Big tractors and high-tech gear are usually farmers’ most significant expenses after buying land. If you pick the wrong way to pay for them, it doesn’t just cost you money, it can freeze your credit and make it hard to run your business for years.
Deciding whether to lease or buy isn’t as simple as it used to be. It has changed from a basic choice about ownership into a smart calculation about how long technology lasts, how to save on taxes, and how to keep cash ready in the bank.
Whether you are running a dairy farm in Quebec or harvesting potatoes in New Brunswick, this guide explains your options so you can make the best possible choice for acquiring your next piece of equipment.
Lease or Buy? First, Ask the Right Questions
Before you decide whether to lease or buy your next big piece of agricultural equipment, it’s important to ask the right questions:
- What type of equipment do you need? Do an Equipment Needs Assessment to be sure you really do need additional machinery, and to confirm you have selected the right type.
- When and how will you use the equipment? Seasonal leases can help you spread the cost of leasing over the months when your business is most lucrative, so that there is less financial pressure during the off season.
- What is your current financial situation and how do you anticipate it will evolve?
- What is your 3-year plan? Are you expanding or holding steady?
- Do you need a single big deduction this year or a steady deduction over many months? Ask your accountant.
- What would be a realistic total cost of ownership (TCO) for the equipment?
- What would be a realistic total cost for leasing the equipment?
With your answers, you will be ready to delve into the world of equipment financing with a clear view of what you need, so you can decide between leasing and purchasing with a solid understanding what each option provides.
First, let’s take a look at leasing.
The 4 Strategic Advantages of Leasing Farm Equipment
Leasing has become the go-to choice for Canadian farmers who want access to modern equipment only when they need it, who are looking for the lowest possible costs, and who need the best short-term tax breaks.
There are four main benefits to leasing:
1. Preserve Working Capital
Leasing keeps your bank credit lines free so you can use that money for things like seed and fertilizer.
2. Access the Latest Technology
Farm tech changes fast. Leasing lets you trade in sprayers and self-driving machines every 3 to 5 years so you aren’t stuck owning obsolete equipment that slow down processes.
3. No Budget Surprises
When you lease, you pay a steady, predictable monthly fee, which makes both short and long-term budgeting easier.
4. 100% Tax Deductible
Lease payments are 100% deductible expenses, making leasing is a good choice if you need a tax write-off this fiscal year.
The 3 Strategic Advantages of Buying Farm Equipment
Despite the advantages of leasing, buying remains the preferred path for core equipment that you plan to use as long as it lasts (10 years or more), if you have the cash reserves.
Purchasing farm equipment offers three main advantages:
1. Build Your Equity
Owning your equipment adds value to your business. It puts an asset on your books that you can use as backup to help secure loans for growing your farm.
2. No Limits on Use
Unlike many leases, there are no hour limits. If you need to work 24/7 to beat a storm during harvest, you don’t have to worry about paying extra for every hour you run.
3. Freedom to Customize
When you own the machine, you have the right to customize it whenever and however you want. Whether you’re adding new sensors or welding on a custom hitch, you don’t have to worry about breaking a lease contract.
Canadian Tax Rules for Farm Equipment
The Canada Revenue Agency (CRA) treats leasing and buying very differently. Understanding these rules is the key to a lower tax bill.
How the CRA Treats Farm Equipment Leases
When you lease, your payments are typically 100% deductible as a business expense in the year they are made.
In addition, you only pay sales tax on the monthly payment, not the full purchase price. This significantly improves day-to-day cash flow.
This means leasing equipment presents significant tax advantages.
Important note: a Capital Lease (one that includes a buyout option) may be treated as a sale for tax purposes. Always confirm the implications of a lease with your accountant before signing. It’s also a good idea to be familiar with the different types of equipment leases.
Read more in our Guide to Equipment Leasing for Small Businesses.
Capital Cost Allowance and Farm Equipment Purchases
Deducting the cost of depreciable property like farming and agricultural equipment is called capital cost allowance (CCA). Eligible equipment is divided into classes, with a different percentage deductible depending on the type of equipment and its use. Farmers can calculate their farming income and expenses for income tax purposes using the T2042 Statement of Farming Activities.
Accelerated Investment Incentive
Note that the Accelerated Investment Incentive (AII) suspends the CCA half-year rule for eligible property acquired after Nov 20, 2018, and becoming available for use before 2028. Businesses can claim up to one and a half times the normal Capital Cost Allowance rate in the first year, with a phase-out reducing benefits for property available after 2023.
A Note on zero-rating farm machinery
To help with cash flow, the Canadian government also labels certain big pieces of farm machinery as zero-rated. This means you don’t pay any GST/HST on them when you buy them. It is important to remember that if you choose to lease the same piece of equipment, the CRA often views it as a service, and you may have to pay GST/HST on your monthly lease payments even if the machine would have been tax-free to buy. However, you can usually claim those taxes back as Input Tax Credits (ITCs) on your next return.
Generally, zero-rating only applies to purchases of major equipment that is designed specifically for farming and meets specific standards (size, power, and function). Equipment like trucks, excavators and trailers may not qualify.
Lease or Buy Farm Equipment: How to Decide?
Overall, the choice to buy or lease farm equipment should be based on several factors:
Cash flow
Leasing often requires lower upfront costs and can help manage cash flow. Purchasing might be a better option if you know you will use the equipment for a long time, making the TCO lower than the total cost of long-term lease payments.
Usage patterns
Frequently used equipment may be better to own, while seasonal or specialized machinery might be better leased.
Technological advancements
Equipment subject to rapid technological changes may be better leased to allow for regular upgrades. Purchasing makes more sense for sturdy equipment that is not likely to become obsolete.
Tax implications
Consider the different tax treatments for leased and purchased equipment. Always ask for up-to-date information and confirm whether there are any new or temporary government programs that could affect your tax payments on farm equipment.
Quick Glance at Farm Equipment Leasing and Buying
| Farm Equipment You Should Lease | Why Lease? | Farm Equipment You Should Buy | Why buy? |
| High-Tech Sprayers | The technology changes rapidly | Grain Bins | They last a long time and the technology is not evolving quickly. |
| Primary Tractors | You need 99% uptime and a warranty. | Land Rollers and Plows | They are unlikely to become obsolete. |
| Specialized Harvesters | They are only used for only 3 weeks a year, making a seasonal lease a logical choice. | Utility Trucks | These are assets you’ll likely keep for 10+ years. |
Lease your Farm Equipment with Soluco
Ultimately, the decision to lease or buy farm equipment should be tailored to each farm’s specific needs, financial situation, and long-term goals. Consulting with an agricultural accountant or financial advisor can help in making the most informed decision for your operation.
At Soluco, our team is always ready to answer your questions so you can understand your options. Contact us and one of our team members will be pleased to explain how equipment leasing could be the best option for you. Or, take our short quiz to find out whether leasing or buying heavy equipment is a better option for your business.
Disclaimer: This guide is for informational purposes. Tax laws change frequently; always consult with a qualified Canadian tax professional or CPA before making significant financial decisions.