Both a lease and a loan get you the machine. Both involve a monthly payment. So contractors often pick whichever one quotes the lower payment and move on — and that is exactly where deals go sideways. The real differences between leasing and financing are buried in two places almost nobody reads carefully: the buyout line at the end of the contract, and the tax treatment of the payments. Get those two right and the monthly number sorts itself out.
I have watched contractors sign an FMV lease for the low payment, then get surprised by a six-figure buyout they did not budget for. I have watched others finance a machine they planned to flip in three years, eating depreciation they did not need to. Neither is a bad product — they are just built for different situations. Let me break down how each one actually works, what the buyout and tax layers do to the math, and when each one fits.
How a loan works
When you finance equipment, a lender gives you the money to buy the machine. You own it from day one — technically the lender registers a lien until you pay off the loan, but it is your asset on your books. You make monthly payments of principal plus interest, usually over 3 to 7 years, and when the loan clears, the machine is yours free and clear.
- You own it — it is an asset on your balance sheet from the start.
- You build equity — every payment reduces what you owe, and when you are done you own a machine that still has resale value.
- A down payment is common — typically 10–20%, depending on credit and equipment. Our down payment guide covers it.
- Tax: you claim Capital Cost Allowance (CCA) on the machine and deduct the interest portion of your payments (not the principal). More on that below.
How a lease works
When you lease, the leasing company buys the machine and lets you use it for a monthly payment. It feels like ownership in practice, but legally the lessor owns the equipment during the term. At the end, your options depend on the lease type.
- The lessor owns the machine during the term (for true leases).
- Monthly payments are often lower than a loan, because you are not necessarily paying down the full value.
- The down payment is often lower or zero — many leases take first and last payment upfront instead of a percentage down.
- Tax: for a true lease, you deduct the lease payments — simpler than running a CCA schedule.
- End-of-term options vary by lease type, which is where the economics turn.
Lease types: the buyout changes everything
Not all leases are the same. The buyout structure decides the real cost.
$1 (dollar) buyout. You buy the machine for a token amount at the end. This is the most common structure for contractors and functions almost exactly like a loan — the monthly payments are similar because you are effectively paying off the full value. The wrinkle is tax: because it is in legal form a conditional sale, the CRA treats it as a purchase, not a lease (covered below).
10% buyout. You buy the machine for 10% of the original price at the end. Payments are lower than a $1 buyout because you are deferring that 10%. Good if you want lower payments during the term but still intend to own.
Fair market value (FMV) buyout. At the end you can buy at appraised value, return the machine, or upgrade. Payments are the lowest because you are only paying for the depreciation during the term — but the buyout is an unknown, and it is usually substantial.
| Lease Type | Monthly Payment | End-of-Term Cost | Ownership | Tax (general) |
|---|---|---|---|---|
| $1 buyout | Highest (≈ loan) | $1 | You own it | Taxed as a purchase (CCA + interest) |
| 10% buyout | Medium | 10% of original | You own it after buyout | Generally lease deduction during term |
| FMV buyout | Lowest | Market value (unknown) | Optional | Lease deduction |
The monthly-payment comparison
Real numbers, illustrative, at roughly 9% (rates float off the 4.45% prime rate as of June 2026). Say a new Komatsu PC210 excavator at $280,000:
| Loan | $1 Buyout | 10% Buyout | FMV Lease | |
|---|---|---|---|---|
| Value | $280,000 | $280,000 | $280,000 | $280,000 |
| Down | $28,000 (10%) | First/last | First/last | First/last |
| Term | 5 years | 5 years | 5 years | 5 years |
| Monthly | ~$5,230 | ~$5,850 | ~$5,350 | ~$4,600 |
| Paid over term | ~$341,800 | ~$351,000 | ~$349,000 | ~$276,000 |
| End-of-term cost | $0 (owned) | $1 | $28,000 | Market value (~$100–140K) |
| Total to own | ~$341,800 | ~$351,000 | ~$377,000 | ~$418,000+ |
Read the bottom row, not the monthly row. The loan has the lowest total cost to own (you put money down and there is no buyout). The FMV lease has the lowest payment but the highest cost if you end up buying — because the big buyout lands at the end. The 10% sits in the middle.
Key takeaway: A lower monthly payment is not a cheaper deal. Always price the total cost to own, buyout included, before you choose.
The tax layer (this is where it actually matters)
This is where your accountant earns the fee — and where I see the most confusion online, because a lot of advice borrows American rules that do not apply here. General guidance follows; confirm your specific situation with your accountant.
