Tax Implications of Buying vs Leasing Commercial Real Estate in Ontario

By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

One of the most significant financial decisions business owners in Mississauga, Toronto, and the broader GTA face is whether to buy or lease their commercial real estate. This choice has far-reaching implications for cash flow, balance sheet strength, tax efficiency, and long-term wealth creation.

While conventional wisdom often focuses on monthly payment comparisons, the tax treatment of ownership versus leasing can dramatically alter the true cost equation. Understanding depreciation rules, interest deductibility, land appreciation, and HST recovery can mean the difference between building equity or simply paying rent.

In this comprehensive guide, we examine the tax implications of buying versus leasing commercial real estate in Ontario, analyze Capital Cost Allowance (CCA) benefits, explore financing structures, and provide a decision framework for business owners seeking tax-efficient property strategies.

Understanding the Buy vs Lease Decision: Beyond Monthly Payments

Why This Decision Matters

Commercial real estate represents one of the largest capital allocations for growing businesses. The tax treatment of ownership versus leasing affects:

Deductibility of payments: Lease payments vs. mortgage interest and CCA
Cash flow timing: Upfront capital vs. ongoing rent expense
Balance sheet impact: Asset ownership vs. off-balance-sheet financing
Wealth accumulation: Equity building vs. landlord enrichment
Exit flexibility: Asset sale proceeds vs. lease termination

In markets like Mississauga, Brampton, and Oakville, where commercial property values have appreciated substantially, the decision between buying and leasing often hinges on tax efficiency and long-term strategic goals rather than short-term cash considerations alone.

Tax Framework: Buying vs Leasing

Buying Commercial Real Estate:

Mortgage interest is deductible as a business expense
Building (not land) is eligible for Capital Cost Allowance depreciation
HST on purchase can be recovered (Input Tax Credit) if GST/HST registered
Property taxes, insurance, maintenance fully deductible
Disposition may trigger capital gains (50% taxable) or recapture income
Potential for tax-deferred sale using Section 22 replacement property rules

Leasing Commercial Real Estate:

Full rent payment is immediately deductible
No depreciation benefit (landlord claims CCA)
No asset appreciation benefit
Simpler cash flow and budgeting
No HST recovery on rent (built into lease rate)
Greater operational flexibility and lower upfront capital

Capital Cost Allowance (CCA) on Owned Commercial Real Estate

CCA Class Structure for Commercial Buildings

When you purchase commercial real estate in Canada, the CRA divides the acquisition cost into two components:

Land: Not depreciable (no CCA), but appreciates over time and generates capital gain on sale
Building: Depreciable under CCA Class 1 at 4% declining balance rate (or 6% for buildings acquired after March 18, 2007, and used for manufacturing)

Key CCA Rules:

First-year half-year rule: Only 50% of normal CCA rate in year of acquisition (2% instead of 4%)
Terminal loss or recapture on disposition
CCA is optional claim it only when tax reduction is beneficial
CCA creates “undepreciated capital cost” (UCC) which affects future gain/recapture calculation

Example: $1,200,000 Commercial Building Purchase in Mississauga

Allocation:

Land: $400,000 (non-depreciable)
Building: $800,000 (Class 1, 4% CCA)

Year 1 CCA (half-year rule):

CCA claim: $800,000 2% = $16,000
Tax savings (26.5% corporate rate): $16,000 26.5% = $4,240

Year 2 CCA:

UCC: $800,000 – $16,000 = $784,000
CCA claim: $784,000 4% = $31,360
Tax savings: $31,360 26.5% = $8,310

Over 10 years, total CCA deductions of approximately $300,000 create tax deferrals of nearly $80,000 at corporate rates.

For businesses in Oakville, Brampton, or Toronto with significant taxable income, CCA provides a powerful tax shelter that reduces current-year tax while preserving asset equity.

Interest Deductibility and Financing Structures

Deducting Mortgage Interest

Interest on loans used to acquire commercial real estate for business purposes is fully deductible under the Income Tax Act, provided the property generates or is reasonably expected to generate income.

