The Canadian finance leasing industry includes property-based financing, equipment leasing, and vehicle leasing. Finance leasing reached a peak of 105.4 billion CAD in 2007 (compared to only 50 billion in 1998). Due to the economic recession, total asset financing declined to 80.8 billion CAD in 2008-09.
It is estimated that the total lease assets under management by Canadian leasing companies amount to approximately 103 billion CAD, with equipment finance companies accounting for 48 billion CAD. The majority of lessees (60%) are small and medium-sized enterprises (SMEs). Commercial equipment financing in Canada in 2004 was 19 billion CAD.
Statistics on the Operating Status of the Canadian Commercial and Industrial Machinery Leasing and Rental Industry (2010)
|
|
Annual Revenue (Million CAD) |
Operating Expenses (Million CAD) |
Operating Profit Margin (%) |
Wages, Salaries and Benefits (Million CAD) |
|
2010 |
6,712.0 |
5,945.8 |
11.4 |
1,278.1 |
|
2009 |
6,458.5 |
5,745.1 |
11.0 |
1,317.5 |
|
2008 |
6,742.4 |
5,910.9 |
12.3 |
1,326.2 |
The Canadian leasing market consists of domestic and international bank leasing companies, large independent entities, and a large number of small leasing companies. The "Canadian Finance and Leasing Association" currently has about 200 member leasing companies, most of which are equipment and vehicle leasing companies operating in Canada, with about 20% being large corporations. These large leasing companies include major multinational groups such as GE Capital, CIT, Bank of America, PNC Equipment Finance, Caterpillar Financial Services Inc., Wells Fargo, IBM Financial, and John Deere Credit. 95% of the financing for these companies comes from within Canada. Small private leasing companies are mostly dependent and have smaller business volumes.
The Canadian leasing market is characterized by the fact that the transaction volume of small leasing companies mainly depends on lease contractors and vendor program projects, while the transactions of medium and large leasing companies come more from direct lessees. Due to the relatively small size of the overall Canadian market, there are few specialized leasing companies limited to specific equipment, and leasing companies' services are characterized by diversification. The Canadian leasing industry has high recognition within the government, and the potential of the leasing market is growing, especially with significant room for development in the SME market share.
In Canada, asset-based finance leasing accounts for 25% of the annual new investment in machinery, equipment, and commercial vehicles. About 60% of the industry's clients are SMEs. Although many credit providers are large financial institutions, such as banks, credit unions, and insurance companies, corporate finance companies and regional small independent finance leasing companies still account for a significant number.
Types of Leasing Consumers and Their Market Share
The asset/equipment-based finance leasing industry represents a significant new channel for commercial capital sources. This financing method relies primarily on cash-flow-based credit analysis of specific assets, rather than the traditional "net worth" lending provided by banks. Asset-based lending is secured by inventory and receivables rather than equipment, and it holds great market potential.
Similarly, there is a significant market need for project financing solutions for infrastructure, including power assets (hydro, wind, gas turbines, nuclear, and alternative fuels), hospitals, toll roads, and transportation.
Types of Leased Equipment and Market Share Ranking (2004 Statistics)
|
Rank |
Equipment Type |
2003 |
2004 |
|
1 |
Vehicles (Total) Trucks Trailers Public Vehicles |
27% 14% 11% 2% |
25% 13% 11% 2% |
|
2 |
Construction Equipment |
12% |
13% |
|
3 |
Manufacturing and Processing Equipment |
9% |
9% |
|
4 |
Aircraft and Related Equipment |
7% |
7% |
|
5 |
Office Equipment |
6% |
6% |
|
6 |
Computers (Software and Hardware) |
6% |
5% |
|
7 |
Medical and Healthcare Equipment |
3% |
3% |
|
8 |
Forestry Equipment |
3% |
3% |
|
9 |
Mining and Oil Equipment |
3% |
3% |
|
10 |
Material Handling Equipment |
2% |
2% |
|
11 |
Office Furniture and Fixtures |
1% |
1% |
|
12 |
Store Furniture, Shelving, Equipment |
1% |
1% |
|
13 |
Railway Rolling Stock |
1% |
1% |
|
14 |
Agricultural Equipment |
1% |
1% |
|
15 |
Communication Equipment |
0% |
0% |
|
16 |
Water Containers |
0% |
0% |
|
17 |
Hotels, Restaurants, Apartments |
0% |
0% |
|
18 |
Other |
17% |
17% |
The traditional practice of Canadian leasing is to focus on the relationship between the borrower/lessor and the asset user (i.e., the implementation of asset-based financing products), but financial companies and lessors often use specialized securitized financing to reduce the cost of providing asset financing products.