When you finance (own the machine). You add the equipment to your CCA schedule — most heavy mobile construction equipment (excavators, dozers, loaders) is Class 38 at 30% declining balance, not the Class 10 you will sometimes see quoted (Class 10 is motor vehicles and general contractor's movable gear; both are 30%, but the class matters). You deduct CCA each year — largest early, smaller each year after — plus the interest portion of your payments. And for 2026 there is a bonus: the federal Reaccelerated Investment Incentive suspends the half-year rule and gives a machine put to work this year a much larger first-year deduction than the plain class rate — roughly three times the normal first-year amount. The exact figure depends on the asset and your situation, so have your accountant run it rather than working off a rule of thumb.
When you lease (a true lease). You deduct the lease payments that reasonably relate to earning business income — the business-use portion. No CCA schedule to manage, and unlike passenger vehicles (which CRA caps separately), heavy equipment leases have no special dollar cap on the deduction. The deduction is steady year to year.
The nuance that trips everyone up — Canada uses a legal-form test. The CRA does not ask whether a lease "feels like" a purchase. Since it cancelled its old interpretation bulletin in 2001, its position is that a contract which is, at law, a lease is taxed as a lease, and a contract which is, at law, a conditional sale is taxed as a purchase. So a true FMV lease lets you deduct the payments — but a $1-buyout agreement, being in legal form a conditional sale, is taxed as a purchase: you claim CCA and interest, not the full payment, and any part of a payment that is really buying a bargain purchase option is not deductible at all. Which bucket your specific contract lands in depends on how it is written — a question for your accountant, not the equipment salesperson.
You can also elect to treat a lease as a purchase. If you lease equipment worth more than $25,000 and both you and the leasing company agree, you can file a CRA election (Form T2145, under section 16.1 of the Income Tax Act) to treat the lease payments as principal plus interest — so you claim CCA and deduct the interest, exactly as if you had financed it. It is opt-in and needs the lessor's cooperation, but it is a real lever when the ownership math favours the CCA route.
Key takeaway: For tax, the legal form of your agreement decides whether you deduct payments (true lease) or claim CCA plus interest (purchase, including a $1-buyout). It is not about how the deal "feels," and it does not automatically follow the accounting label — so confirm the treatment before you sign.
The balance-sheet question — and who it actually matters to
One classic reason to lease is to keep debt off the books and preserve borrowing capacity for bonding or a line of credit. Whether that works depends on your accounting framework, and this is another place American advice misleads.
Most private Canadian contractors report under ASPE (Accounting Standards for Private Enterprises), and under ASPE Section 3065 the old distinction still holds: a true operating lease stays off your balance sheet — you simply expense the rent — while a capital lease goes on the balance sheet as an asset and a matching liability. Under ASPE, a lease is a capital lease if any one of three things is true: you are reasonably assured of ending up owning the machine (a title transfer or a bargain purchase option — and a $1 buyout is a bargain purchase option), the lease runs for most of the machine's economic life (usually 75%+), or the payments total substantially all of its value (usually 90%+).
Two cautions before you lean on this:
- It is an ASPE thing. Public companies report under IFRS 16, which since 2019 brings nearly every lease onto the balance sheet — so the off-balance-sheet play does not exist there.
- Even under ASPE, an operating lease is still disclosed in the notes to your financial statements. "Off the balance sheet" means not capitalized, not invisible — a lender or surety who reads your statements will see it.
When leasing makes more sense
- You upgrade every 3–5 years. An FMV lease is built for the trade-up cycle — hand the machine back, lease the next one, always run current equipment.
- Cash flow is tight. Lower payments keep cash in the business for payroll, fuel, and materials. For a contractor growing into bigger jobs, preserved cash can beat equity in a machine.
- You want simpler books. Deducting a steady lease payment is simpler than CCA schedules, interest, and disposal calculations.
- The equipment depreciates fast or goes obsolete. Truer of GPS/survey/tech-heavy gear than of excavators and dozers, but if you expect the resale value to fall hard, leasing pushes that risk to the lessor.
- It is a project-specific machine. A two-year bridge contract that needs a dozer? Lease it for two years and hand it back when the project ends, instead of being stuck selling iron you no longer need.
- You want to protect borrowing capacity (and you report under ASPE) — a true operating lease keeps the obligation off the balance sheet, which can matter for bonding. Confirm with your accountant.
