Leasing vs Ownership of Business Assets
Is ownership of an asset favoured over leasing? This is a question that should be answered only when the economics of the decision can be separated from its income tax implications. The basic advantages of leasing are: (a) lower monthly payments compared to a bank. loan or lien note; (b) an additional source of financing when bank borrowing has reached maximum levels; (c) may insulate the lessee from equipment obsolescence when contracted for short periods of time; and (d) will not affect the liabilities side of companys balance sheet and adversely impact companys ability to arrange additional financing, if required.
Let us look at an example. Assume a company is considering the purchase or lease of a particular piece of equipment costing $50,000 today if it were to be bought outright. The asset is expected to have a resale value, in four years time, of $20,000 (residual value).
If the company does not have the funds available, it could choose to purchase this asset with a bank loan. The bank lends the funds to the company, who would then have to repay the loan at an interest rate that would be commensurate with their credit worthiness. Since the prime bank rate is somewhere between 7 and 8%, it would not be unreasonable to expect the company to borrow at a 10% rate of interest. This translates into blended (principal and interest) monthly payments of approximately $1,268.
However, if the company chose to lease the equipment, it would be considered as if the company had entered into a contract for its long-term rental. The lease payments would be determined by combining the assets reduction in value over the term of the lease (here, $50,000 minus $20,000), the interest rate that the leasing company must pay to finance their original purchase of the asset and any other charges, such as an administration fee and the desired profit margin, that the lessor is able to pass onto their clients.
To the extent that the required lease payments are less than $1,268 per month, then leasing, rather than purchasing the asset, appears to make sense.
One clause of the lease agreement covers what will happen to the assets when the lease is over. The lessee might be given an option to purchase the asset for the residual value that was established at the outset of the lease. A higher residual value typically requires the lessee to make lower lease payments, but it should not be set so unrealistically high that at the end of the contract, the lessee will be required to pay an amount that grossly over states the value of the asset at that time.
A second option is for the lessee to simply return the asset at the end of the lease, but then he will have to enter the entire process again if he wishes to continue having similar equipment to produce his product.
For income tax purposes, Revenue Canada may look beyond the terms of the lease contract and determine that the lease is a "financial lease" and little more than a "disguised purchase". This would be the case when the residual value is particularly low, say $1. They assume that the asset will hold its value beyond the term of the lease and that it is very likely that the lessee will exercise his option to purchase the asset at that time. Thus, the lessee would not be able to deduct the full amount of the monthly payments under the terms of the lease contract, but would have to "set up" the equipment as an asset of the company and take depreciation (capital cost allowance) at government prescribed rates. This may result in a lower write off of costs initially, although in the long run they will equal out and be the same.
Leases that do not attempt to cover the expected useful life of the asset and encourage the lessor to return the item at the end of the contract so that it may be re-marketed by the lessor are called "operating leases". Such leases allow the lessor to expense his monthly lease payments on a pay-as-you-go basis.
How to Save Money on Auto Insurance
In Canada, automobile insurance is legislated by the provinces and there are different schemes in different regions of the country. In British Columbia, Manitoba, Saskatchewan and Quebec the government has a monopoly on auto insurance, although some of these provinces allow for limited competition on optional coverage and vehicle damage. The other provinces have private auto insurance models. And statistics show that government insurers tend to offer lower premiums, especially Manitoba.
It is not just the auto insurance system that can affect the premium youll pay, but also the kind of car you drive. Our tastes in automobiles have changed over the years from two-cars and family sedans that were popular in the 1980s to more sports-utility vehicles and passenger vans that we see on the road today. Our automotive transportation boasts the latest advances in technology making our vehicles both safer and more efficient. But because of their high price, more costly to insure.
Another element in the calculation of your annual automobile insurance premium is the kind of driving and driver that you are. Are you a prudent person who drives short distances to work or a rampant lane changer speeding from appointment to appointment, cell phone in one hand and business organizer and steering wheel in the other? Insurers monitor years of driving experience, average amount of driving distance per annum, traffic infractions and at-fault accidents very carefully and allocate premiums accordingly. Here are some tips to help you keep auto insurance premiums in line:
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