Key Considerations:

Interest deductibility requires business use (not personal)
Must trace borrowed funds to income-producing purpose
Interest on shareholder loans used to purchase property may be limited
Allocation of interest between land and building is irrelevant (both deductible if business use)

Lease vs. Purchase: Cash Flow Comparison

Scenario: $1,200,000 Building in Mississauga
Option A: Purchase with 20% Down ($240,000), 80% Mortgage ($960,000)

Mortgage: 5.5% interest, 25-year amortization
Monthly payment: ~$5,900 (principal + interest)
Year 1 interest expense: ~$52,000 (deductible)
Year 1 CCA claim: $16,000 (deductible)
Total Year 1 deductions: $68,000
Tax savings (26.5%): $18,020
Net Year 1 outflow: $70,800 – $18,020 = $52,780

Option B: Lease

Monthly rent: $8,000 ($96,000/year)
Rent fully deductible
Tax savings (26.5%): $25,440
Net Year 1 outflow: $96,000 – $25,440 = $70,560

While the lease appears more expensive in Year 1, the ownership route builds equity ($15,000+ mortgage principal paydown) and captures property appreciation often 35% annually in GTA markets.

HST Considerations: Input Tax Credits on Purchase vs Lease

HST on Commercial Real Estate Purchases

When a business purchases commercial real estate in Ontario, HST (13%) applies to the building value (not land). If the purchaser is registered for GST/HST, they can claim an Input Tax Credit (ITC) to recover the HST paid.

Example: $800,000 Building (excluding land)

HST paid: $800,000 13% = $104,000
ITC recovery: $104,000 (if 100% business use)
Net HST cost: $0

This ITC recovery represents a massive cash flow advantage over leasing, where HST is embedded in monthly rent and cannot be separately claimed.

HST on Lease Payments

Lease payments are subject to HST, which is included in the total rent amount. While businesses can claim ITCs on the HST portion of rent, the base rent itself remains a pure expense with no equity or appreciation benefit.

Lease Rent: $8,000/month

Base rent: ~$7,080
HST (13%): ~$920
ITC claimable: $920
Net rent: $7,080/month

For businesses in Mississauga, Toronto, and Vaughan with strong cash positions, the ability to recover six-figure HST amounts through ITCs on building purchases creates a compelling financial advantage.

Property Appreciation and Wealth Building in the GTA

Long-Term Equity Accumulation

One of the most overlooked benefits of owning commercial real estate is property appreciation. In high-growth GTA markets like Mississauga, Oakville, and Brampton, commercial properties have historically appreciated 35% annually.

10-Year Ownership Scenario:

Purchase price: $1,200,000
Annual appreciation: 4%
Value after 10 years: $1,776,000
Equity gain: $576,000
Mortgage principal paid: ~$180,000
Total wealth accumulation: $756,000

When the business sells the property, 50% of the capital gain is taxable, resulting in an after-tax gain of approximately $650,000 wealth that would never accrue under a lease arrangement.

For service-based businesses, professional corporations, and family-owned enterprises in Ontario, owning the building creates a valuable retirement asset and succession planning tool.

Tax-Deferred Rollovers: Section 44 Replacement Property

Using Section 44 to Defer Capital Gains

When a business sells commercial real estate and reinvests proceeds into a replacement property, Section 44 of the Income Tax Act allows deferral of capital gains taxation.

Requirements:

Replacement property acquired within 24 months
Same or similar use (commercial for commercial)
Election filed with CRA

Tax Benefit:

Defers capital gains tax to future sale
Preserves cash for acquisition
Enables portfolio growth without tax drag

This provision is particularly valuable for businesses in Mississauga and the GTA seeking to upgrade facilities, consolidate operations, or reposition real estate holdings without triggering immediate tax liabilities.

Learn more about tax planning strategies and corporate structuring at Insight Accounting CPA.

Financial Analysis: Decision Framework for Ontario Businesses

When Buying Makes Sense

Ideal Conditions:

Business has strong cash reserves or access to favorable financing
Long-term operational stability (10+ years in location)
Desire for wealth accumulation outside operating business
Tax benefits from CCA and interest deductions are material
Local market shows strong appreciation trends (GTA core markets)
Business seeks balance sheet strength and collateral for future borrowing

When Leasing Makes Sense

Ideal Conditions:

Business needs operational flexibility (uncertain growth trajectory)
Capital is better deployed in core operations (higher ROI than real estate)
Rapid market changes expected (e.g., tech startups)
Maintenance and property management are burdensome
Short-term occupancy expected (under 5 years)
Business prefers off-balance-sheet financing

For businesses in Etobicoke, Vaughan, and Richmond Hill, the decision often hinges on growth projections, capital availability, and risk tolerance rather than tax considerations alone.

