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To Lease or Not To Lease

Spring time and planting season are behind you. Did the equipment survive? Harvest Season will be hear soon enough. Are you in need of new equipment to bring in the crops?

Or maybe you need to replace the van for your HVAC, plumbing or electrician business.

One thing that farmers and tradespeople know is that to get the job done you need reliable equipment.

How to finance the purchase is a major issue. The two most common options are borrowing funds to buy the equipment or leasing equipment from the supplier or through a third party.

Should you lease or buy?
Use this calculator to find out! We calculate monthly payments and your total net cost. By comparing these amounts, you can determine which is the better value for you.

The terms and interest rate applied to the purchase loan and cost of leasing are obvious reference points to determine the benefits of going one route over the other.

There are significant tax implications that come in to play, however, that can make one method of financing a better decision. 

If you borrow to buy the equipment, for instance, you will be able to deduct all the interest on the loan and claim an annual depreciation charge called capital cost allowance.

However, the Canada Revenue Agency places depreciable properties in different classes and each class has its own rate of depreciation. 

The length of time it takes for an item to become fully depreciated can make a major difference in your tax position.

For instance, CRA considers hopper bins a Class 6 asset that can be depreciated at only a 10% annual rate on the declining balance. 

Class 8 equipment can be depreciated at a higher rate of 20%, while a combine is categorized as a Class 10 asset and has a 30% rate.

Purchasing three hopper bins for $25,000 would take more than 20 years to write off. For tax purposes, you will be able to claim all the interest on the loan and a total of $18,129 capital cost allowance over a 23 year period.

Leasing the bins, however, will allow you to deduct $19,625 in lease payments over a mere three-year time period with a $2,500 buy-out option after the third year. 

The low capital cost allowance rate for hoppers (a Class 6 item) encourages leasing, providing the ability to claim the full amount 20 years sooner than would otherwise be available through loan financing.

This benefit declines with higher class capital cost allowance rates. The combine (a Class 10 item) would provide about a $86,000 deduction over 6 years, which would be roughly the same if you borrowed the money or leased the equipment.

In this case, your decision whether to borrow money to buy or lease would simply come down to the comparative terms, conditions and costs of both methods of financing. 

Lower CCA class rates generally favour leasing rather than borrowing funds to finance equipment.

For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.