There are many advantages to choosing to lease equipment for your business, including significant tax benefits. From heavy machinery to restaurant or office equipment, leasing allows you to benefit from numerous tax deductions, making this type of equipment financing preferable to loans or direct purchases in Canada.
Key takeaways
- Leases vs. Loans: The Canada Revenue Agency (CRA) considers lease payments to be an operating expense, which means the full cost (both principal and interest) is tax-deductible. In contrast, with a loan, only the interest is deductible.
- 100% Deductible Payments: Regardless of whether it’s an operating or capital lease, all monthly payments are generally 100% tax-deductible on your annual tax return.
- Pay Sales Tax in Installments: When you lease, you can pay the Sales Tax (GST/HST/PST) in small monthly installments rather than a single upfront lump sum.
- Claiming Input Tax Credits (ITCs): By paying sales tax monthly, you can claim it as an Input Tax Credit (ITC) every year of the lease, rather than in one lump sum in a single tax year, as you would with a loan.
- Safeguard your Capital: The overall tax benefits from leasing can lead to a lower total tax bill, helping your business to safeguard its capital.
Tax benefits of equipment leasing
The tax advantages of equipment leasing are one of the main reasons businesses choose to lease rather than buy. In Canada, leasing could mean paying less tax overall, no matter the size or scope of the equipment you are using.
Soluco offers financing for tractors, forestry and logging equipment and more. We can help you accelerate your business growth by acquiring the equipment you need, when you need it and with the best conditions. Please note that tax laws for passenger vehicles are unique and may differ.
There are three main possible tax advantages to leasing:
- Lease payments are considered an operating expense, meaning they are deductible from a company’s taxable income.
- Regardless of the type of lease (operating or capital), both the principal and the interest are deductible.
- Sales tax can be paid in small monthly installments which are eligible for the Input Tax Credit every year of your lease.
Overall, these advantages mean paying less tax and safeguarding your capital. Let’s take a closer look at each key point.
1. Leases can offer better tax advantages than loans
The Canada Revenue Agency (CRA) considers lease payments to be operating expenses, whereas loans are treated as capital expenses.
When you lease your equipment, the total cost – both the principal and the interest – are deductible. On a loan, you can only deduct the interest, not the principal. While this may not make a dramatic difference for smaller equipment, the difference can be significant if you need to acquire heavy machinery like agricultural equipment or even larger vehicles like trailers.
Depending on the size of your business, you may benefit more from short term or long term tax benefits, but in either case, leasing will help you pay less tax than if you rely on a loan to get the equipment you need.
2. Monthly lease payments are usually tax-deductible
There are two main types of leases. You can lease new equipment, or used equipment like excavators, with the goal of eventually owning that equipment. This is called a capital lease, and your payments will go toward purchasing the asset, but you will also be responsible for maintaining the equipment just as if you already owned it.
You can also choose an operating lease, which allows you to use the equipment without eventually owning it. Your monthly payments are similar to rental payments, in that they simply allow you to use equipment for a defined period of time and under specific circumstances (location, etc.).
In both cases, the Canada Revenue Agency allows you to deduct all your lease payments on your annual tax return. This means that equipment lease payments at Soluco could be 100% tax deductible!
Curious to learn more? Read our article about the pros and cons of heavy machinery leasing.
3. Pay Sales Tax in installments when you lease
When you lease a piece of equipment, whether it is construction equipment, transport equipment like trucks, or handling equipment like forklifts or conveyors, you do not have to pay Sales Tax (GST/HST/PST) up front. Instead, you can pay a small amount each month for the duration of the lease.
For tax purposes, this means that you can claim this tax expenditure every year of your lease in the form of Input Tax Credits (ITCs). ITCs are applicable to eligible commercial expenses and cannot be claimed by public service bodies using the quick method of accounting or by individuals.
When you rely on a loan for equipment purchase, you can also claim the Sales Tax as an ITC, however this one large claim applies only to one tax year, even if your business continues to pay back the loan in subsequent years.
Sometimes it is necessary to upgrade or trade in equipment before your lease is up. If you pay monthly Sales Tax, you will only have to pay taxes on the equipment for the period of time during which you used it.
It is recommended that you talk with your accountant or with a representative at Soluco if you have further questions about how to claim the tax benefits that are your due when leasing.
Enjoy the tax benefits of equipment leasing from Soluco
When you choose to lease equipment, you benefit from numerous advantages, including potentially lower tax rates.
Financing companies like Soluco offer optimal lease terms so that your business can access the equipment you need to move forward, without the financial burden incurred through loans or direct purchases.
Technology moves fast, but with the right financing plan, your business doesn’t have to be left behind. Contact us today to find out how we can help you take the next step. With more than 25 financial partners in Canada specialized in commercial equipment lease financing, we offer flexible solutions approved within as little as 48 business hours.