Tax Benefits of Equipment Financing in Canada

When business owners think about financing equipment, most focus on interest rates and payments. But there’s another critical piece of the puzzle that’s often overlooked:

The tax benefits.

Whether you lease or buy, financed equipment can offer powerful deductions—helping you reduce taxable income, increase after-tax cash flow, and reinvest in your business.

In this guide, we’ll cover:

• How Capital Cost Allowance (CCA) works in Canada
• When you can deduct lease payments vs loan interest
• How to structure financing for maximum tax efficiency
• Real examples of how equipment deductions reduce tax liability

Disclaimer: This article offers general guidance for informational purposes only. Always consult with a licensed accountant or tax advisor before making financial decisions.

Overview: How Does Equipment Financing Save You Money at Tax Time?

Financing allows you to spread out the purchase cost of an asset—but many of those costs are deductible.

Depending on whether you lease or buy, you may be able to deduct:

• Lease payments
• Loan interest
• Capital Cost Allowance (depreciation)
• Related expenses (e.g. insurance, delivery, installation)

These deductions can reduce your net taxable income, which lowers your tax bill. For cash-based small businesses, this is especially helpful in smoothing profitability across years.

Option 1: Tax Treatment of Equipment Loans

When you finance equipment through a loan, you own the asset. As a result:

• You can claim CCA (Capital Cost Allowance) annually to depreciate the asset
• You can deduct the interest portion of your loan payments
• You cannot deduct the full loan payment (since it includes principal repayment)

Example:

Let’s say you finance a $100,000 CNC machine over 5 years:

• Annual loan interest: $6,200 (deductible)
• CCA rate: 30% (applied to the declining balance)

Your tax deductions could include:

• Year 1: ~$6,200 (interest) + ~$15,000 (CCA half-year rule)
• Year 2: ~$4,800 (interest) + ~$21,000 (CCA)
• And so on…

This structure allows you to spread deductions over several years—helpful for long-life assets.

For a full list of asset class CCA rates, visit the CRA’s CCA classes.

Option 2: Tax Treatment of Leased Equipment

When you lease equipment, the lender retains ownership, and you:

• Deduct 100% of the lease payment as an operating expense (as long as it’s business-use)
• Do not claim CCA (since you don’t own the asset during the lease)
• May pay tax on residual value if you purchase the equipment later

This approach is often simpler and more predictable from a tax standpoint—especially for service-based businesses or those with variable income.

Example:

You lease a $60,000 refrigerated van for 4 years at $1,350/month:

• Annual deduction = $1,350 × 12 = $16,200
• No asset ownership required
• Easy to match against delivery income on the P&L

Tip: Lease-to-own agreements may offer a $1 buyout at the end to convert the asset to ownership for future depreciation.

Lease vs Loan: Side-by-Side Tax Comparison

Real Case Study: Using Tax Deductions to Fund Expansion

Business: Alberta-based welding shop
Need: Buy $80,000 plasma cutter and CNC machine
Decision: Financed both over 48 months via term loan

Result:

• Claimed $7,000+ in first-year interest and depreciation
• Reduced taxable income enough to reinvest in hiring an apprentice
• Equipment increased job capacity by 40%, funding growth into a new industrial park contract

Your credit analyst and accountant can help structure deals that align with your year-end tax planning.

Additional Tax-Advantaged Expenses You Can Bundle

When structuring a financing deal, many business owners don’t realize they can include:

• Delivery and installation costs
• Accessories or safety modifications
• Training or software licensing (in some cases)

If bundled properly into the loan or lease, these costs can often follow the same tax treatment as the equipment itself—saving you even more.

Learn more about smart structuring on our Refinancing & Bundling page.

Tips to Maximize Tax Benefits

✅ Work with your accountant before year-end to plan large purchases
✅ Use lease payments to reduce tax liability in high-income years
✅ Time purchases strategically (e.g. Q4 buys allow half-year CCA claim)
✅ Track all related expenses, including install and vendor invoices
✅ If cash is tight, consider Sale-Leaseback to convert old equipment into deductions and cash flow

FAQs: Equipment Financing and Taxes

Can I deduct lease payments and CCA together?
No. You deduct one or the other depending on whether you own the equipment. Leases = payment deduction. Loans = CCA + interest deduction.

Does it matter if the equipment is used or new?
No. Used equipment qualifies for the same tax treatment—as long as it’s used in your business and properly documented.

Can I finance equipment purchased from a private seller?
Yes. If the asset is properly invoiced, valued, and documented, it’s eligible for financing and related deductions.

What if I pay cash instead of financing?
You’ll still be able to claim CCA, but you won’t be able to deduct interest or lease payments—so your total write-off may be lower in the early years.

Want to structure your equipment purchase to lower your tax bill?
Speak to a credit analyst or use our calculator to model payment scenarios that support both cash flow and tax efficiency.

‍