Although the purchase option is cheaper overall, it requires that buyer to pay more per month than the lease option.
Maroney on Money for July 6, 1997
In my last article I reviewed the basic differences between buying and leasing a new vehicle. This week I’ll attach some numbers to the words and review the income tax differences between the two options.
My selected vehicle was advertised for sale in the Vancouver Sun last week at $21,788. The same vehicle could be leased for $299 per month for 30 months with a $3,400 downpayment and a $350 security deposit. The lease has an implicit interest rate of 8.3% and a buy-out option at the end of the lease term of $14,865 less the security deposit.
To purchase this vehicle outright, the buyer would have to pay both PST and GST which would raise the total cost of the purchase to $24,838. Assuming a 10% downpayment ($2,484), an interest rate of 8.3% (i.e., a rate equivalent to the lease interest rate) and a three year term, the monthly loan payment would be $704.
At the end of the loan term, the buyer will have paid $2,975 in interest resulting in a total cash outlay of $27,813.
Assuming that the buyer is fortunate enough to be able to deduct vehicle expenses for income tax purposes, a claim may be made for both tax depreciation on the vehicle and interest on the bank financing.
Commencing in 1997, in general, the maximum amount that may be depreciated is limited to $25,000 (before PST and GST) subject to a rate of 15% in the first year and 30% each year thereafter. There is also a limit of $250 per month on the interest paid on bank financing. Neither of these limits come into play in the case at hand. Only the portion relating to business use of the vehicle may be claimed for income tax purposes.
Turning to the lease option, the actual monthly lease payment will be $341 after factoring in the PST and GST applicable to the $299 advertised amount.
Lease payments are deductible for income tax purposes, subject to a limit of $550 per month which is not a factor in this case. Again, only the business portion of the lease payments may be claimed. Notice also, that tax depreciation cannot be claimed on a vehicle that is leased.
At the end of the thirty month lease term, the lease payments will total $10,230. In calculating the total cost, PST and GST must be calculated on both the $3,400 downpayment and also the $14,865 buy-out option. This brings the total cost of the vehicle to $31,053 which is $3,240 higher than the total cost of buying the vehicle (ignoring the fact that the lessee will likely have to finance the buy-out thereby incurring further interest costs down the road).
Although the purchase option is cheaper overall, it requires that buyer to pay $363 more per month than the lease option. This isn’t pocket change to most people which helps to explain the popularity of leasing.
Jim Maroney is a chartered accountant with Andrews, Brown, Maroney in Maple Ridge.
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