Business car leasing can lessen the upfront costs of getting your employees behind the wheel. But you may come across mileage limitations depending on the type of contract you choose. And it can be more expensive in the long run.
Rather than fronting the cash to buy a vehicle for your business outright, you can opt to lease a car through your business. This allows you to upgrade your vehicle every few years — taking advantage of new technology and safety features — while keeping your monthly costs low.
There are two types of business car leasing options available to business owners in Canada: open-ended and closed-ended. Both come with a purchase option that allows you to buy your vehicle at the end of the lease term. Or you can choose to return it and upgrade to a newer model. In either case, pay attention to the business car lease requirements you’ll need to adhere to.
Open-ended leases, also known as terminal rental adjustment clause (TRAC) leases, are more popular with commercial vehicles because of their short loan terms and lack of mileage restrictions.
In open-ended business car leasing, you — not the leasing company — are responsible for how much your vehicle depreciates and how much it’s worth by the end of the lease (which is called the vehicle’s “residual value”). Because your business is responsible for the vehicle’s rate of depreciation, your vehicle can be used however it’s needed.
Residual value is another term for the remaining value of an asset after it has depreciated over a period of time. In addition to how much and how hard you drive, your vehicle’s residual value will depend on its make and model as well as the state of the market when the lease period is up.
Say you lease a new car at $25,000 and your lease payments are structured assuming the car will depreciate by $10,000 by the end of the lease term, leaving a value of $15,000. If the car ends up depreciating by $12,000 by the end of your lease and is then worth $13,000, you’ll have to pay $2,000 to cover the unanticipated depreciation.
Alternatively, if the car only depreciates by $8,000 and is worth $17,000 when the lease is up, your leasing company will then have to pay you $2,000. This payment acts as a “refund” of sorts to make up for the higher lease payments you agreed to make when it was believed that the car would lose more value than it actually did.
Closed-ended leases are more popular for non-commercial vehicles in Canada, but may also work well for your business. These come with a set of business car lease requirements, such as fixed monthly payments, fixed terms and mileage restrictions. And unlike an open-ended lease agreement, you won’t bear the cost of depreciation because closed-ended leases are based on mileage and not the car’s residual value. But since there is a mileage limit, you’ll have to pay extra if you go over. The rate is usually set anywhere between $0.08 and $0.20 per kilometre, but you could pay more or less depending on your contract.
If you’re only planning on using your corporate vehicle semi-regularly, then a closed-ended lease could be ideal. However, businesses that intend to use their vehicles regularly may not get the best deal out of this type of contract because they’re likely to need more leeway in the lease agreement for vehicle depreciation and wear and tear.
It depends on your situation. Generally, business car leasing might be best if you plan on getting a new car in a few years. Buying might be a better choice if you want to modify your business vehicles or if you want full ownership of your fleet. The table below summarizes the differences between buying and leasing a vehicle.
| Buying a car | Leasing a car | |
|---|---|---|
| Who owns the car? | When you buy a car, you (or your business) own it — your lender only has a lien against the vehicle should you fail to repay. | The dealership. A lease is more like an extended rental period; once the period is over, the car is returned. |
| What are the upfront costs? | Usually a down payment of 10%-20% of the car’s value as well as provincial/territorial registration costs, fees and taxes. | It may include a down payment, a security deposit, an acquisition fee, the first month’s payment and other taxes and fees. |
| How large are the payments? | With a car loan, you pay back both interest and principal. A shorter loan term makes your payments higher, but a longer loan term increases means you’ll pay more in interest. | Since you aren’t paying for the car itself, your payments will be smaller unless you lease a more expensive car. Lenders charge interest as well as fees for vehicle depreciation and mileage, should you go over your yearly limit. |
| Do you need to worry about maintenance? | Yes. By conducting regular maintenance and avoiding excessive wear and tear, you can keep your car functioning for years to come. You can also improve its trade-in value if you want to buy a new vehicle. | Yes. Beyond regular maintenance, you’ll need to pay for any excessive wear and tear that happens to the car during the lease period. |
| Are there mileage limits? | No. Since you own the car, you can drive it as much or as little as you want. | Yes. Most lease contracts limit you to a certain amount, usually around 25,000 kilometres. If you go over this, you’ll have to pay a charge per kilometre. |
| Can you end the contract early? | Yes, but your lender might charge prepayment penalties to make up for the interest it won’t get from your continued repayments. Not all lenders charge this fee. | Yes, but there will likely be high fees and charges attached to ending your contract ahead of schedule. |
| What happens at the end of the loan term? | You’ll own your car, free and clear. You can sell it or keep it, whichever you choose. | If you have an open-ended lease, you must purchase the car. If you opted for a closed-ended lease, you can walk away from the term and either buy or lease a different vehicle. |
Finder data suggests that men aged 25-34 are most likely to be researching this topic.
| Response | Male (%) | Female (%) |
|---|---|---|
| 65+ | 3.27% | 1.96% |
| 55-64 | 4.41% | 2.78% |
| 45-54 | 14.38% | 4.74% |
| 35-44 | 12.75% | 8.17% |
| 25-34 | 20.10% | 9.48% |
| 18-24 | 8.99% | 8.99% |
If you decide that buying a vehicle is the better option for your business, check out the car financing options in the table below.
