Leasing A Car Through Your Business In Canada

Many businesses require a vehicle to carry out day-to-day operations. But when it comes time to acquire one, should you buy it, or lease it through your business? 

Leasing a car through your business might mean lower upfront costs and the ability to upgrade frequently without a hitch. But you’ll also be restricted to the number of kilometres you can put on it as well as any potential modifications you might need to make. 

Let’s take a closer look at leasing a vehicle through your business to help you decide if this makes the most economical sense for you. 

What Does It Mean To Lease A Car Through A Business?

Odds are, you need a vehicle for your business. While you could always pay cash for the car and buy it outright, you may want to lease it instead, which you can do through your business instead of as an individual. 

Leasing a car through your business simply means that your business is on the title of the vehicle instead of you. 

Ways To Lease A Car Through Your Business

There are two types of leasing options available to business owners: open-ended and closed-ended leases. Each offers a purchase option that would let you buy the vehicle when the lease term ends. Otherwise, you can return the vehicle and upgrade to another model. 

Open-Ended Business Car Lease 

An open-ended lease is typically short-term and doesn’t have mileage restrictions. You’re responsible for your vehicle’s depreciation and how much it’s worth by the end of the lease, which is referred to as the vehicle’s “residual value”. Since your business is responsible for the vehicle’s depreciation rate, you’re free to use it any way you see fit with no restrictions. 

If you intend to use your business vehicle on a regular basis, an open-ended lease might be ideal since it gives you more flexibility for depreciation and wear and tear.

Closed-Ended Business Car Lease

Unlike open-ended leases, a closed-ended lease comes with specific business car lease requirements, including mileage restrictions, fixed monthly payments, and fixed terms. Close-ended leases are based on mileage, which means you won’t be responsible for the vehicle’s cost of depreciation or its residual value. However, there is a limit on mileage, which means you’ll be paying extra if you go over that limit.

If you plan to use your business vehicle semi-regularly, then a closed-ended car lease might be best. 

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Cost Of Leasing a Car Through Your Business

The amount you’ll pay on a lease for a business vehicle will depend on your lease agreement. On an open-ended lease, you’ll pay a monthly fee, plus the difference between the vehicle’s original anticipated residual value and the actual resale value when the lease ends. On a closed-ended lease, on the other hand, you will just pay a monthly payment and any applicable mileage costs.

There may be other costs associated with leasing your vehicle through your business, such as the following:

• Origination fees
• Maintenance and repair fees
• Account maintenance fees
• Excess wear-and-tear fees
• Early repayment fees
• Late payment fees

Advantages Of Leasing A Car Through Your Business

There are unique benefits of leasing your car through your business, including the following:

• Lower monthly payments. Compared to a traditional car loan, monthly lease payments are typically lower. Plus, there are fewer maintenance costs associated with leasing, which means less money tied up in your car and more cash flow available for your business.
• Mileage and fuel expenses are easier to track. Your leasing company may have an online platform that lets you keep tabs on your gas usage and mileage, which alleviates the complexities of tracking your business vehicle. 
• Upgrade to a newer model more often. Leasing a car means you’ll be able to upgrade to a newer model more frequently, which would be more complicated and expensive to do when you buy or finance your car. 
• Create a strong brand for your business. Having a car that’s dedicated to your business can strengthen its brand and make it stand out from the competition.
• Tax deductions. When you use your car for business purposes, you can deduct certain expenses come tax time, such as gas, insurance, and maintenance fees. 

Disadvantages Of Leasing A Car Through Your Business

Along with the perks of leasing your car through your business comes a few drawbacks to consider as well, including the following:

• May cost more over the long run. There may be fewer upfront costs associated with a car lease, but you could find yourself paying more over the long haul if you put a lot of miles and wear and tear on the car compared to a vehicle purchase. That said, you may be able to cut down on these costs if you choose to buy the car once your lease ends.
• You don’t own the vehicle. Leasing a car basically means renting it, so you don’t actually own the vehicle. Unlike financing, the monthly payments you make in a lease arrangement won’t lead to you owning a business asset.
• Restrictions on mileage (on closed-ended car leases). If you have a closed-ended vehicle lease, you’ll be limited to sticking to a certain number of kilometers. If you go over that limit, you’ll have to pay extra.
• Restrictions on modifications. Doing significant work on your business vehicle may not be allowed when you lease.

