Canadian Plastics

Leasing

Today it is critically important to balance the short-term operating needs for capital against the long-term equipment needs. That is why businesses today are looking at leasing as a form of financing...

February 1, 1999   By Lisa Larking



Today it is critically important to balance the short-term operating needs for capital against the long-term equipment needs. That is why businesses today are looking at leasing as a form of financing that best preserves the company’s flexibility, freedom of action, and its liquidity. They realize that they can reap the benefits associated with using the equipment without the high cost of ownership.

Traditional Lease Benefits

No down payment–you can put your capital to work for your business instead–for investment, expansion or payroll.

Lower monthly payments–your monthly payments can be much lower than they’d be if you had bought and financed the same equipment. There can be a purchase option at the end of term.

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Improved balance sheet–with a properly structured operating lease, the rental payments can be treated as an operating expense, and the lease obligation will appear in the notes and not as debt. The less debt on your balance sheet, the more financial flexibility you have.

Upgrade options–When technological advances make your equipment obsolete, the flexibility built into a properly structured lease ensures you have the creativity you need to guarantee your equipment lease meets the demands of your business.

Leasing and Revenue Canada

Leasing can be more attractive in certain situations than a loan on an after tax basis:

Revenue Canada allows a company to deduct the full lease rental on a True Lease. For example, if your rental is $10,000 per month, then Revenue Canada will let you deduct up to $120,000 in rental payments for tax purposes in a given year.

Whereas with a Loan or a Non-True Lease a company can deduct the Capital Cost Allowance ( “CCA” ) and interest. CCA for most plastics equipment is 30 percent. But Revenue Canada only permits half of the CCA–or 15 percent of the Cash Selling Price–to be taken in the first year of the equipment acquisition. This is known as the “Half-Year Rule”.

The Half-Year Rule on a loan creates an interesting situation where at certain times of your fiscal year a lease may provide a greater tax savings than a loan. For example, if your equipment is delivered at the beginning of your fiscal year, the 12 monthly lease rental deductions may be greater than the 15% CCA and interest deductions.

LeasElect

If your strategy is to:

Acquire state-of-art plastics equipment

Maximize cash flow benefits of a

standard lease

Maximize tax savings from purchase

of new equipment

Keep debt off the balance sheet

One solution is GE Capital’s LeasElect. It combines the tax features of a term loan with the cash flow and balance sheet benefits of a lease.

LeasElect is a leasing product that takes advantage of the benefits of Revenue Canada’s joint election filing for eligible equipment. The LeasElect alternative should always be considered in lease versus ownership decisions. This is particularly true when acquiring assets of long economic life–particularly when acquiring assets late in your fiscal year. LeasElect expands your equipment funding alternatives and can save your company money.

LeasElect allows a Lessee, if it chooses, to claim CCA under a lease arrangement. Instead of normally expensing all of the lease rentals for tax purposes, the lessee can treat the lease as though it were a loan; the rental payments will be treated, for tax purposes, not as rent, but as blended payments of interest and principal. If the lease is structured as an operating lease, the client can treat the rental as an expense for balance sheet purposes.

In order to qualify the Lease must:

Be a true lease in eyes of Revenue Canada,

and with a term longer than one year

Cover qualifying equipment which has

a market value of more than $25,000

Must be manufacturing equipment.

The LeasElect option is most attractive when:

CCA rates for the equipment are high.

The lease starts late in the Lessee’s

fiscal year.

The economic life of the equipment

is long.

The term of the lease is 5 years or longer.

The prescribed rate is lower than the

lease rate.

In today’s competitive market, it is important to acquire the right equipment, but it is just as important to acquire the right funding structure. CPL

Lisa Larking is an Account Manager with GE Capital Canada Equipment Financing and specializes in providing funding for the Plastics Industry. She can be reached at 416/941-6872 or email:llarking@cefca.capital.ge.com


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