Leon, an Ontario resident, runs a successful cleaning business. He wants to buy a car to travel between job sites and is hoping to find an affordable model that will make less of an environmental impact than a traditional vehicle. After doing some research, Leon decides to lease a 2023 Hyundai Elantra Hybrid SE (valued at $31,000.00 by the dealer).
Below is a breakdown of Leon’s possible costs if he leases the vehicle. He’ll have to pay around $180.00 to register his car with the provincial government – this includes the cost of licence plates, a sticker and a vehicle permit. If he has a closed-ended lease, he could also end up paying extra if he exceeds his yearly mileage limit or puts excess wear and tear on the car.
| Value of the vehicle | $31,000.00 (purchase price) |
| Deposit | None required |
| Funding type | Auto lease |
| Interest rate (APR) | 5.90% |
| Loan term | 5 years |
| Additional fees |
|
| Payment amount | $547.00 monthly or $252.00 biweekly |
| Total lease payments by the end of the term | $32,820.00 with monthly payments or $32,760.00 with biweekly payments |
*The information in this example, including rates, fees and terms, is provided as a representative transaction. The actual cost of the product may vary depending on the retailer, the product specs and other factors.
Business car lease requirements and the exact eligibility criteria will vary between leasing companies and car manufacturers. However, you generally need to:
The cost of a business car lease depends on your contract. With an open-ended lease, you’ll pay a monthly fee as well as the difference between the estimated residual value of the vehicle established at the beginning of the lease contract and the actual resale value at the end of the lease period. With a closed-ended lease, you’ll only need to pay the monthly fee and any additional mileage costs.
Some other costs you might have to pay include:
Fleet management is ideal if you already have cars for your business but want assistance with the administrative burden of tracking vehicle usage and expenses.
Essentially, you outsource your vehicle management to a different company, which allows for an easy way to track and manage your vehicle expenses — all in one invoice. You may also be able to negotiate discounts on servicing, repairs and fuel.
If you only have a few vehicles and can handle the books, fleet management may not be for you. However, if your business uses a number of cars, trucks or vans, then hiring a company to manage the costs may pay off. Check with your accountant to see if fleet management is a good idea for your business.
From lower upfront costs to gaining an edge over the competition, there are a few perks of business car leasing:
Trying to decide between leasing or buying a vehicle for your business? Here are a few potential drawbacks to leasing to consider:
Yes. The Canada Revenue Agency (CRA) allows business owners to deduct the cost of depreciation, but not the cost of purchasing vehicles. If you use your vehicle for both personal and business use, you can only claim expenses related to your use of the vehicle for business purposes.
For example, if you drive 40 km one day but 15 km of that is spent running personal errands, you can only claim vehicle expenses associated with 25km of driving.
The CRA often uses the terms depreciation and “Capital Cost Allowance (CCA)” interchangeably for the purpose of determining tax claim eligibility. Deductible vehicle expenses are calculated the same way for sole proprietorships, partnerships and corporations, however, each entity reports these expenses differently to the CRA. You can use the CRA’s Automobile Benefits Online Calculator to help determine what you vehicle tax benefits might be eligible for.
What vehicle tax deductions can I write off?
Sole proprietorships report business vehicle depreciation on line 9936 (“Capital cost allowance (CCA)”) of Tax Form T2125 Statement of Business or Professional Activities.
Partnerships report depreciation on line 9943 (“Other amounts deductible from your share of net partnership income (loss)”) in part 6 of form T2125.
Being in a partnership does not mean you can claim more deductibles on an asset than if one person operated the same business alone. The sum of vehicle expenses – depreciation as well as other eligible costs – collectively claimed by all partners in a partnership must equal what a single individual would claim for the same vehicle(s). In other words, the amount that the CRA allows you to claim for a single vehicle’s expenses is the same regardless of whether 1 person uses that vehicle or 101 people use it.
Corporations report vehicle depreciation on of form T2 Corporate Income Tax Return (see Income Tax Folio S3-F4-C1 General Discussion of Capital Cost Allowance).
Your commercial vehicle expenses claim should be based on your business year not the calendar year. You will need to calculate the capital cost of your vehicle, determine which class of depreciable property it falls under according to CRA regulations and then apply the yearly depreciation rate for that class to the vehicle’s capital cost. The result is the capital cost allowance (CCA) for that vehicle, which you can deduct from your taxes.
Talk to either a tax accountant or a tax lawyer to know exactly what you’re eligible to claim and how to claim it.
As your business expands, adding vehicles to your fleet through a lease could make the difference between spending thousands upfront or spreading the cost out over time. But you won’t be able to modify the vehicle to fit your business’s unique needs. And it could be more expensive in the long run if you or your employees drive a lot. However, exercising a purchase option when your lease expires could be a way to avoid paying fees for excess use. If you’re on the fence, it’s worth considering the pros and cons of business car leasing and if you can meet the business car lease requirements.
Thinking of buying a car for your business instead? Check out our guide to business vehicle financing.
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