Capital cost allowance (CCA) vs. leasing: how the math differs in Canada

Short answer: In Canada, buying equipment lets you deduct its cost gradually through capital cost allowance (CCA), while leasing equipment usually lets you deduct the full lease payment as an expense each year. Over time, the total tax deduction is often similar, but the timing and cash flow are very different — and that’s what really matters for most Canadian businesses.

Below, we’ll walk through how both rules work, side-by-side math, and a practical way to choose a structure (and not just chase the biggest deduction in year one).

How CCA works when you buy equipment in Canada

Key point: When you buy equipment, you generally cannot deduct the full cost right away. Instead, you claim CCA each year based on the asset’s class and rate, using the declining balance method. (Canada)

The core CCA idea

The CRA treats most equipment as depreciable property. You add the equipment to a CCA class, then each year you can deduct a percentage of the undepreciated capital cost (UCC) of that class. (Canada)

For many typical business assets:

• Class 8 (20%) covers a lot of general equipment: machinery, furniture, refrigeration equipment, tools over $500, office equipment, etc. (Canada)
• Other classes (e.g., manufacturing, clean energy) may have higher or special rates. (Canada)

Key CCA features:

• Declining balance: You apply the rate to the remaining UCC, not the original cost.
• Half-year rule: In the year you buy the equipment, you can usually only claim CCA on half of the net additions to that class. (Canada)
• Pooling: Assets in the same class are usually pooled together in one UCC balance instead of being tracked individually. (Cadesky)

Example: $100,000 Class 8 asset

Assume:

• Purchase price: $100,000
• CCA class: Class 8 (20%)
• Ignore temporary accelerated incentives to keep the example clean.

Very simplified, your tax deductions from CCA might look like this:

• Year 1:
  • Half-year rule → base = $50,000
  • CCA = 20% × $50,000 = $10,000
  • UCC at year-end ≈ $90,000
• Year 2:
  • CCA = 20% × $90,000 = $18,000
  • UCC ≈ $72,000
• Year 3:
  • CCA = 20% × $72,000 = $14,400
  • UCC ≈ $57,600
• Year 4: CCA ≈ $11,520
• Year 5: CCA ≈ $9,216

So over 5 years you deduct roughly $63,000 of the $100,000 cost; the rest stays in UCC and is deducted in later years or when you dispose of the asset.

What CCA means for cash and tax

CCA is a non-cash deduction:

• You paid the cash earlier (or you’re paying it via a loan),
• But you get to reduce taxable income every year as long as the UCC remains.

CCA is also generally discretionary — you can claim up to the maximum each year, but you don’t have to claim it all. (Canada) That flexibility can be useful if you expect higher tax rates in future years.

If you bought the equipment with a bank loan, you may also deduct interest expense separately, while the principal is not deductible (it’s just repaying what you borrowed).

If you’re considering a large purchase, a Mehmi advisor can help you map how CCA interacts with structures like asset based lending and secured loans to fund the equipment without crushing your cash flow.

How leasing equipment is deducted for tax

Key point: When you lease equipment, CRA usually lets you deduct the lease payments you incur in the year as a current business expense — instead of claiming CCA. (Canada)

Straight lease treatment (the common case)

For most commercial equipment leases:

• You do not own the asset during the term.
• You do not claim CCA on it.
• Instead, you deduct lease payments as “property leasing costs” in the year they’re incurred. (Canada)

CRA’s guidance for property leasing costs is pretty simple:

Deduct the lease payments incurred in the year for property used in your business. (Canada)

So if:

• Annual lease payments = $24,000 (before tax)
• All business use → you can generally deduct $24,000 each year for the term.

For many Mehmi clients using equipment leases, this is exactly the math: straightforward annual deductions matching what they pay.

Special election: treat lease as a loan and claim CCA

There is a wrinkle most owners never hear about.

If certain conditions are met — mainly that the fair market value (FMV) of the leased property at the start of the lease is more than $25,000 — CRA lets you elect to treat the lease as a loan and:

• Deduct only the interest portion of the payments, and
• Claim CCA on the underlying asset, as if you owned it. (Canada)

This can make sense for very large assets or certain industries (like a major combine or fishing boat) but isn’t typical for everyday office or shop equipment.

