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Short answer: On a typical commercial equipment lease in Canada, you (the lessee) pay GST or HST on each lease payment and most fees, based on the province where the equipment is used. The lessor collects and remits the tax, and if your business is GST/HST-registered, you can usually recover that tax as input tax credits (ITCs).
This post breaks down who owes what, when, and how to structure leases so tax doesn’t surprise you or crush your cash flow.
Key takeaway: GST/HST is a consumption tax on the use of equipment, not a punishment for financing. For registered businesses, most or all of it is recoverable through ITCs — but the timing and cash flow differ between leasing and buying.
At a high level:
If you are a GST/HST registrant using the equipment primarily (more than 50%) in your commercial activity, you can generally claim ITCs to recover the tax you paid or owe on lease payments and related costs. (Canada)
From a Mehmi-style perspective: GST/HST should rarely be the deciding factor between leasing and other structures. It’s more about cash flow, flexibility, and balance sheet impact than about “saving tax.”
Key takeaway: Legally, the lessee pays, the lessor collects and remits, and CRA gets the money. The only real question is whether your business gets it back as ITCs.
On a standard equipment lease:
Very small businesses may not be required to register for GST/HST if their taxable revenues are under $30,000 in any single calendar quarter or over four consecutive quarters. (Canada)
Opinionated take: Many small operators stay unregistered “to avoid paperwork” and quietly eat 13–15% on every payment. That’s often more painful than doing quarterly returns. Talk to your accountant before deciding to stay a non-registrant if you’re leasing meaningful equipment.
Key takeaway: Think of every charge on the lease as either a taxable supply now or something that might become taxable when it’s used or applied. The big buckets are: upfront fees, ongoing rent, extra charges, and the end-of-term buyout.
Common items:
These amounts are generally taxable at the same rate as the lease, and you’ll see GST/HST charged either:
If your lease is structured through Mehmi’s equipment leasing platform, we’ll usually roll eligible soft costs into the financed amount and the tax follows the same pattern as your regular rent, which can smooth cash flow instead of hitting you all at once.
You can see these costs clearly itemized in most lender packages and funding checklists (e.g., admin and documentation fees listed alongside the base rent and taxes).
Under GST/HST rules, each lease interval (month, quarter, etc.) is treated as its own taxable supply. The tax is calculated on that period’s rent at the rate determined by the place-of-supply rules. (Canada)
Practically, that means:
This is one of the big advantages of leasing equipment vs. buying it with a lump-sum cash or term loan: you don’t have to fund all of the GST/HST on the full purchase price on day one; you fund it gradually with each payment, which keeps your working capital more flexible.
If you want to compare this to paying cash or using a term loan (where GST/HST on the full asset usually hits upfront), a leasing specialist at Mehmi can model both options using their online calculator at https://www.mehmigroup.com/calculator.
Equipment leases often include variable charges:
As a rule of thumb, if a charge is part of the consideration for using the leased equipment, expect it to be taxable at the same rate as the core rent. CRA treats most charges under the lease agreement as part of the taxable supply of use of the asset. (Canada)
Two specifics to watch:
End-of-term options vary (FMV, fixed residual, $10 buyout, etc.), but for GST/HST purposes:
For businesses registered for GST/HST, the buyout tax is usually fully recoverable as an ITC, so the net cost is the buyout itself, not the tax.
Key takeaway: The rate depends on where your customer is considered to receive the supply (place of supply), not where the lessor’s head office is. If you operate across provinces, the rate can change.
For leases of tangible personal property, CRA’s place-of-supply rules focus on where the equipment is ordinarily located and used. (Canada)
Examples:
If equipment moves between provinces during the lease (e.g., trucks, mobile machinery), your lessor may need to:
For fleets and transportation assets, it’s worth working with a finance partner experienced in multi-province leasing — Mehmi’s transportation expertise is built for exactly these cross-jurisdiction details.
Key takeaway: If you’re registered and the equipment is used primarily in your commercial activity, most or all of the GST/HST on your lease is recoverable — but you need to track use and keep proper documentation.
CRA’s ITC rules say you can recover GST/HST paid or payable on property or services acquired for use in your commercial activities. (Canada)
For leased equipment, that generally means:
If you use the equipment more than 50% in commercial activities, you’re generally eligible to claim ITCs on 100% of the GST/HST on that lease (with some exceptions like passenger vehicles). (Canada)
If equipment is used for both business and personal purposes:
In plain English: if you’re leasing a pickup that doubles as the family truck, you probably can’t claim 100% of the tax. Keep mileage logs and let your accountant apply the CRA formulas.