When financing makes more sense
- You will run the machine for years. Buy a Cat 320 you will keep 8–10 years, finance it over 5, and enjoy 3–5 years of a paid-off machine earning with no payment. A lease has you paying the whole time you use it.
- You want equity. Every payment builds toward an asset with real resale value you can sell, trade, or borrow against. A lease builds none.
- You value control. Ownership means no hour limits, no return conditions, no excess-use penalties — modify it, run it hard, sell it whenever.
- You have the down payment. Putting 10–20% down lowers the principal and the total interest, cutting lifetime cost.
- You are buying used or older iron. Leasing options thin out on older machines because residual value is harder to estimate — financing is often the only route on a used excavator that is 5–8 years old.
- The machine holds value. Cat, Komatsu, and Deere equipment retains strong resale — it makes little sense to lease (and hand back) an asset that still has real value at term end.
Key takeaway: Running the machine until it owes you nothing — finance it. Upgrading every few years or need it only for a project — lease it. Then let your accountant weigh the tax and balance-sheet layer on top.
The hybrid approach
Most established contractors use both:
- Core fleet → finance. Your daily-driver excavator, main dozer, everyday skid steers — long-term assets. Finance, pay off, run payment-free.
- Supplemental or project gear → lease. The second excavator for a 3-year job, the articulated truck you only need on big earthmoving, the loader you will replace in a few years.
- Tech-heavy gear → lease. Anything where you want the latest model regularly.
That gives you equity and long-term savings on the core fleet while keeping flexibility and lower payments on the rest.
A quick decision framework
| Your Situation | Lean Toward |
|---|---|
| Running the machine 7+ years | Finance |
| Upgrading every 3–5 years | Lease |
| Tight cash flow, need the lowest payment | Lease (FMV) |
| Want to own and build equity | Finance |
| Project-specific equipment | Lease |
| Used or older equipment | Finance |
| Want the biggest first-year deduction | Talk to your accountant — depends on the legal form |
| Want the simplest total cost to own | Finance (or a $1-buyout, which is similar) |
Before you sign either one, ask: How long will I keep it? What is the buyout? Are there hour or usage limits? What does early termination cost? And — the one that decides the tax — what is the legal form of this agreement, lease or conditional sale? That last one is for your accountant.
Getting the right structure
Lease vs. finance is not one-size-fits-all — it turns on your numbers, your tax situation, your accounting framework, and your plans for the machine. If you are not sure which fits your next purchase, reach out to IronFinance and we will run both scenarios with real numbers for your deal.
Sources: Lease vs. purchase tax characterization (legal-form test) and the section 16.1 / Form T2145 election — Canada Revenue Agency, T4002 and CRA leasing costs; CCA on financed equipment — CRA T2125 guidance; ASPE 3065 vs IFRS 16 lease accounting — BDO Canada; prime rate — Ratehub. Tax and accounting treatment depend on your business and the legal form of your agreement; confirm with your accountant. Rates and figures are illustrative market conditions as of June 2026 that float with prime — not quotes.
You can also review our rate comparison guide to evaluate the financing side correctly, or our banks vs. private lenders comparison to find the right lender for your deal.
Already own equipment, or eyeing a different machine?
Frequently Asked Questions
Is it better to lease or finance construction equipment in Canada?
It depends on how long you will keep the machine and what you want from the tax and cash-flow side. Financing builds equity and gives you ownership at the end — best for machines you will run for years. Leasing keeps monthly payments lower and gives you flexibility to upgrade — best for machines you replace every 3–5 years. The buyout structure and your accounting framework change the math, so compare total cost to own, not the monthly payment.
Can you write off leased equipment on your taxes in Canada?
For a true lease, you deduct the lease payments that reasonably relate to earning business income (the business-use portion) — and unlike passenger vehicles, heavy equipment leases have no special dollar cap. But a $1-buyout agreement that is, in legal form, a conditional sale is taxed as a purchase instead: you claim Capital Cost Allowance plus loan interest, not the full payment. Which applies depends on how your contract is written, so confirm with your accountant.
What happens at the end of an equipment lease in Canada?
It depends on the lease type. A $1 (dollar) buyout lets you own the machine for a token amount — it functions like a loan. A 10% buyout sets the end purchase at 10% of the original value. A fair-market-value (FMV) lease lets you buy at the appraised value, return the machine, or upgrade. Understand the buyout before you sign — it is where most of the real cost difference lives.