Asset-based financing (and securities) is highly dependent on a complex, and sometimes conflicting, set of tax and accounting rules. The structure of the Canadian finance and leasing market is largely influenced by financial services regulations and taxation.
The Canadian "Bank Act" stipulates that banks cannot engage in consumer vehicle leasing or any asset-based leasing business unless it is a "finance lease." Based on this regulation, the vehicle leasing industry has been dominated by manufacturer finance companies and smaller leasing groups (especially independent car dealers). Furthermore, banks cannot provide "operating" leases for leased assets to consumers.
Banks can provide operating leases in cases where most of the equipment risk is offset by purchasing residual value guarantees. Small industrial entities provide operating leases by assuming the residual value and remarketing risk of specific assets, which makes operating leases relatively expensive (unless credit can be obtained from pension funds or insurance companies, or part of the financing can be securitized). Although banks cannot directly enter this type of leasing business, they can provide credit to vehicle leasing companies, and it is often on a non-recourse basis.
Facilitating corporate investment in new machinery, equipment, and vehicles can promote national productivity and improve the national standard of living. According to relevant studies, between 1992 and 2002, the asset-based financing industry directly increased the national standard of living by 2.3%, equivalent to 8% of the total increase in the national standard of living.
II. Management and Regulation of Finance Leasing Operations in Canada
Canada has 10 provinces and 3 territories. Provincial, territorial, and federal governments have their own administrative and legal management powers and scopes. In general, Canadian provinces and territories are responsible for formulating policies and regulations involving property and civil rights within their respective jurisdictions; the federal government is mainly responsible for formulating policies and regulations regarding national affairs.
Canada does not have separate legislation for the leasing industry. Laws related to the leasing industry include both federal legislation and laws enacted by provincial and territorial legislatures, mainly including the "Bank Act," "Income Tax Act," "Personal Property Security Act," "Bankruptcy and Insolvency Act," "Companies' Creditors Arrangement Act," and "Wage Earner Protection Program Act." The leasing industry in Canada is managed by each province. The federal government does not regulate leasing, with the sole exception of the federally responsible "Bankruptcy and Insolvency Act." Therefore, parties must understand the province or territory of the specific leasing transaction in advance and ensure that the transaction complies with relevant local laws. However, the laws and regulations related to the leasing industry in many Canadian provinces and territories (except Quebec) are basically similar.
Tax law plays a major role in the regulation of the leasing industry. Provinces have their own regulatory measures for the finance leasing activities of their subordinate municipalities. Taking Ontario as an example, the "Municipal Act" enacted by the provincial government has specific regulations for the finance leasing of municipalities. The "Municipal Act" was drafted with the assistance of the Committee on Debt Issuance and Investment Policy, which is composed of representatives from the Ontario Financing Authority, the Association of Municipalities of Ontario, the Municipal Finance Officers' Association, municipal staff, and investment associations. Finance leasing refers to a situation where the municipality is the lessee, makes a commitment to pay, and debt-finances the cost (equivalent) of the property to be purchased.
According to the relevant provisions of the Ontario "Municipal Act," Ontario municipalities must analyze and disclose specific standardized information in their finance leasing contracts. The municipal council must first determine and state the finance leasing policy and objectives before it can proceed to sign a finance leasing contract. Municipalities must report all finance leasing agreements and transactions at least once every fiscal year.
