How you intend to use the car determines what makes the most financial sense, according to Chartered Accountant Sylvain Campeau a senior tax manager with Collins Barrow LLP in Ottawa.
"Your specific needs are instrumental in deciding the best approach.
Will you change cars in three or four years, or keep it for the long term?
Is it for personal or business use? How important is your comfort level? Remember that extras like four-wheel drive and a great sound system add up."
Affordability
Chartered Accountant John Lokker, chairman and CEO of National Traffic Services in Brampton, says it's a question of cash flow.
"What is your disposable income? The more you spend, the more you lose. A car can depreciate as much as 30 per cent when it leaves the lot."
Don't overbuy if you are tight financially. With a low down payment (less than 10 per cent of the purchase price), leasing is a simpler means of obtaining a vehicle, but you still need to buy car insurance.
Tax Perspective
Tax is one component of the decision. But first you must determine if you are even eligible to claim your car expenses as a deduction.
As Campeau explains, "Leasing may be more beneficial from the tax perspective, but the tax savings must compensate you sufficiently over the long term.
"Many people want to save taxes and think it justifies leasing a higher-end vehicle where the tax savings are higher. Generally, you can claim up to $800 per month on a lease. If you are buying a car, you can claim depreciation only on the first $30,000.
While an $800 lease will give you a higher-end car than a $30,000 one, despite the higher tax savings you still may not be financially ahead. If you have to spend more to save taxes, then you are out of pocket and not saving at all," Campeau adds.
Aside from tax savings, it may pay to keep your current car for up to 10 years, if it has a good repair record and you like it.
Mileage and Penalties
"Leasing is more complex," explains Lokker, "with different issues at stake. Determine the residual value - your cost to buy the vehicle at the end of the lease - and also the mileage.
"Mileage is critical. When arranging your lease, you must set an anticipated mileage - the more mileage, the more your monthly payment. Should you exceed the allowable mileage, the penalties are significant - as high as 10 cents per kilometre or more. It's often cheaper to buy out the lease than pay the penalty."
Lokker goes on to suggest, "Consider the lease term against the warranty on a new vehicle. While you will pay less to lease, you will have nothing at the end. By buying, you have a car you can rely on with no worries about mileage and maintenance while under warranty.'
Both CAs agree - do your homework first. Then you can be confident that you are making the decision that is right for you.
More information on this topic is available from a Chartered Accountant.
