Buy vs Lease

Both leasing and buying offer pros and cons depending on cash flow, ongoing maintenance, repair costs and the estimated future value of the asset. When new equipment or a farm vehicle is purchased, it is set up on the balance sheet along with any corresponding loan and expensed for tax purposes via capital cost allowance at prescribed rates as outlined by Canada Revenue Agency. Owning equipment or a vehicle generally requires more capital upfront but means that any equity belongs to you. Not to mention the fact that the asset can be leveraged for financing purposes. However, while the tax write offs of ownership are generally higher in the first few years due to depreciation, there is also the added risk with ending up with an obsolete or worthless asset requiring endless repair and maintenance long after the warranty has expired.

When considering a lease, it is important to determine whether the agreement is an operating lease or a capital lease as the tax implications will vary depending on this distinction. Acquiring equipment or a farm vehicle through a capital lease results in accounting and treatment that is very similar to the handling of a purchase. On the other hand, when new equipment or a farm vehicle is acquired through an operating lease, the lease payments are expensed directly on the income statement without having an asset or loan being recorded on the balance sheet.

Choosing an operating lease may reduce the risk of ending up with an obsolete or worthless asset that has lived past warranty expiration. However, while an operating lease offers a consistent annual write off for tax purposes, it also generally poses limits that restrict the equipment usability and can result in expensive fees to cover overage charges or damage.

So, the choice to purchase or lease really depends on your farm business’ cash flow, ongoing maintenance and repair costs, and the estimated future value of the asset. If you would like to discuss which approach for acquiring a new piece of equipment or a farm vehicle would be right for your farm business, please contact Allied Associates.