October 1, 2021 | Blog
Business Assets: Lease vs Owning
A fundamental decision that any business has to make is whether to own or lease capital assets used. What are some of the advantages and disadvantages to either option, and what are the tax implications?
From tax expert Gerry Vittoratos
Advantages to Owning or Leasing Capital Property
Advantages to Owning Capital Property
The biggest advantage to owning the capital property is the ownership itself. This can be particularly advantageous if the useful life of the asset is long. The longer useful life of the asset, the more you can spread out the cost of the asset over several years, lowering the overall cost. The asset can also be sold in the future, with the owner being able to recoup some of the funds spent on it. There’s also the Capital Cost Allowance (CCA) claim that can be made, which we discuss below.
Advantages to Leasing Capital Property
The biggest advantage to leasing equipment is the low initial cost when you lease. In many cases, leasing equipment does not require a large down payment. Another advantage to leasing equipment is being able to easily upgrade when newer/better equipment becomes available. Lower maintenance costs are also an advantage, being the responsibility of the company that issues the fix.
Disadvantages to Owning Capital Property
Amongst the biggest disadvantages to owning capital property is the high upfront cost. Purchasing equipment will usually require a down payment, which adversely affects cash flow. Another disadvantage is maintenance of those assets, which now fall into the hands of the buyer. There is also the risk of the equipment becoming obsolete quickly, which will be harder to upgrade due to the higher initial cost.
Disadvantages to Leasing Capital Property
The biggest disadvantage to leasing capital property is the higher overall cost over time. The longer the lease, the higher the overall cost vs buying the property. There is also no equity in the capital asset, which doesn’t allow for recouping some of the cost through an asset sale. Moreover, the business will also be bound by the terms of the lease, which will be problematic in the case of an asset with a quick obsolescence.
Tax Implications of Leasing/Owning Capital Assets
Leasing costs would be considered as current expenditures [ITA 18(1)]. The expense incurred in the year would be directly deducted off net business income. Capital assets owned directly would be deemed as capital expenditures, and therefore can only be expensed through Capital Cost Allowance (CCA), commonly referred to as depreciation expense [ITA 18(1)(b)].
At first glance, current expensing is usually more beneficial tax-wise since you’re expensing the leasing charges paid in the year, while with owned assets, you can only claim a percentage of the value of the asset as an expense on a declining balance [ITA 20(1)(a) & ITR 1100(1)]. However, with the advent of the Accelerated Investment Incentive (AII), which allows for the tripling of the first-year depreciation rate for all assets, the gap between leasing expense and depreciation expense has been narrowed greatly. In the short term, the depreciation expense will greatly surpass leasing charges expense due to AII. For a case study of this phenomenon, please consult our previous article on buying vs leasing a vehicle.
For certain capital assets, immediate expensing is allowed if your company is a CCPC. Therefore, eligible companies will be able to claim the full value of the purchase of eligible property immediately, instead of claiming the prescribed CCA rate only. This new temporary measure gives a significant advantage to owned assets since the full value can be expensed in the first year, while leasing expenses can only be claimed over several years.