Practical point: Most small and mid-sized businesses simply deduct lease payments and skip this election. But it’s worth asking your accountant if you’re doing a big ticket deal with heavy equipment financing.

Side-by-side: buy with CCA vs lease the same equipment

Key point: Over the full life of the asset, the total deductions under CCA vs leasing are often in the same ballpark — but the pattern over time is very different. Leasing tends to give larger, level deductions early, while CCA starts slower and stretches longer.

Assumptions (simple, but realistic)

Let’s compare two options for a $100,000 piece of equipment you’ll use 100% for business in Ontario:

1. Buy and claim CCA (Class 8, 20%, half-year rule) – no special accelerated incentives.
2. Lease for 5 years, with level payments totalling $115,000 (principal + interest).

Ignore HST and interest deductibility details for a moment; we’re just looking at pre-tax deduction patterns.

Approximate deduction patterns (Years 1–5)

<table>
 <thead>
   <tr>
     <th>Year</th>
     <th>Buy &amp; CCA – deduction</th>
     <th>Lease – deduction (lease payments)</th>
   </tr>
 </thead>
 <tbody>
   <tr>
     <td>1</td>
     <td>$10,000</td>
     <td>$23,000</td>
   </tr>
   <tr>
     <td>2</td>
     <td>$18,000</td>
     <td>$23,000</td>
   </tr>
   <tr>
     <td>3</td>
     <td>$14,400</td>
     <td>$23,000</td>
   </tr>
   <tr>
     <td>4</td>
     <td>$11,520</td>
     <td>$23,000</td>
   </tr>
   <tr>
     <td>5</td>
     <td>$9,216</td>
     <td>$23,000</td>
   </tr>
 </tbody>
</table>


(Lease total over 5 years = ~$115,000; CCA total over 5 years ≈ $63,000, with further CCA in later years.)

What this means:

• Leasing:
  • Bigger deductions early, steady each year.
  • Closely matches your actual cash outlay.
• CCA on purchase:
  • Makes you wait — the half-year rule caps year-1 deduction. (Canada)
  • Deductions decline over time, but keep going beyond year 5.

From a pure tax deduction view, leasing looks nicer in the early years; CCA “catches up” over the longer life of the asset. The real question is what your business needs now: cash, borrowing capacity, or long-term ownership.

A Mehmi advisor can quickly model this with their calculator so you can see after-tax costs under different structures, including equipment leasing and equity-unlocking options like refinancing or sales leaseback.

When CCA (buying) usually wins

Key point: Buying and claiming CCA often makes more sense for long-life, critical equipment where you want full control, strong residual value, and flexibility to use accelerated CCA rules when they’re available.

Situations where buying tends to shine:

1. Core, long-term assets
   • Buildings, major production lines, or specialized machinery you plan to keep for 10–20+ years.
   • CCA lets you spread the deduction across the full useful life, and you’re not locked into a lease term. (Canada)
2. You have strong cash and credit
   • You can use a bank loan or a Mehmi-arranged facility to buy the equipment outright.
   • You’re comfortable funding the upfront HST (and recovering it) and gradually claiming CCA.
3. You expect higher profits in later years
   • Because CCA is discretionary, you can save some deduction capacity for years when your taxable income (and tax rate) will be higher.
4. Assets that don’t go obsolete quickly
   • Agricultural machinery, heavy construction assets, and other durable equipment where rapid tech change is less of a risk.
   • Here, a combination of purchase + asset based lending can work well.

Contrarian point: Some owners assume “buying is always better tax-wise.” That’s rarely true. The tax rules are designed so you’re not unfairly punished for choosing a lease — the trade-off is really about control and long-term strategy vs flexibility and cash flow.

When leasing usually wins

Key point: Leasing is often the better fit when cash flow, flexibility, and obsolescence risk matter more than ultimate “ownership.”