Recapture and Terminal Loss on Disposition

Understanding CCA Recapture

When a business sells commercial real estate for more than its UCC (but less than original cost), the difference between proceeds and UCC is “recaptured” as fully taxable income.

Example:

Original building cost: $800,000
CCA claimed over 10 years: $300,000
UCC: $500,000
Sale proceeds (building only): $900,000
Land proceeds: $500,000

Tax Consequences:

Recapture: $800,000 – $500,000 = $300,000 (fully taxable as income)
Capital gain: $900,000 – $800,000 = $100,000 (50% taxable)
Total taxable income: $300,000 + $50,000 = $350,000

Recapture can create significant tax liabilities in the year of sale, making tax planning and timing critical.

At Insight Accounting CPA, we help Mississauga and GTA business owners model disposition scenarios and minimize recapture impacts through installment sales, holdbacks, and strategic CCA management.

Holding Company Structures: Tax-Efficient Real Estate Ownership

Separating Real Estate from Operating Company

Many business owners in Ontario use a holding company structure to own commercial real estate separately from the operating business. This structure offers:

Tax Benefits:

Isolates real estate appreciation from active business income
Facilitates estate planning and succession
Protects real estate from operating business creditors
Enables income splitting via dividends to family shareholders
Simplifies sale of operating business (buyer doesn’t acquire property)

Structure:

Holdco owns commercial real estate
Opco leases from Holdco (rent flows tax-free between related corporations if both Canadian)
Holdco can claim CCA; Opco deducts rent
Potential for tax-deferred transfers using Section 85 rollover

This approach is common among professional corporations, healthcare practices, and family businesses in Mississauga, Brampton, and Oakville seeking to preserve wealth across generations.

Financing Alternatives: Conventional Mortgages vs. SBA Loans

Commercial Mortgage Options in Canada

Conventional Commercial Mortgages:

Typically 6575% loan-to-value
510 year terms with 2025 year amortization
Interest rates: Prime + 1.5%3%
Require strong debt service coverage ratio (1.25x+)

Alternative Financing:

Vendor take-back mortgages
Private lenders (higher cost, lower qualification hurdles)
CMHC-insured loans for multi-unit properties
Lease-to-own arrangements

For businesses in Toronto, Mississauga, and surrounding GTA communities, access to favorable commercial mortgage terms depends on financial strength, industry stability, and property quality.

Explore fractional CFO services to model financing scenarios and optimize debt structures.

Case Study: Mississauga Manufacturing Company

Background

A mid-sized manufacturing company in Mississauga was leasing a 15,000 sq ft facility at $18/sq ft annually ($270,000/year). The landlord offered to sell the property for $3,500,000 (land: $1,200,000; building: $2,300,000).

Analysis

Lease (Status Quo):

Annual rent: $270,000
Tax deduction (26.5%): $71,550
Net cost: $198,450/year
10-year net outflow: $1,984,500

Purchase (20% Down, 80% Mortgage):

Down payment: $700,000
Mortgage: $2,800,000 at 5.5%, 25-year amortization
Annual mortgage payment: $206,000 (interest + principal)
Year 1 interest: ~$152,000
Year 1 CCA: $46,000 (half-year rule on $2,300,000 building)
Total deductions: $198,000
Tax savings: $52,470
Net Year 1 outflow: $206,000 – $52,470 = $153,530
10-year principal paydown: ~$500,000
Estimated property appreciation (3%/year): $970,000

Outcome:

The company purchased the property, building $1,470,000 in equity over 10 years while reducing net annual outflow by $45,000/year. At retirement, the owner sold the property for $4,600,000, realizing $800,000+ in after-tax proceeds.

Common Mistakes Business Owners Make

1. Ignoring Land vs. Building Allocation

CRA requires reasonable allocation between land and building. Overstating building value to maximize CCA can trigger audit adjustments.