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How To Lease A Car Through Your Business

To lease a car through your business, follow these steps:

Step 1 – Determine What You Need the Vehicle For

Will you be using the vehicle predominantly for business purposes? If so, leasing it through your company makes sense. You’ll be able to write off expenses related to your car to save on taxes. 

But if you only plan to use it sporadically for your business and drive it more for personal reasons, it might make more sense to lease or finance it in your name. 

Also, consider how long you intend to keep the car for. If you like the idea of a new car every three years or so, then leasing might be a great idea. But if you prefer to hang onto the vehicle for the long haul, then purchasing it might make more economical sense. 

Find out if you should buy a new or used car.

Step 2 – Understand the Costs

There are certain costs associated with leasing a vehicle that you should get familiar with before going this route, such as the following: 

• Price Of The Lease – Also referred to as “cap costs,” the price of your lease should be much lower than the MSRP to make leasing the more financially-sound decision. You can reduce your cap costs through discounts like factory rebates.

• Residual value. What your car is worth when the lease term ends is referred to as the residual value. Ideally, the residual value will be as low as possible if you decide to exercise your right to purchase the vehicle at the end of the lease. If you don’t want to buy it, then a higher residual value is better, as it will mean lower monthly payments.

• Interest rate. Leases come with interest rates, which have a direct influence on the overall cost of your lease, much like when you finance a car. 

• Down payment. Most leases require some sort of upfront down payment, so you’ll need to save up for this chunk of money before taking out a lease.  

• Miscellaneous fees. There are often other small fees involved in a lease, such as sales taxes, licensing fees, and title fees.

Step 3 – Compare Options

Shop around with different lease companies, banks, and car manufacturers and compare their offers to find the best deal.  

Step 4 – Review the Terms

Once you’ve settled on a lease company and contract, be sure to carefully go over all the terms of the lease before you sign off on the contract. For instance, you’ll want to determine the exact MSRP and negotiate the cap cost to the lowest price possible. 

Requirements To Lease A Car Through Your Business

In order to qualify for a car lease through your company, you’ll need to meet certain criteria, which will vary from one lease company to another. Generally speaking, however, you’ll need the following:

• Business identification documents, such as a business number or articles of incorporation.
• Documents showing that your business is capable of covering lease payments, such as revenue statements or assets that can serve as collateral.
• Proof of how long your business has been in operation (ideally, this should be at least 2 years).
• Good business credit score.

Tax Deductions And Leasing A Car For Business

If you lease your car for business purposes, you can write off a portion of your lease payments. More specifically, you can deduct the business portion of your lease payments come tax time. There is an $800 limit (plus HST) on monthly lease payments that you can deduct, which adds up to a $9,600 maximum in tax-deductible expenses per year. 

Let’s say your annual lease payment is $4,800 (or $400 per month) and the percentage of your lease payments for business use is 75%. In this case, you could deduct $3,600 on your tax return. 

Keep in mind that the CRA tax rule has limits on the depreciation on vehicles that are considered luxury cars, which means there would be limits on lease payments for these types of vehicles.

Check out the tax rebates for electric and hybrid cars.

Should You Buy or Lease Your Car Through Your Business?

Whether you should lease or buy your car through your business depends on a few factors. Refer to the chart below to help you decide which road to take.

Final Thoughts

Having a business vehicle as part of your company fleet may be necessary to help you carry out business operations. But you’ll need to decide whether or not it makes sense to lease the car through your business or buy it outright. Consider things such as how much mileage you intend to put on the car, how often you think you may need to upgrade, and the potential tax deductions that may be available to you before making your decision.