Lease vs. Finance: Which Makes More Sense for Contractors?
For Canadian contractors, financing is better when you plan to keep the machine long-term and want to build equity. Leasing is better when you need lower monthly payments, plan to upgrade every three to five years, or want simpler tax deductions. Lease payments are fully deductible as operating expenses, while financed equipment uses Capital Cost Allowance and interest deductions spread over multiple years.
You have decided on the machine — say it is a Cat 330 excavator, or a John Deere 333G compact track loader, or a fleet of three Bobcat S650 skid steers. Now you need to decide how to pay for it. Your lender or broker has given you two options: a lease or a loan. Both get you the machine. Both involve monthly payments. But they work differently under the hood, and the right choice depends on your business, your tax situation, and your plans for the equipment.
This is not a theoretical exercise. The difference between leasing and financing can mean thousands of dollars a year in tax savings, different cash flow impacts, and completely different flexibility when it is time to upgrade. Let us break down how each one works and when each one makes sense.
How Equipment Financing (Loans) Work
When you finance a piece of equipment, a lender gives you money to purchase the machine. You own the equipment from day one (technically the lender holds a lien on it until you pay off the loan, but it is your asset on your books). You make monthly payments of principal plus interest over a set term — usually 3 to 7 years — and when the loan is paid off, the machine is yours free and clear.
Key characteristics of equipment financing:
- You own the equipment. It is an asset on your balance sheet from the start.
- You build equity. Every payment reduces what you owe. After the loan is paid off, you own a machine that still has value.
- Down payment is common. Most equipment loans require 10-20% down, depending on your credit and the equipment. Our down payment guide covers this in detail.
- Tax treatment: You claim Capital Cost Allowance (CCA) on the depreciation of the equipment. You also deduct the interest portion of your payments. The CCA deduction is spread over multiple years based on the asset class.
- You are responsible for everything. Maintenance, repairs, insurance — it is all on you. Which is the same whether you lease or finance, honestly, since most equipment leases are "net leases" where the lessee handles maintenance.
How Equipment Leasing Works
When you lease equipment, the leasing company buys the machine and lets you use it in exchange for monthly payments. You are essentially renting the equipment on a long-term contract, though it feels very similar to ownership in practice. At the end of the lease, you have options depending on the lease type.
Key characteristics of equipment leasing:
- The leasing company technically owns the equipment during the lease term (for most lease structures).
- Monthly payments are often lower than loan payments for the same machine and term, because you are not necessarily paying down the full value.
- Down payment may be lower or zero. Many leases require first and last month's payment upfront rather than a percentage down.
- Tax treatment: Lease payments are generally fully deductible as an operating expense in the year they are made. This is simpler than CCA calculations and can provide a larger deduction in the early years.
- End-of-term options vary by lease type (more on this below).
Lease Types: The Details Matter
Not all leases are the same. The buyout structure at the end changes everything about the economics.
$1 Buyout Lease (Capital Lease)
At the end of the term, you buy the machine for $1. This is the most common lease structure for contractors and it functions almost identically to a loan. The monthly payments are similar to loan payments because you are effectively paying off the full value of the machine. The main difference is the tax treatment — CRA may treat this as a capital lease, meaning the tax treatment is similar to ownership (CCA + interest deduction).
10% Buyout Lease
At the end of the term, you buy the machine for 10% of the original purchase price. Monthly payments are lower than a $1 buyout because you are deferring 10% of the cost to the end. This is a good option if you want lower monthly payments during the lease but still plan to own the machine.
Fair Market Value (FMV) Lease (Operating Lease)
At the end of the term, you can buy the machine at its fair market value, return it, or upgrade to a new machine. Monthly payments are the lowest because you are only paying for the depreciation during the lease term, not the full value. CRA generally treats these as operating leases, and the payments are fully deductible as a business expense.
| Lease Type | Monthly Payment | End-of-Lease Cost | Ownership | Tax Treatment |
|---|---|---|---|---|
| $1 Buyout | Highest (similar to loan) | $1 | You own it | Often treated like ownership (CCA) |
| 10% Buyout | Medium | 10% of original price | You own it after buyout | Lease deduction during term |
| FMV Buyout | Lowest | Market value (unknown) | Optional | Full lease deduction |
The Monthly Payment Comparison
Let us put real numbers on this. Say you are getting a 2024 Komatsu PC210LC excavator for $280,000.
| Loan (Finance) | $1 Buyout Lease | 10% Buyout Lease | FMV Lease | |
|---|---|---|---|---|
| Amount/Value | $280,000 | $280,000 | $280,000 | $280,000 |
| Down payment | $28,000 (10%) | $0 (first/last) | $0 (first/last) | $0 (first/last) |
| Term | 5 years | 5 years | 5 years | 5 years |
| Rate | 9% | 9.25% | 9.5% | 9.5% |
| Monthly payment | ~$5,230 | ~$5,850 | ~$5,350 | ~$4,600 |
| Total paid over term | ~$341,800 | ~$351,000 | ~$349,000 | ~$304,000 |
| End-of-term cost | $0 (you own it) | $1 | $28,000 | Market value (~$100-140K) |
| Total cost to own | ~$341,800 | ~$351,001 | ~$377,000 | ~$418,000+ |
A few things jump out from this table:
- The loan has the lowest total cost to own because you paid a down payment upfront and there is no end-of-term buyout.
