The lease you can do

Your iron’s aging and the question arises: is it better to buy or lease your next truck? Indeed, you may be surprised to learn that some of the advantages you’ve associated with leasing might not even exist anymore.

Scott Taylor, a trucking specialist with Transport Financial Services in Waterloo, Ont., acknowledges that the clearest advantage to most lease arrangements is that your payments will match your income tax deduction. You put your $15,000 or $20,000 down, which has to be divided over the life of the lease, and each time you make a payment that is what you get to expense.

It’s a classic operating lease, Taylor says, meaning that you’re basically paying for the use of the vehicle, like a rental arrangement, and when the lease is up you give it back to the owner.

Option No. 2 is a capital lease. When the lease expires you have the option or maybe even the commitment to buy the truck and own it.

This, Taylor says, is where things get confusing.

The Canada Customs and Revenue Agency (CCRA) has made it clear that when you enter a capital lease, you’re really supposed to treat it as you would a purchase. So, explains Taylor, “if the terms of the lease give you the opportunity to buy the truck for a dollar after five years, a reasonable person would go into that lease arrangement with an intent to buy. “Therefore, it is a buy,” Taylor states, and you would expect the deal to be treated as a purchase for tax purposes.

However, the tricky part is when you go to lease the next truck.

“If you’re supposed to treat the next vehicle like a lease and the old one is on like a purchase, you have a big problem,” Taylor says. You may face a gain on a sale that has to be declared as income. From a tax standpoint, that could be painful.

Pay attention here. According to Taylor, if you have your first truck and you trade it in and make a few bucks on it, “that gain on the sale, when you buy the next truck, gets buried into the calculations for the future write-down on the new vehicle.” But if you gain $20,000 on the sale of your first truck and you lease the second truck, the $20,000 has to be claimed as income right away.

On the other hand, if you decide to purchase a truck instead of leasing it, the purchase can be deducted.

It all adds up to the same amount as a lease. The key is the timing.

When you buy the truck, CCRA places it on a capital-cost allowance (CCA) schedule, a formula used to determine how much you can deduct for the vehicle. The big amounts come in the first few years of ownership because of the heavy depreciation schedules on the CCA. After that, however, in the next two or three years, there can be a big difference between payments and expenses.

For example, a company could have a $2,500 monthly payment, but with depreciation and interest write-off can only expense $1,000.

“That’s never going to happen with a lease because whatever you are paying is what you are writing off,” Taylor says.

However, even though buying may lead to some tax burden, it has an advantage over leasing in that you gain an asset that could prove valuable when it’s time to hit a bank for a loan. If you lease, you have nothing.

“I have clients who get caught on that very thing,” says Taylor. “They go into their bank to get a new loan, the bank looks at a financial statement and says there are no assets here. If you have got a truck on that statement, you can argue you have some equity and they may be willing to finance on that,” he says.

A third lease option is the full-maintenance lease. The leasing company will put you in a brand new vehicle and cover the costs of all maintenance. Your monthly payments will be expensed, but they will be considerably higher than they would be with a non-maintenance lease. You’ll have to have the extra cash to cover the extra payments.Here’s another lease/buy caveat you’ll want to think about. It’s always tempting to try to negotiate a better lease/loan payback deal, right? Doesn’t it make sense to pay everything off as fast as you can?

What you might not know is that leases are based on a flow of payments, so leasing companies are under no obligation to offer discounts on the interest just because you want to pay it off faster. And if you want to move your pay-out to another company, the price might be very steep. (With a loan, you agree to pay a certain capital amount so the lender has the option of offering a discounted interest rate on an early payout.)
We told you it wasn’t easy.