Leasing tends to win in these cases:

1. You need to protect cash and your line of credit
   • With a lease, you usually don’t fund the entire purchase price or HST upfront.
   • Lease payments are spread out and fully deductible as they’re incurred. (Canada)
   • Your operating line is free for payroll, inventory, and daily surprises.
   • This is why many Mehmi clients pair equipment leases with a working capital loan or business line of credit instead of maxing everything on one bank facility.
2. Technology and equipment that age quickly
   • IT hardware, POS, lab equipment, some medical and manufacturing tech.
   • Leasing lets you refresh more frequently without worrying about remaining UCC in a CCA pool.
   • Programs like rent try buy for hospitality make this even more flexible for hotels and restaurants.
3. You want to bundle soft costs and add-ons
   • Leasing can wrap in delivery, install, training, and even extended warranties.
   • CRA treats those payments as lease expenses instead of separate capital costs in many cases, simplifying your tax treatment (though exact treatment depends on structure). (Canada)
4. You may refinance or restructure later
   • Leasing keeps the asset structure clean for future refinancing or sales leaseback if you need to free up equity for growth or deal with a tight cash period.
5. You have B/C credit or limited security
   • Leasing companies (including Mehmi’s lending partners) often underwrite more heavily to equipment value and cash flow than pure balance sheet ratios.
   • That can be easier than trying to add another term facility at your bank.

Special rules and traps to be aware of

Key point: The basic story is simple — CCA for owned equipment, lease deductions for leased equipment — but there are edge cases: vehicles, long-term leases, mixed personal/business use, and big-ticket leases where you might elect to treat the lease as a loan.

Passenger vehicles and leased vehicles

For passenger vehicles, CRA has specific limits:

• You can deduct lease payments for a business-use vehicle, but there are monthly caps and formulas to prevent over-deducting on luxury vehicles. (Canada)
• If you own the vehicle, you use CCA (with its own limits) rather than deducting payments. (Venn)

This is a classic area where your accountant will look closely at your logs and structure. If your business runs trucks or specialized vehicles, Mehmi’s truck and trailer financing can be structured with these CRA rules in mind.

Mixed personal and business use

Whether you buy or lease:

• If you use equipment for both business and personal purposes, you can only deduct the business-use portion of CCA or lease payments. (Canada)
• CRA expects a reasonable basis for your split — often hours, mileage, or similar practical metrics.

Long-term leases where you claim CCA

As mentioned earlier, certain long-term leases can be treated like financing arrangements:

• Under specific rules (e.g., Income Tax Act subsection 16.1), a lessee may be treated as owning the property and can claim CCA if conditions are met. (Canada)
• In practice, this is used for very large, long-life assets, and the legal drafting is critical.

For most Mehmi clients using standard equipment financing, the structure is intentionally kept simple: either clear ownership + CCA, or clear lease + deductible payments.

How lenders and accountants actually think about this

Key point: Your accountant mostly cares about tax efficiency and compliance. Your finance partner cares about cash flow, security, and risk. The best structure is where those goals line up — not just whichever yields the largest deduction in year one.

Real-world considerations:

• Cash flow: Leasing spreads out tax deductions and cash costs. Buying with CCA front-loads cash out (down payment + tax) and back-loads some deductions.
• Borrowing capacity:
  • A term loan for equipment uses up room with your bank.
  • Leasing with independent funders can preserve capacity at your primary lender.
• Balance sheet optics:
  • Ownership puts an asset (and potentially a loan) on your books.
  • Lease classification depends on your accounting standards, but historically some owners preferred off-balance-sheet structures (less common now under new standards).
• Resale and flexibility:
  • If you expect to sell or upgrade in a few years, leasing may pair better with options like vendor programs and structured upgrades.
  • If this is a “forever asset,” CCA on ownership can be cleaner.

Mehmi sits in the middle of this conversation. Their team talks “bank” with your lender, “tax” with your accountant, and cash flow and uptime with you — and then builds a structure (lease, purchase with invoice or freight factoring backing working capital, etc.) that actually fits how your business runs.

A simple framework: CCA vs leasing for your next purchase

Key point: Instead of asking “Which gives the biggest write-off?”, ask three questions: How long will I keep it? How tight is cash? How much risk am I taking on the asset?