2. Claiming CCA Without Considering Recapture

CCA is optional. In years where income is low, claiming CCA may not make sense if future recapture will occur at higher tax rates.

3. Failing to Recover HST Input Tax Credits

Businesses that don’t properly claim ITCs on commercial property purchases leave six-figure tax savings on the table.

4. Not Modeling Long-Term Appreciation

Focus on monthly payment comparisons ignores wealth accumulation through property appreciation often the largest financial benefit of ownership.

5. Using Operating Company to Own Real Estate

Holding real estate in an operating company exposes the asset to creditors and limits estate planning flexibility.

Best Practices for Tax-Efficient Commercial Real Estate Decisions

1. Conduct Comprehensive Financial Modeling

Compare lease vs. purchase scenarios over 10+ year horizons, including:

Tax deductions (rent vs. interest + CCA)
Equity accumulation (principal paydown + appreciation)
HST recovery
Exit proceeds and capital gains

2. Consult a CPA Early in the Process

Engage a CPA with commercial real estate expertise before signing purchase agreements or lease renewals to model tax impacts and structure transactions optimally.

3. Use Holding Company Structures Where Appropriate

Separate real estate ownership from operating business to enhance asset protection, estate planning, and tax efficiency.

4. Optimize Financing Terms

Negotiate favorable mortgage terms and consider tax-deductibility when structuring down payments and loan covenants.

5. Plan for Disposition

Understand recapture and capital gains implications; use Section 44 replacement property rules or installment sales to manage tax liabilities.

FAQ: Buying vs Leasing Commercial Real Estate Tax Questions

Is mortgage interest on commercial real estate fully deductible?

Yes, interest on loans used to acquire commercial real estate for business purposes is fully deductible as a business expense in Canada.

Can I claim CCA on commercial real estate immediately?

You can claim CCA starting in the year of acquisition, but the half-year rule limits the first year claim to 2% (half of the normal 4% Class 1 rate).

What is the CCA rate for commercial buildings in Ontario?

Commercial buildings are Class 1 assets with a 4% declining balance CCA rate (or 6% for certain manufacturing buildings acquired after March 2007).

How does HST work on commercial real estate purchases?

HST (13% in Ontario) applies to the building portion (not land). Businesses registered for GST/HST can claim Input Tax Credits to recover the full HST paid.

Should I own commercial real estate in my operating company or a holding company?

For most businesses, holding real estate in a separate holding company provides better asset protection, estate planning flexibility, and tax efficiency.

What is CCA recapture and how is it taxed?

Recapture occurs when you sell a building for more than its UCC (after claiming CCA). The recapture amount (proceeds minus UCC, capped at original cost) is fully taxable as income.

Can I defer capital gains when selling commercial real estate?

Yes, under Section 44 of the Income Tax Act, you can defer capital gains by acquiring a replacement property within 24 months and filing an election with CRA.

Is leasing always cheaper than buying?

Not necessarily. While leasing may have lower upfront costs, ownership builds equity, captures appreciation, and often provides superior long-term tax efficiency.

Take Action: Plan Your Commercial Real Estate Strategy with Expert CPA Guidance

Whether you’re considering purchasing your first commercial property in Mississauga, evaluating a lease renewal in Toronto, or restructuring real estate holdings across the GTA, the tax and financial implications are complex and consequential.

At Insight Accounting CPA, we provide comprehensive commercial real estate tax planning services, including:

Buy vs. lease financial modeling and tax analysis
Capital Cost Allowance optimization
Holding company structuring and Section 85 rollovers
Disposition planning and recapture minimization
Financing strategy and debt service analysis
HST compliance and Input Tax Credit recovery

Our team, led by Bader A. Chowdry, CPA, CA, LPA, brings deep expertise in commercial real estate taxation, corporate structuring, and long-term wealth planning for Ontario business owners.

Contact us today for a consultation:

(905) 270-1873

insightscpa.ca

Serving Mississauga, Toronto, Brampton, Oakville, Vaughan, and the Greater Toronto Area

Disclaimer: This article provides general information and should not be construed as professional tax or legal advice. Tax rules and regulations change frequently. Consult with a qualified CPA to assess your specific circumstances before making commercial real estate decisions.