worth 50k after pdi and taxes.

First scenario:
You went and financed the car and kept it for 9 years. After 9 years car's value is close to 0. Overall it cost you around $55,000 including loan interest.

Second scenario:
You leased your car the whole time. Monthly payment is around $650 a month to cover pdi, taxes, etc. Over 9 year time period you paid $70,000.

The difference is $15,000, That translates to $3,000 per year for after warranty ownership period.
That $3,000 covers scheduled maintenance (free when you lease), wear and tear costs such as brakes (not an issue when you lease and take the wear coverage) plus any additional repairs you might need to do.

If you are lucky you might actually get to keep 50-100$ in your pocket. Looking at piece of mind owning a new car, fuel cost savings running newer and more effecient engine, and of course that smell of new make you think twice before commiting to a car for the next 9 years...


Interesting. You mention you are worried about reliability hence the desire to lease and remain in warranty. Leasing at 700-900/mth translates to $8400+ a year (not counting tax deductions) but you get the picture. I would seriously doubt maintenance would cost you $5-6k per year EVERY year. I used to think this way and realized I just liked new cars.......the maintenance reliability story over time does not hold water. I am certain keeping at BMW past warranty for say 5 additional years costs far less in maintenance than leasing a new one.

Originally Posted by Bimmer Al

Hmmmm. Are you saying the average cost Year of Year, EVERY year to maintain a BMW is $5-7k per year? If that were true BMW would never sell another car.....All would be leased and the residuals would all plummet to near zero.

Taking year 5 through 10, that would suggest a cost of 5x $5000 or $25k in 5 years for repairs? Impossible for a 3 series. Let's just admit we like to drive new cars.......suggesting it would cost over $25k to maintain a 3 series is ridiculous.