If you later register for GST/HST, CRA may allow ITCs on some property you already hold and use in your commercial activities as of the date you became a registrant, including capital equipment. (Canada)
However, for lease payments you made before registration, you typically won’t be able to retroactively claim ITCs on those intervals. That’s another argument for early registration if you know you’ll be leasing significant equipment.
Key takeaway (slightly contrarian): For most registered businesses, HST/GST is economically neutral between leasing and buying in the long run — but timing and cash flow can make leasing more comfortable.
If you:
For companies who want to preserve their operating line of credit and avoid tying up working capital in tax, leasing can be more attractive, especially when combined with structures like:
If you go the term loan route, the economics of principal and interest differ from a lease, but from a GST/HST perspective you’re still facing a big upfront tax bill on the purchase price.
Key takeaway: Most deals are straightforward, but certain scenarios have extra GST/HST wrinkles: startups, sale-leasebacks, refinancing, and cross-border or cross-province use.
New businesses often:
If you’re a startup:
In a sale-and-leaseback, you sell owned equipment to a finance partner and lease it back:
For refinancing existing assets via refinancing or sales leaseback or asset based lending, CRA will look closely at documentation to ensure the taxable supplies (sale vs. lease) are properly supported and not double-taxed. Proper invoices and proof of payment are key.
There are special rules where:
These are nuanced areas where a good leasing advisor and tax professional should work together.
Key takeaway: A 10-minute review of the tax lines in your lease can save years of confusion and CRA adjustments.
Before signing, ask:
If you’re working through Mehmi’s vendor program, these questions are typically built into the process, so rates and tax handling are clear to you and your equipment supplier from day one.
Background
A family-owned restaurant in Mississauga decided to:
Total project cost from several vendors: $180,000 + HST.
They had already maxed their bank operating line and didn’t want to drain their cash reserves to fund HST and equipment at the same time.
Challenge
If they bought everything outright with cash or a bank term loan:
Solution
Working with Mehmi:
Results
The operators commented later that “HST felt like just another line item on the lease invoice,” not a separate cash crisis — exactly the outcome a well-structured lease should aim for.
1. Do I pay HST/GST on every lease payment for equipment?
Yes. Each lease payment is treated as a separate taxable supply, and GST/HST is calculated on that payment based on the applicable rate for your province and the place-of-supply rules. (Canada)
2. Can my business get back the HST/GST paid on an equipment lease?
If your business is GST/HST-registered and the equipment is used primarily in your commercial activities, you can usually claim ITCs for the full GST/HST paid on each lease payment, subject to specific rules and restrictions (e.g., passenger vehicles, mixed use). (Canada)
3. Does it matter if I lease instead of buy when it comes to HST/GST?
For most registered businesses, the total tax recovered over time is similar, but the timing is different: purchases usually mean a large tax amount upfront, while leases spread GST/HST across the term. Leasing can help smooth cash flow and is the default focus in Mehmi’s equipment financing solutions.
4. What HST/GST rate applies if my lessor is in another province?
The rate is determined by where you use the equipment, not the lessor’s address. If your equipment is ordinarily located in a participating HST province, you pay the HST rate for that province; if in a non-participating province like Alberta, you pay 5% GST only. (Canada)
5. Do I pay HST/GST on the buyout at the end of my lease?
Yes. If you exercise your purchase option, the buyout is treated as a taxable sale of the equipment, and GST/HST applies to the buyout amount at the applicable rate at that time. If you’re registered and using the asset in your commercial activity, you can typically claim an ITC on that tax.
6. Should a new or small business register for GST/HST before signing an equipment lease?
If you expect to exceed $30,000 in taxable revenues over four consecutive quarters, you’ll be required to register. (Canada) But even below that threshold, voluntary registration can make sense if you’re taking on significant equipment leases — otherwise, HST/GST becomes a real cost you can’t recover. It’s worth talking to your accountant and your leasing partner (like Mehmi) before finalizing the structure.
If you’re planning a major equipment upgrade and want to understand how the GST/HST will hit your cash flow under different structures, a Mehmi advisor can walk you through side-by-side scenarios with their equipment leases, truck and trailer financing, or heavy equipment financing programs — and help you avoid tax surprises before you sign.
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