As a Kelowna accountant I often get asked by my clients if they should buy or lease a company vehicle.

The answer to this depends on the company and the individual using the vehicle. The difference between leasing and buying is often a cash flow and philosophy decision, versus a tax driven decision.

Determine what you can comfortably afford to spend each month on car expenses and work backwards. When you lease, your payments are usually substantially lower because they have a residual value depreciated from the vehicle, effectively making leasing cheaper than buying.

Related: 5 Tax Tips That Challenge The Status Quo

Think About Interest Rates Both Ways

When you’re leasing, car dealerships have an imputed interest rate in the lease cost and sometimes that lease can be at 0% versus a 5% financing rate. In this case, its obvious that it makes more sense to lease.

Years and years ago before car dealerships had their system worked out to a science, you could win or lose with a lease.

For example, if you leased a vehicle that was $40,000 and they put a residual value on it of $20,000 – you’re only paying off $20,000. When you got to the end of the 3 year term and you had to come up with $20,000…is the vehicle worth $20,000? 25k? 15k?

If you were lucky, the vehicle was worth $25,000, you pay your 20k to buy it out and you won. If you were really lucky, the vehicle was only worth 10K and you hand the vehicle back to the dealer. The 10k loss is taken by the leasing company and you walk away. Ah, the olden days!

Fortunately for leasing companies, they know almost exactly what their vehicles are worth now. Since you don’t get that differential you used to get, the decision can only be made now based on finances and cash flow.

What’s Your Philosophy?

Your philosophy towards owning a vehicle is potentially the most important factor because if you believe that you are going to want a new vehicle every two or three years, then you should probably lease. You can only trust one person to make this decision and it’s not your Kelowna accountant…it’s you!

If you’re the type of person that likes to buy a vehicle and own it forever then you should buy it out right from the beginning. Buying out a lease can be significantly more expensive in the long run.

That said, if you finish your lease and the vehicle appraises at 25k with only a 20k buyout and you want to keep it…then it makes sense to consider buying it.

Are You Using The Vehicle For Personal Use?

If there is going to be personal use of the vehicle, buy it personally – that’s always my standard answer. Whether you lease it or buy it for personal use essentially follows the same guidelines, but let me give you a strong word of caution.

If you’re going to have personal use of the vehicle then you should own it outside of the company. Do not own it within your company!

Related: 5 Questions to Ask Your Kelowna Accountant

I strongly advise this to all of my clients simply because it’s safer (and ends up costing you less in the long run). Revenue Canada will audit you and when they come to a vehicle that’s owned by the company they will ask you if it is used at all for personal use. If the answer is yes, I guarantee that you will be assessed because you will have not treated it correctly because no one does (the rules are very strict and sometimes do not contain common sense).

Don’t Be Afraid To Ask For Help

Buying a company vehicle is a big decision and requires some thought and consideration before making a final commitment. Don’t ever be too shy or afraid to seek advice from a trusted advisor, mentor or your Kelowna accountant. There is no “one size fits all” method, so do yourself a favour and make sure you have all your ducks in a row before signing any paperwork to spare yourself unnecessary and avoidable anxiety.

Based on your experiences, what do you prefer: leasing or financing? Leave your answer in the comments below.

About the Author

Ken Davidson is a Chartered Accountant with BDO Canada LLP, a Kelowna accounting firm. Ken specializes in helping Kelowna businesses that are in start-up mode, companies in Kelowna that are in their growth phase and are ready to take their revenues to the next level, and professionals to secure their financial future with solid investment advice. Ken is best known for his strategic planning advice that positions him as a trusted advisor above and beyond being a Kelowna accountant that gives typical tax planning advice. To contact Ken for a Strategic Business Review to learn how he may be able to help your Kelowna business, email him at kdavidson@bdo.ca.