Use this quick framework:

1. How long will I keep this equipment?
   • 3–5 years and then upgrade → leasing tends to fit better.
   • 10+ years, critical core asset → buying + CCA often makes sense.
2. How tight is my cash and credit?
   • Tight cash, line of credit near its limit → prioritize leasing and/or working capital solutions.
   • Strong cash and borrowing power → buying with CCA becomes more realistic.
3. How risky is the asset (tech, residual, regulation)?
   • High risk of obsolescence or regulatory change → you may not want full ownership risk.
   • Stable, simple, and always useful (e.g., forklifts, certain Class 8 gear) → more comfortable to own.

Once you’ve answered those, a Mehmi advisor can plug numbers into their calculator and compare:

• After-tax cost of a lease through Mehmi,
• After-tax cost of owning and claiming CCA, funded either by your bank or a Mehmi-arranged facility,
• Hybrid approaches like refinancing or sales leaseback if you already own older equipment.

Anonymous case study: manufacturer comparing CCA vs leasing

Background

A small Ontario manufacturer wanted a new CNC machine:

• Equipment cost: $250,000
• Expected useful life: 10+ years, but tech changes every 5–7 years
• The bank offered a 5-year term loan at competitive rates.
• Mehmi offered a 5-year equipment lease with an option to buy the machine for a modest residual at the end.

The owner’s first instinct: “I’d rather own it. My accountant says CCA is a great deduction.”

Option 1 – Buy and claim CCA

With a purchase:

• They’d pay HST on the full $250,000 upfront and then recover it via input tax credits.
• Using a Class 8 rate of 20% and the half-year rule, the CCA deductions would be heavier in years 2–4, lighter in year 1 and later years. (Canada)
• They’d also deduct interest on the term loan, but principal repayments would not be deductible.

Option 2 – Lease with deductible payments

With Mehmi’s lease:

• HST would be charged on the lease payments over time instead of on the full price upfront.
• Annual lease payments were slightly higher than the loan payments, but fully deductible as leasing costs. (Canada)
• At the end, they could either:
  • Buy the machine for the residual, or
  • Roll into a new machine if technology changed materially.

What changed the owner’s mind

When they looked only at “lifetime total deductions,” the comparison was surprisingly close. CCA plus interest expense produced a similar total deduction to the lease payments — just stretched differently over time.

The deciding factors were:

• Cash flow: Leasing required a smaller upfront hit, especially on HST.
• Flexibility: The owner admitted they’d probably want a newer model within 7 years.
• Bank relationship: Keeping the bank line free for inventory and receivables felt smarter than tying it up with another term loan.

They chose the Mehmi lease with a reasonable buyout option. The business gets:

• Strong deductions in each of the next five years,
• The ability to upgrade or buy out based on how the business and technology evolve, and
• A cleaner balance between bank facilities and non-bank equipment financing.

Their accountant’s conclusion: “From a tax angle, both options are fine. From a business angle, the lease clearly fits your growth plan better.”

FAQ: CCA vs leasing in Canada

1. Is leasing always better than claiming CCA for tax purposes?

No. Leasing often gives larger, level deductions earlier, because you deduct lease payments as you incur them. (Canada) CCA starts slower (due to the half-year rule) and declines over time, but stretches across the asset’s full life. (Canada) Over many years the total deduction can be similar; the real difference is timing and cash flow.

2. Can I claim CCA on leased equipment?

Normally, no — if it’s a regular lease, you don’t own the asset, so you deduct lease payments instead. (Canada) In some cases, where the fair market value is high and conditions are met, you can elect to treat the lease as a financing arrangement and claim CCA as if you owned the asset, while deducting only the interest portion of the payments. (Canada) This is a specialized strategy to discuss with your accountant.

3. What CCA class applies to most business equipment in Canada?

Many general business assets — furniture, machinery, tools over $500, office equipment — fall into Class 8, which has a 20% CCA rate on a declining balance basis. (Canada) Some manufacturing or clean-energy equipment can qualify for other classes and higher rates. CRA maintains an updated list of CCA classes and rates each year. (Canada)

4. Are lease payments always fully deductible?

Lease payments for property used in earning business income are generally deductible as leasing costs in the year they’re incurred. (Canada) Exceptions include:

• Passenger vehicles, where monthly deductions are capped and prorated. (Canada)
• Mixed personal and business use, where you must allocate only the business-use portion. (Canada)

For standard commercial equipment leases that Mehmi arranges, most or all of the payment is deductible when the equipment is used 100% in the business.

