Leasing your business vehicles can lessen the upfront costs of getting your employees behind the wheel. But you may come across mileage limitations depending on the type of contract you choose. And it can be more expensive in the long run.
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Rather than fronting the cash to buy a vehicle for your business outright, you can opt for a business car lease. This allows you to upgrade your vehicle every few years — taking advantage of new technology and safety features — while keeping your monthly costs low.
There are two types of leases available to business owners: open-ended and closed-ended agreements. Both come with a purchase option that allows you to buy your vehicle at the end of the lease term. Or you can choose to return it and upgrade to a newer model.
Open-ended leases, also known as terminal rental adjustment clause (TRAC) leases, are more popular with commercial vehicles because of their short terms and lack of mileage restrictions.
In an open-ended lease, you — not the leasing company — are responsible for how much your vehicle depreciates and how much it’s worth by the end of the lease (which is called the vehicle’s “residual value”).
What does this mean for your business? Say you lease a new car at $25,000 and your lease payments are structured around the assumption that the car will depreciate $10,000 by the end of the lease term, leaving its value at $15,000. If the car depreciates by $12,000 at the end of your lease term and is worth $13,000 when the lease is up, you’ll have to pay $2,000 to cover the unanticipated depreciation.
On the other hand, if the car only depreciates by $8,000 and is worth $17,000 when the lease is up, your leasing company will then have to pay you $2,000. This payment acts as a “refund” of sorts to make up for the higher lease payments you agreed to make when it was believed that the car would lose more value than it actually did.
A closed-ended lease may be more popular with individuals, but it can also come in handy for commercial use too. These have fixed monthly payments, fixed terms and mileage restrictions.
Unlike an open-ended lease agreement, you won’t bear the cost of depreciation, because closed-ended leases are based on mileage not the car’s residual value. The more you drive, the more you pay.
And unless you choose to purchase the vehicle at the end of the lease term, you won’t have to worry about how much or little the vehicle is worth.
Closed-ended leases comes with their own drawbacks, of course. Because they usually last anywhere from 3-5 years, you’ll be stuck with the vehicle for the entire length of the term — unless you choose to end the lease early, which can incur a large fee. And since there’s a mileage limit, you’ll have to pay extra if you go over. The rate is usually set anywhere between $0.08 and $0.20 per kilometre, but could be more or less depending on your contract.
If you’re only planning on using your corporate vehicle semi-regularly, then a closed-ended lease may be appropriate. However, businesses that intend to use their vehicles regularly may not get the best deal out of this type of contract, because they’re likely to need more leeway in the lease agreement for vehicle depreciation and wear and tear.
Should I buy or lease my business vehicle?
It depends on your situation. Generally, getting a business vehicle lease might be best if you plan on getting a new car in a few years. Buying might be a better choice if you want to modify your business vehicles or if you want full ownership of your fleet. The table below summarizes the differences between buying and leasing a vehicle.
Who owns the car?
When you buy a car, you (or your business) own it — your lender only has a lien against the vehicle should you fail to repay.
The dealership. A lease is more like an extended rental period; once the period is over, the car is returned.
What are the upfront costs?
Usually a down payment of 10%-20% of the car’s value as well as provincial/territorial registration costs, fees and taxes.
It may include a down payment, a security deposit, an acquisition fee, the first month’s payment and other taxes and fees.
How large are the payments?
With a car loan, you pay back both interest and principal. A shorter loan term makes your payments higher, but a longer loan term increases means you’ll pay more in interest.
Since you aren’t paying for the car itself, your payments will be smaller unless you lease a more expensive car. Lenders charge interest as well as fees for vehicle depreciation and mileage, should you go over your yearly limit.
Do you need to worry about maintenance?
Yes. By conducting regular maintenance and avoiding excessive wear and tear, you can keep your car functioning for years to come. You can also improve its trade-in value, should you want to buy a new vehicle.
Yes. Beyond regular maintenance, you’ll need to pay for any excessive wear and tear that happens to the car during the lease period.
Are there mileage limits?
No. Since you own the car, you can drive it as much or as little as you want.
Yes. Most lease contracts limit you to a certain amount, usually around 25,000 kilometres. If you go over this, you’ll have to pay a charge per kilometre.
