Financing Equipment: Leased vs. Borrowed Equipment Tax Implications

Leasing Equipment: Immediate Deductions

Lease payments are fully deductible as operating expenses. A $500 monthly lease payment is deductible immediately. This reduces taxable income each month. Leasing is simple from a tax perspective.

Borrowing for Equipment: Depreciation via CCA

When you borrow to purchase equipment, the equipment is your asset. You deduct depreciation via Capital Cost Allowance (CCA) annually. Interest paid on the loan is also deductible. This approach requires more accounting but may provide larger total deductions over time. For a related tax-compliance angle, see Tax Deductions for Tool Purchases: How the $100,000 Tool Box Pays Off.

Tax Deduction Comparison: Lease vs. Borrow

A $50,000 lift financed via loan costs $500 monthly for 10 years. Total payments are $60,000. Deductions include depreciation and interest. A $500 monthly lease also totals $60,000 but is fully deductible immediately. The timing of deductions differs.

Cash Flow Impact: Lease vs. Borrow

Leasing requires consistent monthly payments. Borrowing requires a down payment plus monthly payments. Leasing preserves cash. Borrowing requires capital upfront. Choose based on your cash position.

Equipment Ownership and Flexibility

Leasing gives you access without ownership. You return the equipment at lease end. Borrowing makes you the owner. Ownership provides long-term value if you keep the equipment for years.

The Interest Deduction Advantage

Loan interest is fully deductible. A $50,000 loan at 7% costs $3,500 in year one interest, all deductible. Lease payments are also deductible but include principal repayment of the lessor's cost.

Lease vs. Borrow Decision Framework

• Choose leasing for predictable cash flow needs
• Choose borrowing for long-term equipment use
• Leasing simplifies accounting
• Borrowing may provide larger total tax deductions
• Consider equipment technology obsolescence
• Evaluate interest rates and lease terms
• Factor in maintenance responsibilities

Special Equipment Considerations

Some equipment is better leased (technology that becomes obsolete quickly). Other equipment is better purchased (lifts and compressors with long useful lives). Evaluate each purchase separately. For a broader financial management perspective, review Small Business Tax Rates by Province: Where Is It Cheapest to Operate?.

Frequently Asked Questions