According to Ontario's regulations, the City of Toronto requires its municipal financial management officials to submit reports on their finance leasing projects to the City's Executive Committee, explaining the source of funds, financial significance, and impact. Annual financial statements must indicate the cost budget of their lease financing when listing the proportion of various finance leases in the city's existing long-term debt. The treasurer shall report the finance leasing situation to the municipal council annually, explaining the proportion of finance leasing in the city's existing long-term debt, and ensure that these leasing activities do not violate the municipal government's relevant leasing policies. City agencies, boards, and committees will all comply with the municipal government's lease financing policies and objectives.
The City of Toronto stipulates that all finance leasing agreements that exceed the scope stipulated by the municipal council and are considered material by the municipal council and the Department of Finance must meet the following points:
Every finance leasing transaction must be subject to the city's standards and allow for municipal and public review. If possible, the finance leasing must include a complete list of fixed payments.
Before signing a material finance leasing agreement, the municipal council must evaluate the transaction based on the report provided by the treasurer. Doing so allows the city to have an accurate understanding of the cost of the transaction. The evaluation must include legal and financial advice.
In county, regional, and municipal areas, when a lower-tier municipality's finance leasing arrangement may affect the credit rating of its county or regional government, the lower-tier municipality must inform the county or region of its leasing arrangement, including the schedule and terms, before making a decision.
At the same time, the municipality must also have separate financial regulations clearly stating that payments under finance leases that exceed the municipal term are all legal debts of the city and are within the financial authority.
III. Tax and Accounting Systems Related to the Leasing Industry
(I) Tax System
Canada is a country with a decentralized federal and local tax system, implementing a three-level tax collection system of federal, provincial (or territorial), and local governments. The federal and provincial governments each have relatively independent tax legislative powers, and local tax legislative powers are granted by the provinces. Due to the implementation of a non-centralized system, provincial tax policies are flexible, and each province has a certain degree of autonomy in tax types, collection methods, and tax equalization, but provincial tax legislative power cannot contradict federal tax legislative power.
The main taxes involved in the leasing industry include: corporate income tax and surtax, personal income tax and surtax, goods and services tax (consumption tax), capital tax, land and property tax, etc.
Income Tax. Canada's income tax is collected by the federal government and provincial or territorial governments. Canadian residents must pay income tax based on their income earned worldwide. Non-Canadian residents must pay taxes in Canada as long as they have the following income or gains from Canada. Canadian personal income tax "taxable income" is divided into four categories: employment income, business income, investment income, and capital gains. Federal personal income tax implements progressive tax rates; the higher the taxpayer's income, the higher the tax rate. Most passive (investment) income earned by non-residents in Canada, including interest, dividends, rent, and royalties, is subject to a 25% withholding tax as long as the payments are made or prepaid by Canadian residents to non-residents. Non-residents in Canada may reduce or exempt the income tax payable based on tax treaties signed between their country of residence and Canada.
Consumption Tax and Other Taxes. Canada's consumption tax is a general term for a category of taxes: first, the Goods and Services Tax (GST), which is similar to China's value-added tax, is divided into federal GST and provincial GST. Since 1991, Canada has levied a 7% federal GST on the sale of most goods and services, and the current tax rate has dropped to 5%. Provinces levy GST on retail goods and services, ranging from 6% to 12%. Rental income is subject to this tax. Second, there is an excise tax similar to China's consumption tax, which levies special excise taxes on gasoline, diesel, cigarettes, alcohol, jewelry, air conditioning, and heavy vehicles. However, basic food, medical services, childcare and education, residential rent, financial services, resale housing, insurance, and prescription drugs are exempt from consumption tax. For most people who pay GST due to the purchase of goods in business operations, this tax expenditure can be offset through a tax refund mechanism. Some provinces levy sales tax on the sale of personal tangible assets and the provision of certain services. When calculating income tax, provincial sales tax is generally not deductible, and there is no tax refund.
Municipal Taxes (Property Tax). Taxes collected by municipal governments are used for schools, police and fire services, road maintenance, and other local services. Property owners must pay municipal taxes (commonly known as property tax) annually based on the valuation of their property.