Can you end the contract early?
Yes, but your lender might charge prepayment penalties to make up for the interest it won’t get from your continued repayments. Not all lenders charge this fee.
Yes, but there will likely be high fees and charges attached to ending your contract ahead of schedule.
What happens at the end of the loan term?
You’ll own your car, free and clear. You can sell it or keep it, whichever you choose.
If you have an open-end lease, you must purchase the car. If you opted for a closed-end lease, you can walk away from the term and either buy or lease a different vehicle.
Representative example: Leon leases a car for his cleaning business
Leon, an Ontario resident, runs a successful cleaning business known for using plant-based, non-toxic cleaners. He wants to buy a car to travel between job sites and is hoping to find an affordable model that will make less of an environmental impact than a traditional vehicle. After doing some research, Leon decides to lease a 2020 Ford Fusion Hybrid SE (valued at $31,000.00 by the dealer).
Below is a breakdown of Leon’s possible costs if he leases the vehicle. He’ll have to pay around $180.00 to register his car with the provincial government – this includes the cost of license plates, a sticker and a vehicle permit. If he has a closed-ended lease, he could also end up paying extra if he exceeds his yearly mileage limit or puts excess wear and tear on the car.
Value of the vehicle
$31,000.00 (purchase price)
Interest rate (APR)
$0.00 application fee (waived by dealer)
4.00% acquisition/origination fee worked into lease payments (approx. $1,000.00)
$400.00 disposition fee at the end of the lease
$547.00 monthly or $252.00 biweekly
Total lease payments by the end of the term
$32,820.00 with monthly payments or $32,760.00 with biweekly payments
*The information in this example, including rates, fees and terms, is provided as a representative transaction. The actual cost of the product may vary depending on the retailer, the product specs and other factors.
Is my business eligible for a lease?
The exact eligibility requirements for a business car lease varies between leasing companies and car manufacturers. However, you generally need to:
Have business ID documents such as a registration number, articles of incorporation or tax identification papers
Demonstrate your business’s ability to pay for the lease.
Know the type of vehicle your business needs and the lease term you want.
How much will it cost my business to lease a vehicle?
The cost of leasing a vehicle depends on your contract. With an open-ended lease, you’ll pay a monthly fee as well as the difference between the estimated residual value of the vehicle established at the beginning of the lease contract and the actual resale value at the end of the lease period. With a closed-ended lease, you’ll only need to pay the monthly fee and any additional mileage costs.
Fleet management is ideal if you already have cars for your business but want assistance with the administrative burden of tracking vehicle usage and expenses.
Essentially, you outsource your vehicle management to a different company, which allows for an easy way to track and manage your vehicle expenses — all in one invoice. You may also be able to negotiate discounts on servicing, repairs and fuel.
If you only have a few vehicles and can handle the books, fleet management may not be for you. However, if your business uses a number of cars, trucks or vans, then hiring a company to manage the costs may pay off. Check with your accountant to see if fleet management is a good idea for your business.
What are the benefits of a business vehicle lease?
From lower upfront costs to gaining an edge over the competition, there are a few perks to leasing a vehicle for your business:
Improves cash flow. Leasing a vehicle typically comes with lower monthly payments compared to the payments you’d make for buying a car with a loan. It also comes with fewer maintenance costs, which frees up cash for you to invest in other areas of your business.
Lowers driving costs for your employees. Not having to wrack up miles on their own car means your employee can drive without worrying about extra costs added to their job.
Makes it easier to track mileage and fuel expenses. Some car leasing companies offer an online portal so you can easily see fuel usage and servicing of your fleet of vehicles. This makes tracking mileage, fuel expenses and maintenance a lot less complicated.
Gives you an edge over the competition. A corporate car can be a bonus that makes your company stand out. And leasing means your employees can upgrade their car to the latest model every few years.
What are the drawbacks of a business vehicle lease?
Trying to decide between leasing or buying a vehicle for your business? Here are a few potential drawbacks to leasing to consider:
Can be more expensive in the long term. While leasing a vehicle comes with fewer upfront costs, if you’re on the road a lot, excess mileage fees and wear and tear charges may make you pay more than if you’d chosen to purchase the car. (However, if you have the option to purchase the car after your lease ends, you may be able to avoid paying these high fees because you won’t have to pay the leasing company back for depreciation – the car would be yours.)
