There are several factors that you need to consider before concluding which option is better for income tax purposes.
Generally, if you lease a vehicle you can deduct the lease payments from your taxable income (up to a maximum amount depending on the type of vehicle) and claim ITC for the GST portion on your GST return.
If you finance the purchase of a vehicle you can deduct up to $300 per month for interest portion of your loan payment and also claim depreciation up to 30% of the original cost per year on a declining balance basis. You can claim full amount of GST paid as ITC on your GST return.
The factors you need to consider before concluding which option is better for you include:
- Type of vehicle (passenger vehicle as defined in the Income Tax Act vs a pick-up truck or delivery van have different tax treatments for income tax purposes),
- Purchase price, maximum amount for depreciation for passenger vehicles is capped at $30,000,
- Monthly lease payment, maximum amount allowed for passenger vehicles is $800 per month,
- Interest rate for finance option, maximum amount you can deduct for interest is $300 per month,
- How long you plan to own the vehicle, it will determine the total depreciation you can claim for income taxes,
- Residual value after the lease term end and what are you going to do with this vehicle after the lease term ends. In some lease agreements you can own the vehicle at the end of the lease for $1. Thus, you need to consider how much the vehicle will be worth at the end of the lease term.
- Business use of the vehicle. The amount for lease payments and or depreciation you can claim for a vehicle for income tax purposes is prorated based on the percentage of business use.
Thus, you need to sit down with your accountant and crunch some numbers before concluding which option is better for you for income tax purposes.