Types of Leases
Impact Commercial works with two main types of leases to serve you best.
A capital lease is when the lessor only finances the leased assets, and all other rights of ownership transfer to the lessee — more like a loan. The asset item is included on your operating balance sheet because it is viewed as being owned, which may be the best option if long-term equipment ownership is your goal. According to the Canadian Institute of Chartered Accountants’ handbook, a lease will be treated as a capital lease (i.e. be categorized on your balance sheet as a long-term liability, interest expense on your income statement) if it meets any of the following criteria:
- The lease contains a bargain purchase option (i.e. less than fair market value, anywhere from $1 to 10% of the original equipment cost);
- The lease term is greater than 75% of the estimated economic life of the leased property;
- The present value of the minimum lease payment is greater than 90% of the leased property’s fair market value at the inception of the lease.
An operating lease is a lease whose term is short compared to the useful life of the asset being leased. It is commonly used to acquire equipment on a relatively short-term basis — more like renting. The asset being leased stays off the balance sheet and payments can be deducted for tax purposes because they are considered an operational expense. An operating lease typically contains a provision to purchase the equipment at the end of the lease at fair market value. The lessor may also provide maintenance and insurance.