5. How does CCA affect me if I sell or refinance equipment later?

When you dispose of equipment you’ve claimed CCA on, you may have:

• Recapture (taxable income) if proceeds exceed the remaining UCC, or
• A terminal loss (deductible) if you sell all assets in a class and the class still has a positive UCC balance. (Canada)

If you do a sale-leaseback — selling the asset to a finance company and leasing it back, like Mehmi’s refinancing or sales leaseback — the sale can trigger recapture or losses, and the new lease creates a fresh stream of deductible lease payments. Your accountant will model this before you proceed.

6. How do I practically compare lease vs buy for my next equipment purchase?

A simple approach:

1. Estimate lease payments and the term under a Mehmi equipment lease.
2. Estimate purchase price, CCA class and rate, and any loan payments if you finance the purchase.
3. Model the year-by-year deductions:
   • Lease: lease payments each year. (Canada)
   • Purchase: CCA based on CRA rates, plus any interest expense. (Canada)
4. Factor in your expected profits and tax rates by year, and your cash flow needs.

Mehmi can do this side-by-side using their calculator and help you choose between leasing, buying with business loans, or a hybrid structure that keeps both the taxman and your cash flow relatively happy.

Internal links used

1. Equipment leases – https://www.mehmigroup.com/services/equipment-financing/equipment-leases
2. Equipment financing overview – https://www.mehmigroup.com/services/equipment-financing
3. Heavy equipment financing – https://www.mehmigroup.com/services/equipment-financing/heavy-equipment-financing
4. Rent Try Buy Hospitality – https://www.mehmigroup.com/services/equipment-financing/rent-try-buy-hospitality
5. Asset Based Lending – https://www.mehmigroup.com/services/equipment-financing/asset-based-lending
6. Refinancing or Sales Leaseback – https://www.mehmigroup.com/services/equipment-financing/refinancing-sales-leaseback
7. Vendor Program – https://www.mehmigroup.com/services/vendor-program
8. Working Capital Loan – https://www.mehmigroup.com/services/business-loans/working-capital-loan
9. Line of Credit (business loans) – https://www.mehmigroup.com/services/business-loans/line-of-credit
10. Invoice or Freight Factoring – https://www.mehmigroup.com/services/business-loans/invoice-freight-factoring
11. Secured Loan – https://www.mehmigroup.com/services/business-loans/secured-loan
12. Business Loans overview – https://www.mehmigroup.com/services/business-loans
13. Truck and Trailer Financing – https://www.mehmigroup.com/services/equipment-financing/truck-trailer-financing
14. Calculator – https://www.mehmigroup.com/calculator

External citations used

1. CRA – Claiming capital cost allowance (CCA) (overview of CCA, half-year rule, UCC). (Canada)
2. CRA – Capital cost allowance (CCA) rates (classes and current rates, including Class 8). (Canada)
3. CRA – Class 8 (20%) and general guide to CCA (examples of equipment in Class 8). (Canada)
4. CRA – Property leasing costs (deductibility of lease payments and option to treat as combined principal/interest). (Canada)
5. CRA – Motor vehicle – Leasing costs and Motor vehicle expenses (lease deductibility and limits for vehicles). (Canada)
6. CRA – Income Tax Folio S3-F4-C1, General discussion of CCA and chapter history (discussion of depreciable property and lessee ownership deeming rules). (Canada)
7. CRA – Capital cost allowance – daycare (example of CCA rate and business-use restrictions). (Canada)
8. TaxTips.ca – Capital Cost Allowance (CCA) (practical explanation and references to CRA folio). (taxtips.ca)
9. TurboTax Canada – Should I Buy or Lease My New Business Vehicle? (plain-language explanation that leased vehicles aren’t eligible for CCA; deductions through lease costs instead). (TurboTax Canada)

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