Buying or leasing vehicles?

For most organizations, a vehicle is a big-ticket item where procurement decisions have long-term implications.

October 7, 2011
by Jacob Stoller

Canadian Automotive Review, Print Edition: SEPTEMBER 2011

For most organizations, a vehicle is a big-ticket item where procurement decisions have long-term implications. Consequently, purchasing managers tend to look at acquisition carefully, assessing various options, including the question of whether to buy or lease.

Getting the best deal, however is not as important as getting the right deal, and the latter depends on factors additional to financing and acquisition costs. By gathering the appropriate information on how the vehicle will be used, the purchasing manager can make acquisition decisions within the larger context of what is best for the organization.

“Some basic rules should be followed for determining the best fit,” says Rocky Dwyer, evaluation specialist for the Department of National Defence. The exercise has an added bonus for private organizations—the answers will also help determine the tax implications of the purchase. Here are the key issues that should be considered:

Generic or specialized?
Leasing companies are positioned to provide their most competitive offerings for general-use vehicles, such as passenger vehicles and ordinary vans. Here, leasing companies offer not only the best pricing, but multiple options for vehicle features, terms of lease, and maintenance.

Trucks and other task-specific vehicles, on the other hand, are typically a “one off” for leasing companies, and leases here are likely to be pricier, with fewer options.

On the tax side, Canada Revenue Agency (CRA) has separate categories for passenger vehicles and motor vehicles dedicated to other commercial tasks. An important aspect of the former category is that allowable tax deductions for acquisition costs are subject to limits. “If you buy a passenger vehicle, for example, you are subject to a cap of $30,000,” says Mario Brunetta, senior tax advisor for Toronto-based accounting firm Cunningham LLP.

Business or personal?
Getting a new company car every year is an attractive perk for employees, and leasing companies, through their huge volume arrangements with auto manufacturers, are highly competitive in this category. Typically, employees use these vehicles to travel to and from work, and for other personal use.

The bad news is that CRA deems this personal use as a taxable benefit to the employee. Consequently, usage on these vehicles has to be carefully monitored. CRA recommends keeping a log for each business-related trip, including date, kilometres travelled, destination, and purpose of trip. Not having proper records can become an expensive problem if an auditor knocks on the door.

December or January?
From a tax perspective, timing can be pivotal. If a vehicle is purchased late in the year, CRA stills allows the buyer to depreciate the full amount (15 percent of list price in the year of acquisition) for that year. But, if the vehicle is leased, only the payments made during that calendar year are eligible.

Long or short term?
Buying may make more sense than leasing where vehicles are kept for a long time, as it draws down the fixed cost of purchasing the vehicle. “If it’s a pickup truck for general work and you’re keeping it a while, then I would say that you buy it,” says Al Wright, a certified management accountant formerly with the City of Edmonton.

The right leasing deal, however, can give organizations some flexibility. “Leasing the vehicle with the right needs in mind provides the opportunity to switch out your vehicles based on several factors,” says Dwyer. “One would be a mileage factor—as your vehicles accumulate higher levels of mileage you can return them.”

If the term is only for a few months, or the need for vehicles is seasonal, short term rentals is another option, although the costs are higher. “The short term rental costs more over the long term than leased vehicles which cost more than company-owned,” says Wright.

High or low mileage ratio?
A vehicle’s lifespan is an important measure of depreciation, but mileage ratio—the distance travelled in a specific period of time—is a better indicator, and should always be factored into the lease-versus-buy decision. Leasing contracts have mileage conditions; organizations need to ensure these are adequate for their needs. On the other hand, if the vehicle is purchased, the higher mileage ratio may translate into higher repair costs.

Organizations with high usage need to carefully plan their vehicle replacement strategies to prevent safety hazards and unexpected costs. “Some organizations, after a mileage-based period of time, get rid of the car,” says Dwyer, “because a significant number of miles usually means higher maintenance costs with higher end types of maintenance.”

Large or small fleet?
Organizations with large fleets are more likely to get themselves into the business of owning and maintaining vehicles. High volume justifies the internal administrative costs, and lowers the acquisition price. “Large fleets can usually get a fair discount from a dealer,” says Wright.

Taking stock
Making the best purchasing decision on a vehicle depends more on internal factors than on the terms and conditions of available deals, so it makes sense to review these before looking at pricing and financing. The decision depends not only on costs, but on how a company chooses to deploy its resources. “It’s very much driven by what type of business you’re in,” says Dwyer.                         c.a.r.