Withholding Tax. When Canadian residents pay most forms of investment income (including interest, dividends, rent, and royalties) to non-residents, they usually have to withhold tax equivalent to 25% of the total payment. According to applicable international tax treaties, this tax rate can be reduced. In typical tax treaties, the interest tax is 10%. The dividend tax is 15%, unless the shareholder is a corporation and actually owns 10% or more of the voting rights of the dividend payer, in which case the dividend tax is 5%; the royalty tax is 10%, and some royalties can be reduced to 0%. According to the "Income Tax Act," as long as one person in a partnership is a non-Canadian resident, the enterprise should be considered a non-resident. Therefore, payments made by Canadian residents to such partnerships need to be fully withheld; however, in terms of administrative operations, the Canada Revenue Agency generally allows the payer to audit the partnership and withhold relevant taxes based on the residence and tax treaty status of the partnership members. Although withholding tax is levied on non-resident income earners, it must be withheld by the Canadian resident payer and paid to the tax bureau on behalf of the non-resident; otherwise, the Canadian resident payer will be responsible for paying the tax themselves. Non-residents conducting business activities through their Canadian branches are also considered Canadian residents and are required to pay withholding tax. These regulations effectively turn certain payments, such as interest that a non-resident must deduct when paying another non-resident, into withholding tax paid to Canada.
(II) Accounting System
Definition of Income. Generally speaking, income in the sense of tax law refers to business or property income, income from office or employment, and taxable capital gains. Business or property income is usually equal to the profit from the business or property calculated according to generally accepted accounting principles and business practices after adjustments based on tax law rules. Income also includes half of the capital gains obtained when selling assets (called "taxable capital gains"). Capital gains can be used to offset capital losses in the case of capital losses. The amount of capital gains is generally equal to the proceeds from the sale of assets minus the sum of the "adjusted cost base" (roughly the purchase cost) under tax law and all selling costs.
Interest Expenses and Other Financial Costs. According to the proposed loss tax deduction limitation rules, reasonable interest expenses incurred in business operations by borrowing or acquiring assets to earn income can receive tax deductions. Non-interest expenses, including commissions and handling fees, expenses incurred for borrowing or issuing bonds to earn income, or expenses caused by issuing inventory bonds, can be amortized and deducted over five years. Quebec has proposed legislation to limit tax deductions for expenses to the income generated by the investment. If this rule takes effect, it will only apply to Quebec taxpayers.
Depreciation. Taxpayers have the right to claim tax deductions (Capital Cost Allowance) for the depreciation of assets used in business operations at the prescribed tax rates. Similar tax deductions can be made for other non-deductible capital expenditures incurred by a company to earn profits. These depreciable assets include various machinery and equipment, buildings, and certain intangible assets, including goodwill. Land is not subject to depreciation tax deductions. Capital cost allowance is calculated based on the sum of the undepreciated capital cost of various types of assets rather than based on the undepreciated capital cost of each individual asset. To limit the depreciation benefits of lessors, Canada implements the "specified leasing property rules" for the depreciation of leased assets. This principle divides the leasing market into small tax-exempt leasing assets (single item value less than 1 million CAD) and other non-exempt leasing assets. Small tax-exempt leasing assets mainly include office furniture, office equipment, residential equipment, automobiles, road transport vehicles, and railway cars. Other leasing assets are non-exempt leasing assets, such as industrial equipment, ships, power generation equipment, oil and gas equipment, flight simulation equipment, and telephone exchange equipment. Lessors of small tax-exempt leasing assets can calculate asset depreciation using the declining balance depreciation method. Lessors of non-exempt leasing assets need to calculate depreciation according to the prescribed depreciation rate.
Transfer Pricing Rules. Like many other countries, Canada also adopts transfer pricing rules to protect its tax base. These rules are designed to ensure that the income (and their corresponding tax obligations) of Canadian taxpayers is not overly reduced because they have engaged in transactions that are not legally related with related non-residents. Transfer pricing rules apply to Canadian residents and non-residents conducting business activities in Canada; therefore, transfer pricing rules also relate to subsidiaries (and their parent companies) and branches in Canada. The pricing of goods and the determination of management fees, guarantee fees, and royalties are all contents involved in ensuring the implementation of transfer pricing rules. The tax bureau has special audit powers on transfer pricing issues and can require taxpayers to submit the required documents and materials within 90 days after receiving the official notice from the bureau.