- The FMV lease has the lowest monthly payment, but the highest total cost if you end up buying the machine at fair market value.
- The 10% buyout sits in the middle — moderate payments with a known buyout amount.
Key takeaway: Lower monthly payments do not always mean a cheaper deal. Always calculate the total cost to own the machine, including any buyout, before choosing between leasing and financing.
Tax Implications: CCA vs. Lease Deductions
This is where your accountant earns their fee, and this section is general guidance — talk to your accountant for your specific situation.
When you finance (own the equipment):
- The equipment is added to your CCA schedule (usually Class 10 for most construction equipment at a 30% declining balance rate, though the Accelerated Investment Incentive has allowed higher first-year claims).
- You deduct the CCA amount each year. This is a declining amount — biggest in year one, smaller each subsequent year.
- You deduct the interest portion of your loan payments.
- When you sell or dispose of the machine, there may be recapture or terminal loss implications.
When you lease:
- Monthly lease payments are generally 100% deductible as a business expense in the year they are made (for operating leases and most lease structures CRA accepts as leases).
- The deduction is the same every year (the monthly payment amount times 12).
- No CCA schedule to manage for this equipment.
- Simpler bookkeeping.
For a contractor in a higher tax bracket, the choice between CCA deductions and lease deductions can mean a real difference in taxes owing. In many cases, lease deductions are more advantageous in the first few years because you can deduct the full payment amount rather than being limited to the CCA rate.
Example: On that $280,000 Komatsu, a lease payment of $5,350/month gives you $64,200 in deductible expenses per year. A financed machine with 30% CCA might give you a $84,000 CCA deduction in year one (with the Accelerated Investment Incentive), but that drops to roughly $58,800 in year two, $41,160 in year three, and continues declining. Plus you deduct the interest — maybe $20,000 in year one, declining each year as the principal goes down.
The math gets complicated quickly, which is why you need your accountant involved. But the general principle is: leasing gives you a consistent, predictable deduction every year, while financing front-loads the deduction through CCA.
When Leasing Makes More Sense
You upgrade equipment every 3-5 years. If you run machines for a few years and then trade up, a lease (especially an FMV lease) is designed for this pattern. At the end of the lease, you hand the machine back and lease a new one. No hassle of selling, no trade-in negotiations. You always have current equipment.
You are on a tight cash flow. The lower monthly payments on a lease keep more cash in your business for payroll, fuel, materials, and other job costs. For a contractor who is growing and taking on bigger projects, preserving cash flow matters more than building equity in a machine.
You want tax simplicity. Fully deductible lease payments are simpler to manage than CCA schedules, interest deductions, and eventual disposal calculations. If your bookkeeping is already complicated enough, a lease simplifies things.
The equipment depreciates quickly. Technology-heavy equipment that becomes obsolete or loses value fast is better suited to leasing. This applies more to things like GPS systems, survey equipment, and specialized technology than to excavators and dozers, which hold value relatively well. But even with heavy equipment, if you know the resale value will drop significantly, leasing protects you from that depreciation.
You are working on a specific project. If you have a two-year bridge contract and you need a Cat D6 dozer for that project, leasing for two years is more logical than buying a machine you might not need afterward. When the project ends, the lease ends, and you are not stuck selling equipment.
You want to keep debt off your balance sheet. Operating leases (FMV leases) may be treated as off-balance-sheet obligations, which can be useful if you are trying to maintain borrowing capacity for other things like bonding or lines of credit. Talk to your accountant about whether this applies to your situation.
When Financing Makes More Sense
You plan to run the machine for a long time. If you are buying a Cat 320 that you intend to use for 8-10 years, financing makes more sense. You will pay off the loan in 5 years and then have 3-5 years of a fully paid-off machine generating revenue with no monthly payment. That is pure profit. A lease would have you making payments the entire time you use the machine.
You want to build equity. Every loan payment brings you closer to owning an asset with real value. When you are done with the machine, you can sell it, trade it in, or use it as collateral for other financing. A lease builds zero equity — you are paying for usage, not ownership.
