If you are not in business ie you are a consumer then what follows is largely academic!
If you are in business then the leasing game has a lot to do with the choice of claiming Revenue Canada's (CRA) version of depreciation (Capital Cost Allowance) by owning the equipment OR not owning the equipment but rather leasing it and claiming (for tax purposes) the rental as an expense which may be higher or lower than what you could claim (for tax purposes) as CCA
Depreciation versus CCA
What is Depreciation? Basically it is the loss in value of a tangible item caused by age and wear and tear. In accounting practice capital assets (equipment vehicles etc) are entered on the books as an asset and the cost is expensed over its useful life. Sometimes this is done in equal amounts but more commonly the percent used is based on the previous remaining value. ie if an asset cost $100 and the depreciation percent was 30% then the value after one year would be $70 and after two years $49 (that is reduced by 30% of $70) and so on.
Revenue Canada has an arbitrary depreciation schedule called Capital Cost Allowance which varies depending on the type of equipment (capital asset) involved and whether it is the item's first year of ownership or subsequent.
If you lease a capital asset for your business your accountant will assess for ACCOUNTING purposes whether you should simply treat your lease rentals as an expense or whether you should capitalize the asset (add it to the asset side of your balance sheet and concurrently treat the lease as a loan). The whether question is determined by CICA rules set by the Canadian Institute of Chartered Accountants.
Your Accountant will also assess the lease transaction from a TAX perspective according to Revenue Canada's rules. This basically is supposed to determine who carries the risks of ownership (you or the lessor). If its you then the treatment is similar to the ACCOUNTING treatment if its the lessor then you do not claim CCA or an implied interest (on loan) expense but simply expense the rentals you pay. This is only to your advantage if at least initially the rentals exceed the combination of CCA and interest.
Lease or Loan Advantage Assessment
There are sophisticated methods of comparing a lease versus a loan versus cash. However simply by comparing the P&L expenses of the two different methods for the first two years will give you an inkling of which route to follow.
Basically if the CCA rate is high then unless the leasing Co are prepared to use a low implied interest rate in calculating the lease rental you will gain more tax "expense" by borrowing or paying cash. The lower the CCA rate and the shorter the term the more advantage leasing offers.
Lets use an example
You are in business and want to acquire a Widget costing $100,000. The Widget lets say is Class 8 which carries a CCA rate of 20%. If you buy this asset then
Year 1 CCA $10,000 (1/2 the normal CCA)
Year 2 CCA $18,000 (20% of $90,000)
Expensed in 1st 2 yrs $28,000
If you leased over three years to a 20% option to buy
Rental at 8% $2,623 x 24 = $62,946
Profit reduced $34,946 (62,946-28,000) - tax savings at 25% rate $8,736
Leasing is an out and out winner! Of course it is not that simple! To compare apples with apples one needs to examine the actual cash flows involved and present value at an appropriate opportunity rate. The business's marginal tax rate determines the degree of "savings". If the business was not taxable then there would be no tax saved (tho' the loss can be carried forward).
The More Common CCA Classes
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