TO LEASE OR NOT TO LEASE?
By: Grant Diamond, Tax Analyst with FBC
Spring time and planting season are just around the corner and you may be considering the purchase of new equipment for your farm. However, do you know if it's better to borrow the funds to purchase the equipment or are you further ahead to lease it?
The terms and interest rate applied to the loan and the cost of leasing are obvious reference points to determine the benefits of going one route over the other. However, there are some significant tax implications that come in to play and can make one method a better way to go.
If you borrow the funds to purchase the equipment, for instance, you'll be able to deduct the interest on the loan and claim an annual depreciation charge called capital cost allowance (CCA). However, CRA places depreciable properties in different classes and each class has its own rate of depreciation. The length of time it takes for an item to become fully depreciated can make a major difference in your tax position.
For instance, hopper bins are considered a class 6 asset by CRA and can only be depreciated at a 10% annual rate on the declining balance. Class 8 equipment can be depreciated at a higher rate of 20% while a combine is categorized as a class 10 asset and has a 30% CCA rate.
As an example, purchasing three hopper bins for $25,000, a class 6 item, would take over 20 years to write off. For tax purposes, you'll be able to claim the interest on the loan each year; however, it will take 23 years to claim $22,661 CCA. Leasing the bins will allow you to deduct $26,625 in lease payments over only three years. Leasing provides the ability to claim the full amount 20 years sooner compared to borrowing to purchase the hoppers that have a CCA rate of 10%.
This benefit declines with higher class CCA rates. For example, a $100,000 excavator (a class 10 item) would provide approximately $86,000 CCA deduction over six years which would be roughly the same as if you leased the equipment.
In this case, your decision to borrow or lease would simply come down to the comparative terms, conditions and costs of both methods of financing. Lower CCA class rates generally favour leasing rather than borrowing funds to finance equipment.
There are many other advantages to leasing, such as not having to pay for repairs and short-term options for equipment needed for one season; however, the tax benefits of leasing can be significant for the right equipment and the right asset class.
Grant Diamond is a tax analyst with FBC, a company that has specialized in farm and small business tax for 60 years. FBC has branches in BC, AB, SK, MB and ON to serve its 50,000 members. To learn more about FBC, visit www.fbc.ca. If you have any questions regarding this article, send a message to firstname.lastname@example.org or call toll-free 1-800-265-1002.