Equipment lease or loan? A Canadian worked example with the implied rate, tax and cash flow

To compare an equipment lease with a loan, first find the implied interest rate in the lease by treating its payments as loan payments on the equipment price, then compare total cash out, cash needed at the start and the end-of-term position. A lease often wins on upfront cash and speed; a loan usually wins on total cost when you can make the down payment and plan to keep the equipment. Tax treatment can tilt the result, so involve your accountant before deciding.

This guide is part of the business loan application checklist. Figures are illustrative.

The equipment

A Saskatoon cabinet maker wants an $80,000 CNC router (before tax). It has two offers:

Lease: 60 monthly payments of $1,650, nothing down, $1 buyout at the end.
Loan from its credit union: 10% down ($8,000), $72,000 at 8% over 5 years, secured by the router.

Step 1: find the lease's implied rate

The lessor is effectively lending $80,000 to be repaid with 60 payments of $1,650. Solving for the rate (a spreadsheet's RATE function: =RATE(60, -1650, 80000) x 12) gives about 8.7% a year. The lessor did not print a rate; you had to calculate it.

	Lease	Loan
Implied or stated rate	about 8.7%	8.0%
Cash at the start	$0	$8,000
Monthly payment	$1,650	about $1,460
Total of payments	$99,000	about $87,594
Total cash out including down payment	$99,000 (+ $1 buyout)	about $95,594
Owner at the end	You, after the $1 buyout	You, from day one

On these numbers the loan costs about $3,400 less in total. The lease's advantage is keeping $8,000 of cash in the business at the start and a slightly simpler approval.

Check the loan figures in the payment calculator.

Step 2: GST/HST and provincial sales tax

Buying: GST/HST (and PST in provinces that charge it, such as British Columbia, Saskatchewan and Manitoba, or QST in Quebec) is paid on the full price at purchase. A GST/HST registrant can generally claim the GST/HST back as an input tax credit, but the cash goes out first. Provincial sales tax is usually not recoverable.
Leasing: the taxes are charged on each payment instead, spreading the cash outflow.

For the cabinet maker in Saskatchewan, 5% GST and 6% PST on $80,000 would be $8,800 at purchase, of which the GST ($4,000) is recoverable later. That is extra cash needed under the loan option, unless the lender finances it.

Step 3: income tax treatment

How payments are deducted depends on the legal nature of the agreement:

Owned equipment (loan): you deduct interest and claim capital cost allowance (CCA) on the equipment. General machinery and equipment often falls in Class 8 at 20% a year on a declining balance, while some manufacturing and processing equipment and computers have faster classes. First-year rules and accelerated incentives have changed several times, so check the current CCA rules with the Canada Revenue Agency or your accountant.
True lease (operating lease): payments are generally deductible as rent.
Lease with a nominal buyout, like $1: for tax purposes it may be treated as a purchase financed by the lessor, so you would claim CCA and deduct the financing element rather than the payments as rent.

Because of these differences, compare the after-tax cost only with your accountant's help. For many small businesses the pre-tax comparison above already points clearly one way.

Step 4: the end of the lease

Read the end-of-term options closely:

Type	End of term	Watch out for
$1 or nominal buyout	You own the equipment	Effectively a financed purchase
Fair market value buyout	Buy at market value, return or renew	Value is set by the lessor or an appraiser; budget for it
Fixed percentage buyout (for example 10%)	Buy at a set price	Adds to total cost; include it in the rate calculation
Return only	Hand it back	Wear-and-tear and return-condition charges

Early termination is often expensive: many leases require all remaining payments, sometimes discounted. A loan can usually be repaid early, subject to its prepayment clause.

Decision checklist

Lean towards leasing if:

Cash is tight now and the down payment would strain working capital.
The equipment becomes obsolete quickly (technology, some vehicles) and you want to return or replace it.
The lessor is the manufacturer or dealer offering promotional financing; calculate the implied rate anyway.

Lean towards a loan if:

You will keep the equipment for most of its useful life.
You can make the down payment without hurting cash flow.
The loan rate is lower than the lease's implied rate.
You want to be able to sell or prepay freely.

Either way, the payments count in your debt service coverage ratio, and a lessor usually registers its interest under the provincial PPSA, which other lenders will see. Compare written offers using comparing two loan offers.

Frequently asked questions

Is leasing "off the books"?

For many small private companies using accounting standards for private enterprises, an operating lease stays off the balance sheet, but lenders usually still count the payments. Ask your accountant how your leases are shown.

Can a CSBFP loan finance equipment?

Yes. New or used equipment is an eligible use of a CSBFP term loan. See the CSBFP guide.

Should I accept the dealer's lease because it is quick?

Quick is useful, but get the implied rate and a competing loan offer first. A few days of comparison can be worth thousands of dollars.

What if the lease includes maintenance?

Separate the maintenance value from the financing before you compare, using the price of a stand-alone service contract.

Sources

Canada Revenue Agency — capital cost allowance classes, GST/HST input tax credits
BDC — equipment financing
Innovation, Science and Economic Development Canada — CSBFP equipment loans
Revenu Québec — QST on purchases and leases in Quebec