You value control. Ownership means you can modify the machine, use it however you want, sell it whenever you want, and there are no return conditions or excess-use penalties. Leases sometimes have hour restrictions or condition requirements that can limit how you use the equipment.
You have the down payment available. If you can put 10-20% down, a loan gives you lower total cost over the life of the deal. The down payment reduces the principal, which reduces the total interest you pay.
You are financing used or older equipment. Leasing options are more limited on older equipment. Most leasing companies prefer newer machines because the residual value is easier to estimate. If you are financing a used excavator that is 5-8 years old, a loan is usually your only option anyway.
The machine holds its value well. Equipment like Cat excavators, John Deere dozers, and Komatsu loaders hold their value exceptionally well. When you finance these machines, you build equity in an asset that retains real market value. It makes less sense to lease something that still has strong resale value at the end of the term.
Key takeaway: If you are running the machine until it owes you nothing — finance it. If you are upgrading every few years or need project-specific equipment — lease it. The tax question is a separate layer that your accountant needs to weigh in on.
The Hybrid Approach
Many successful contractors use both strategies depending on the machine and the situation.
Core fleet — finance. Your primary excavator, your main dozer, the skid steers you use every day — these are long-term assets. Finance them, pay them off, and enjoy the years of payment-free production.
Specialty or supplemental equipment — lease. That second excavator you need for a 3-year project, the Cat 740 articulated truck you only need for large earthmoving jobs, the compact track loader you might replace with a newer model in a few years — lease these.
Technology-dependent equipment — lease. Anything where you want the latest model regularly (survey equipment, GPS systems, maybe even newer telematics-heavy machines) is a good lease candidate.
This approach gives you the equity building and long-term savings of ownership on your core fleet while keeping flexibility and lower payments on supplemental equipment.
Questions to Ask Before Deciding
Before you commit to a lease or a loan, ask yourself and your lender these questions:
- How long will I use this machine? More than 5 years points to financing. Less than 5 years leans toward leasing.
- What is the buyout at the end of the lease? $1, 10%, or FMV? This changes the total cost dramatically.
- Are there hour or usage restrictions on the lease? Some leases penalize you for exceeding certain annual hours. If you run machines hard, this matters.
- What happens if I want out early? Both loans and leases can have early termination costs. Know them upfront.
- What does my accountant recommend for my tax situation? This is not a question you should answer yourself. The tax implications are real and situation-specific.
- What is the total cost over the full term including buyout? Do not compare monthly payments alone. Compare total cost to own.
- Do I want this machine on my balance sheet? For bonding and additional borrowing, this can matter.
A Quick Decision Framework
| Your Situation | Lean Toward |
|---|---|
| Running the machine 7+ years | Finance |
| Upgrading every 3-5 years | Lease |
| Tight cash flow, need lowest payment | Lease (FMV) |
| Want to own and build equity | Finance |
| Project-specific equipment | Lease |
| Used or older equipment | Finance |
| Want maximum tax deduction now | Lease (talk to accountant) |
| Want simplest total cost | Finance ($1 buyout lease is similar) |
Getting the Right Structure
The lease vs. finance decision is not one-size-fits-all, and the best approach depends on your specific numbers, tax situation, and business plan. If you are not sure which structure works best for your next equipment purchase, reach out to IronFinance and we will run both scenarios with real numbers for your deal.
Sources: BDC, Mehmi Group. Information current as of March 2026.
You can also review our guide on comparing equipment loan rates to make sure you are evaluating the financing side correctly, or check out our banks vs. private lenders comparison to understand which type of lender is best suited to your deal.
Frequently Asked Questions
Is it better to lease or finance construction equipment in Canada?
It depends on how long you plan to use the machine and how important tax flexibility is. Financing builds equity and gives you ownership at the end — best for machines you will run for years. Leasing keeps monthly payments lower, may offer better tax deductions, and gives you flexibility to upgrade — best for machines you will replace every 3-5 years.
Can you write off leased equipment on your taxes in Canada?
Yes. Lease payments are generally 100% deductible as a business expense in the year they are made. This is different from financed equipment, where you deduct the interest portion and claim Capital Cost Allowance (CCA) on the depreciation. Many accountants prefer the simplicity and immediate deductibility of lease payments, especially for higher-income contractors.
What happens at the end of an equipment lease in Canada?
It depends on the lease type. A dollar buyout lease lets you own the machine for $1 at the end — it functions almost like a loan. A fair-market-value (FMV) lease gives you the option to buy the machine at its appraised value, return it, or upgrade. A 10% buyout lease sets the purchase price at 10% of the original value. Make sure you understand the buyout terms before signing.
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