Should Canadian Farmers Lease or Buy Equipment and Machinery? 

Lower Initial Investment 

Leasing requires minimal upfront capital, which can be great for smaller operations or those just starting. This lower cost barrier allows farmers access to much-needed, high-quality equipment without significantly impacting their cash flow. 

Maintenance and Repair 

Leasing equipment, often the latest models, typically requires fewer repairs and maintenance. This results in a more predictable cash flow for expenses. Additionally, it lowers the risk of downtime during harvest periods due to equipment failure. 

Tax Advantages 

Leasing certain machinery and equipment, such as grain bins, can lead to quicker tax write-offs compared to purchasing them. 

Reduced Risk of Obsolescence 

Rapid technological advancement means that owned equipment can quickly become outdated. Leasing allows farmers to keep up with the latest technology without risking being stuck with obsolete equipment. 

Buyout Option 

Typically, farmers set up leases where there is a buyout option that is quite attractive, so they can still have the option of having equity. Some leases offer the flexibility to pay the buyout or return the equipment/machinery.  

Long-term Cost 

Although leasing requires a lower initial investment, the cumulative cost of lease payments can exceed the cost of purchasing the equipment outright.  

Restrictions on Use 

Lease agreements can come with usage restrictions, affecting how and when the equipment can be operated. This restriction can be particularly challenging during peak seasons when usage is at its highest. 

Penalties for Early Termination 

Farmers may face penalties if they decide to end a lease early. This can be a disincentive to adapt to changing market conditions or technological advancements. 

Ownership and Asset Accumulation 

The primary benefit of buying equipment/machinery is that it allows farmers to accumulate assets in the form of the equipment itself. This can build equity over time and provide potential resale value. 

Tax Advantages 

Purchasing equipment can lead to tax advantages through CCA (capital cost allowance) and Section 179 deductions. CCA allows farmers to account for the wear and tear on the equipment over its useful life, offering a way to recover some of the equipment cost through annual tax deductions. Meanwhile, Section 179 of the tax code permits farmers to add the full purchase price of qualifying equipment in the year it's put into service to the UCC (undepreciated capital cost) pool, up to a certain limit. This can lead to substantial tax savings, particularly in the year of purchase, improving cash flow and reducing the net cost of the equipment. 

Example: 

Consider a farmer who buys a tractor for $400,000. This would create an addition to the Class 10 automotive UCC pool of $400,000 in the year of purchase. The farmer would then get a tax CCA deduction of 30% of the $400,000 in the first year, which would work out to $120,000. This will save tax at a rate varying depending on the farm’s structure (company, partnership, sole proprietor). Each year following the year of purchase, the farmer gets a tax deduction of the balance of the UCC, which in this case is $280,000 at the 30% rate, which would be $84,000 in year 2. This would continue over the following tax years with a smaller and smaller tax deduction.

Long-Term Cost Savings 

Ownership over the equipment's useful life can be more cost-effective than continuous lease payments. Although the upfront cost is substantial, the absence of ongoing payments can lead to long-term savings. Additionally, if the machinery is financed, the cash flows can spread over many years. 

No Usage Restrictions 

Farmers who own their equipment are not subject to any usage restrictions. They can operate their machinery as much as necessary without concern for penalties or overage fees, which is excellent during peak times. 

Initial Capital Requirement 

The upfront cost of purchasing new equipment can be significant, depending on your farm's size and structure type. Farmers may struggle with funding the required down payment for farm machinery and equipment. 

Maintenance Responsibility 

With ownership comes the responsibility for all repairs and maintenance costs. This can be unpredictable and lead to high expenses, particularly with older equipment. This can result in unexpected downtime during peak seasons, meaning less production. 

Recapture 

When a farmer decides to sell a used piece of equipment they had previously purchased, the proceeds on sale of the equipment get netted against the UCC pool for that class of equipment. As current resale values for equipment are quite high, this could potentially result in a repayment of prior year CCA tax deductions with what is known as recapture, if the proceeds included in the UCC pool make the balance go negative. This situation would not occur if leasing equipment.

Reduced Flexibility 

Once purchased, farmers are committed to their choice of equipment for long periods. Due to high costs, changing or upgrading equipment and machinery to evolving needs may be difficult.  

Risk of Obsolescence 

Owned equipment faces the same risk of obsolescence. Farmers may have to reinvest in new machinery to stay competitive or maintain efficiency. 

The Pros and Cons of Operating and Capital Leases 

A lease agreement will fall under one of two categories for accounting purposes: an operating lease or a capital lease. Each has pros and cons, but there is one distinct difference between them.  

The main difference between operating and capital leases is whether you get a buy-out option at the end of the lease and whether you decide to pay the buy-out.

Capital leases are set up, so you might end up owning the asset after the lease is over, which gives the farmer the benefit of the asset’s equity. On the other hand, operating leases are like renting, with no option to own the asset later.  

The main difference between operating and capital leases is whether you get a buy-out option at the end of the lease and whether you decide to pay the buy-out.

Capital leases are set up, so you might end up owning the asset after the lease is over, which gives the farmer the benefit of the asset’s equity. On the other hand, operating leases are like renting, with no option to own the asset later.