You never own the car. When you choose to lease a vehicle, you’re essentially renting it for a set period of time. This means your monthly payments won’t eventually lead to you owning the car.
Mileage restrictions on closed-ended leases. If you opt for a closed-ended lease, your employees will be limited to driving their vehicles a select number of kilometres. And it’ll cost you extra if they go over that limit.
Can’t do major modifications. Most leasing companies won’t allow you to do major work on the truck or van you’re leasing in order to adapt it for your business’s particular needs. So customizing vehicles may be difficult.
Can I deduct car depreciation as a business expense?
Yes. The CRA allows business owners to deduct the cost of depreciation, but not the cost of purchasing vehicles. If you use your vehicle for both personal and business use, you can only claim expenses related to your use of the vehicle for business purposes.
For example, if you drive 40 km one day but 15 km of that is spent running personal errands, you can only claim vehicle expenses associated with 25km of driving.
The Canada Revenue Agency often uses the terms depreciation and “Capital Cost Allowance (CCA)” interchangeably for the purpose of determining tax claim eligibility. Deductible vehicle expenses are calculated the same way for sole proprietorships, partnerships and corporations, however, each entity reports these expenses differently to the CRA.
Tax reporting for sole proprietorships and partnerships
Sole proprietorships report business vehicle depreciation on line 9936 (“Capital cost allowance (CCA)”) of Tax Form T2125 Statement of Business or Professional Activities.
Partnerships report depreciation on line 9943 (“Other amounts deductible from your share of net partnership income (loss)”) in part 6 of form T2125.
Being in a partnership does not mean you can claim more deductibles on an asset than if one person operated the same business alone. The sum of vehicle expenses – depreciation as well as other eligible costs – collectively claimed by all partners in a partnership must equal what a single individual would claim for the same vehicle(s). In other words, the amount that the CRA allows you to claim for a single vehicle’s expenses is the same regardless of whether 1 person uses that vehicle or 101 people use it.
Tax reporting for corporations
Corporations report vehicle depreciation on of form T2 Corporate Income Tax Return (see Income Tax Folio S3-F4-C1 General Discussion of Capital Cost Allowance).
Calculating vehicle depreciation
Your commercial vehicle expenses claim should be based on your business year not the calendar year. You will need to calculate the capital cost of your vehicle, determine which class of depreciable property it falls under according to CRA regulations and then apply the yearly depreciation rate for that class to the vehicle’s capital cost. The result is the capital cost allowance (CCA) for that vehicle, which you can deduct from your taxes.
Talk to either a tax accountant or a tax lawyer to know exactly what you’re eligible to claim and how to claim it.
As your business expands, adding vehicles to your fleet through a lease could make the difference between spending thousands upfront or spreading the cost out over time. But you won’t be able to modify the vehicle to fit your business’s unique needs. And it could be more more expensive in the long run if you or your employees drive a lot. However, exercising a purchase option when your lease expires could be a way to avoid paying fees for excess use.
Frequently asked questions about business car leasing
If your employees drive regularly, you may want to opt for an open-ended lease to avoid wracking up extra mileage costs. If not, then a closed-ended lease might be a better fit.
Residual value is another term for the remaining value of an asset after a period of depreciation. In addition to how much and how hard you drive, your vehicle’s residual value will depend on both its make and model as well as the market when the lease period is up.
If you opt for an open-ended lease, your contract will state an estimated residual value based on general market conditions and average use. However, the actual residual value will be determined at the end of the lease. You may owe the leasing company extra if the car depreciated more than your agreement anticipated, or the leasing company may owe you if the car did not depreciate as much as expected.
Yes, some manufacturers offer discounts if you have a fleet containing a certain number of vehicles — usually at least 5 or 10, although some brands may not require a minimum fleet size for certain businesses. Only certain models may be eligible for fleet discounts, however, so you’ll have to do your research first to find a manufacturer that fits your needs.
Kellye Guinan is a writer and editor with Finder and has years of experience in academic writing and research. Between her passion for books and her love of language, she works on creating stories and volunteering her time on worthy causes. She lives in the woods and likes to find new bug friends in between reading just a little too much nonfiction.
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