Lease or purchase a car

To lease or purchase a car – that’s the perennial question. The answer boils down to another question: how do you intend to use the car – for business or personal use?

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As Chartered Accountant Stephen deBlois from Welch LLP in Ottawa explains, there are pros and cons involved in both options. The decision is ultimately based on personal choice and lifestyle as opposed to being a business decision. “When you own a car, it’s yours. With a leased car, repair charges are minimal, but you must still insure it, just as you would if you owned it. And at the end of the lease you have nothing to show for your money, unless you exercise your option to buy.” “If the car is for personal use, determine how long you want to keep it,” adds Chartered Accountant Steve Gora, President, Gora Financial Consulting Inc. in Toronto. “Leasing is a good option if it’s for a period of less than three or four years, and you don’t intend to purchase the car afterward. There are no income tax implications, as you are only paying GST and PST on the monthly payment and it’s easy to return the car provided you meet three conditions. It must be in good condition; its maintenance checkups must be kept up in line with the manufacturer’s specifications; and the kilometres must not exceed the limit stated in the lease. You’ll be charged extra if you violate any of these conditions.” Beware of the Credit Crunch The economic downturn is another factor to consider. While low interest rates and attractive offers from manufacturers and dealers may make it a good time to lease or purchase, the market is also volatile. “No one has a crystal ball,” says deBlois, “and the value of the car this year may not hold next year, especially if prices come down further.” Run the Numbers It’s important to do your budget and determine what you can afford. Then do your research on whether to purchase or lease because it can be complicated. According to Gora, it’s easy to forget that leasing and lending are different. “In a lease, the lessor owns the car. It may advance the dealer up to 100 per cent of the purchase price and will take the risk of vehicle depreciation. Lenders like financial institutions, however, may not want to lend the full amount and will not take the risk that the vehicle will depreciate.” It is also important to assess the costs of borrowing. A car price may be different depending on whether you lease or buy, and depending on how the interest is calculated. If you decide to buy and finance the car, you pay GST and PST upfront, and the bank loan is based on the total of the base price and the taxes. In terms of continuity over time, you can trade the car in and get a GST/PST reduction. There is still a prepayment, but you do end up only paying tax on the depreciation. However with a lease, each monthly payment is subject to GST and PST. These taxes also apply to the purchase-option price, should you decide to buy the car at lease-end. Using a Car for Business “If the car is used for business, there are income tax concerns to consider. Small business owner-managers should be aware of restrictions on what can be claimed,” advises deBlois. “Watch the cost. You can depreciate only the first $30,000 plus applicable GST and PST of a new car’s cost. On a leased vehicle, you can only claim lease payments of up to $800 plus applicable GST and PST per month, and you can deduct interest charges only of up to $300 per month.” “If an incorporated business provides cars to employees who will also use them for personal use, then those employees can pay significant additional taxes for their use of the cars. These benefits include the annual standby charge, which is based on the cost of the car and can be up to 24 per cent of that cost each year. The operating-cost benefit will also apply, which amounts to 24 cents per personal kilometre driven. Depending on the actual business use of the car, some of these tax benefits may be able to be reduced. If you run the business in a corporation, it is generally advisable to own the car personally and charge the business for its use, to avoid getting hit with these taxable benefits. Where the car will be leased and a corporate business owner doesn’t spend a lot of time driving, the benefit is only two-thirds of the lease cost, and could be fully deductible for a lower-end vehicle for the corporation.