Canadian Equipment Lease Tax Benefits

Two Leasing-specific Deductions That Deliver Valuable Tax Savings for Your Business

Leasing your business equipment in Canada safeguards your capital, cuts red tape, allows for quick and easy upgrades — and offers significant savings at tax time.

Leases and loans are treated very differently by the CRA (Canada Revenue Agency). Two of the most significant differences are found in monthly payment deductions and how you claim Input Tax Credits. Some businesses will benefit from larger, short term tax rebates and some will benefit more from smaller rebates over a longer period of time. Either way, leasing can help bring down your tax bill.

As with most tax issues, there are many variables and not all businesses are the same. Be sure to talk with your accountant to find out how these benefits can be used in your business’s unique situation.

Input Tax Credits (ITCs)

When you make an equipment purchase (with bank financing or as a cash sale) you pay the full amount of Sales Tax (GST/HST/PST) due on that purchase at the time of the sale. Your business will then claim one large ITC on the purchase in that tax year. No further ITCs can be claimed on the purchase in subsequent tax years – even if your business is still paying down the loan. Note that if your bank rolls the Sales Tax into the loan amount, this benefit is usually eliminated.

If you lease the same piece of equipment you do not pay the Sales Tax upfront, but instead pay a small amount on each monthly lease payment. This means that each year you continue to hold the lease you can claim an ITC on the Sales Tax portion of the lease cost. It can also mean paying less tax overall if you upgrade or trade in equipment prior to the end of the lease, as you will only have paid taxes on the equipment for the time you used it.

Monthly Payment Deduction

If you take out a bank loan for an equipment purchase, you will be able to claim a deduction for the interest portion of your loan payment.

If the equipment is leased, CRA lets you deduct your entire lease payments for the year on your year-end tax documents.

The reasoning behind this comes down to how the CRA views the two types of financing. Leases (even Lease to Own agreements) are considered operating expenses, while bank loans are viewed as capital expenses. So, when you lease your equipment, you can deduct the total lease cost as an operating expense. Only the interest on a bank loan is viewed that way — not the portion of your payment that goes toward the principle.

A somewhat common exception occurs with passenger vehicles. Be aware that passenger vehicles are taxed differently than other businesses equipment. You can still deduct part of your lease payment, but the deductible depends on the percentage of business use versus personal use. For example, you have a truck with your business logo on the side, but it happens to be your personal evening & weekend vehicle as well. CRA will let you write off a portion of your payments, but not the whole, as it will be considered split usage and you can’t write off personal leases.

Don’t overlook the small stuff for tax savings. All leases for business equipment can potentially offer deductions. Leased computers, security cameras, printers and even cell phones all qualify. As with passenger vehicles, only deduct the business use portion of the costs. For example, if you use your cell phone for business about 60% of the time and personal calls about 40% of the time, you can claim 60% of the lease cost on your business taxes. This can become a grey area for small business owners who work out of their home. If you have a separate building for your business, CRA will assume all equipment in that space is used exclusively for business purposes. However, that same equipment used at home may be flagged if it is claimed as 100% a business expense. Talk to your accountant and work out together what percentage is reasonable to claim in your circumstances.

As with all financial matters, it’s important to talk to your accountant throughout the year. Planning and goal setting can go a long way toward good financial health for your business and a smaller bill at tax time.

Interested in Finding Out More About Equipment Leasing?

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By Published On: February 20, 2020Categories: Business Advice, Equipment Leasing