A Business Case: Lease or Purchase Clinical Equipment?
Purchasing equipment means you can deduct 10% of purchase price the first year on your taxes. Then 20% of remaining balance in each subsequent year up to 5 total years.
This formula can take up 10 years to arrive at zero. ( See Example 2 Below)
Loans for equipment means that the transaction will show on your balance sheet of the business and credit ceiling will be impacted when it comes to debt to loan ratio on future loans. If you plan on buying a car or financing a home this will be factored in and may affect your ability to borrow.
Lease equipment means you are able to deduct 100% of lease payments each year off your taxes. You deduct the full cost of equipment over the term of the lease which can be from 2 years to 6 years you get to choose.
The lease is like a RENT and viewed as a business expense and long term debt. The RENTED item will NOT appear on your balance sheet but in your company's off balance sheet.
This helps you secure financing to fund your business or other investments. Remember:
- Monthly payment is 100% tax deductible
- Lease Debt is Not recorded on your company balance sheet. So it does not affect your ability to borrow in the future.
For more information on the difference between a lease and a loan and the tax benefits of leases consider this paper by MediCapital.
The Canada Revenue Agency is very specific on:
- How you can claim a Lease. See Example 1
- How you can claim using a loan / purchase. See Example 2
- Note a loan and a purchase have similar rules see example 2
Examples using a $10,000 purchase
Example 1: Lease for 5 years
WILL NOT affect your ability to future borrow:Total being leased DOES NOT AFFECT your debt to loan ratio and does not show up on a credit search.
- Payments $200.18 per month x 60 months = $12,010
- Taxable write off 100%
- No waiting balance
Example 2: Purchasing or taking a loan for 5 years (Prime plus . 5% 3.45% +.5% = 4%)
Loans WILL affect your ability to future borrow:DOES AFFECT your debt to loan ratio and does show up on a credit search.
For instance a $184.17 payment after 5 years of loan = $11,050.02
According to Canada Revenue Agency this is a Class 8 Taxable Code. It allows for a 20% write down up to 5 years, but the first year you are only allowed 10%.
- 1st year allowable depreciation $1000.00 10% of purchase price
- 2nd year allowable depreciation based on $9,000 = $1800.00 write down
- 3rd year allowable depreciation based on $7,200 = $1296.00 write down
- 5th year allowable depreciation based on $5904.00 = $1180.08 write down
Total Undepreciated Capital Cost $4,724.00 remaining:
You can only write this amount off in two instances.
- You sell the unit used and claim the income and the difference is a final adjustment
- You dispose of the unit or give it away and then claim the remaining balance of $4,724.00 that tax year. This could be 10 years from purchase.
If this equipment costs $1,000 or more, you can elect to have it included in a separate class. The CCA rate will not change but a separate CCA deduction can now be calculated for a five-year period. When all the property in the class is disposed of, the UCC is fully deductible as a terminal loss.
Any undepreciated capital cost (UCC) balance remaining in the separate class at the end of the fifth year has to be transferred back to the general class in which it would otherwise belong. To make an election, attach a letter to your income tax return for the tax year in which you acquired the property.
So, should you lease or buy equipment?
You can calculate which option is best for you. Use this calculator to find out! We calculate your monthly payments and your total net cost. By comparing these amounts, you can determine which is the better value for you.