In Terms of Lease Structure, There Are Basically Two Equipment Leasing Options
Regardless of the leasing company you’re dealing with or the type of equipment you wish to acquire, there are really only two types of equipment leasing options available in Canada, with some variations provided around these types.
For the different types of leases, the first and most common type of lease is a capital lease. The capital lease is treated very much like an equipment loan for income tax and accounting purposes in that the outstanding lease amount is recorded on the balance sheet as a long term liability and the cost associated with the lease is expensed as interest and equipment depreciation.
There are basically a group of rules to determine if an equipment lease is a capital lease. These rules are designed to establish the likelihood that either the equipment will be purchased at the end of the lease term or that the lease obligation is written so that almost all the purchase price of the equipment will be repurchased during the lease term.
If a lease does meet any of the rules for a capital equipment lease, then it is an operating lease and has somewhat different accounting and taxation treatment. In terms of the on going liability related to the lease, it is not recorded as a liability on the company balance sheet, but may be mentioned in the notes to the financial statements if the accountant views the liability as being material to the readers of the financial statements. From an income statement point of view, the related leasing cost is considered to be an expense and is written off as such on the income statement.