IV. Operational Experience of Leasing Industry Associations
There are two main leasing industry associations in Canada: the Canadian Rental Association (CRA) and the Canadian Finance & Leasing Association (CFLA). Both associations are non-profit organizations, but they charge membership fees to maintain daily operations and provide some paid services related to the industry. Both associations have very mature websites and have offices in major commercial cities.
(I) Canadian Rental Association (CRA)
CRA is a non-profit industry trade organization dedicated to promoting the success of member companies and advancing the development of the leasing industry. CRA was founded in 1965 and is affiliated with the American Rental Association (ARA). At the same time, CRA also has branches and representative offices in different regions of Canada. CRA serves Canadian leasing companies through a network of regional branches. Also, because CRA is a branch of ARA, its members can share many resources and activities with ARA.
The core values of CRA include: promoting communication and cooperation among members; respecting the diversity and different viewpoints of members when formulating policies; developing leadership mechanisms on a spontaneous and voluntary basis; representing the professionalism and integrity of the leasing industry; and committing to change and continuous improvement.
The main work content of CRA includes: 1. Promoting the development, maintenance, operation, and public welfare of various branches in Canada in a legal manner; 2. Cultivating the good qualities of practitioners in the leasing industry; 3. Promoting ethical practices in industry relations and providing the public with unified high-standard services; 4. Disseminating useful information on industry progress to members, assisting members in expanding their business, and providing information on procedures and professional fields related to the leasing industry; 5. Assisting members in learning, researching, and exchanging relevant knowledge and ideas together; 6. Timely notifying members of important matters related to the leasing industry at the local, national, and international levels; 7. Organizing seminars, trade fairs, and training activities for members and their employees; 8. Designing and developing new systems and relevant procedures for members to increase revenue.
The main working methods of CRA include:
1. Providing insurance plans for members
CRA can provide professional group insurance plans for all members, helping members obtain necessary insurance business at the lowest cost. Since CRA has established a professional insurance system for the leasing industry, combined with the members' own business and analysis of the risks they face, it can provide targeted insurance services for members across Canada, while enjoying group discount prices. The insurance plans specifically designed by CRA for members include: property insurance, remote insurance for leased equipment, liability insurance, business interruption, crime, equipment failure, equipment re-leasing insurance, etc.
2. Hosting industry annual meetings, trade fairs, and exhibitions
CRA's annual meeting is held in conjunction with the American Rental Association's rental exhibition every time, which is conducive to members expanding their business. After the exhibition, an event is also held specifically for CRA members to promote communication among members.
CRA also organizes regional leasing trade fairs and large-scale leasing exhibitions in different provinces in Canada.
3. Collecting and transmitting industry information
CRA has dedicated staff responsible for collecting leasing information and transmitting it to members in a timely manner. Paid members can receive ARA's top industry magazine "Rental Management" every month and can obtain real-time information on changes in the leasing industry via online email. In addition, CRA also publishes publications including: ARA member annual information collection, Canadian Rental Service magazine, etc.
4. Training services
ARA has very rich materials on the leasing industry, including videos, books, magazines, and related teaching aids, which CRA members can share. CRA members can also participate in ARA's seminars and other activities.
CRA also provides some human resources services for members, such as helping member companies formulate employee policy manuals.
5. Experience reports and credit assessment
Helping members simplify daily operations and manage business more effectively, and assisting members in issuing benefit reports and operating cost reports, etc. CRA also provides credit assessment report services for members to help members identify the credit status of customers.
6. Scholarship programs
CRA has also established several scholarship programs to provide funding for further studies for college students, leasing owners, employees, and their immediate family members engaged in the leasing industry.
In addition, CRA can provide members with professional leasing labels and equipment decals to facilitate the management of leased equipment by enterprises.
(II) Canadian Finance & Leasing Association (CFLA)
CFLA represents Canada's asset-based financing, equipment, and vehicle leasing industry. This industry is the largest provider of debt financing outside of traditional lending (bank and credit union) institutions.
CFLA was founded in 1993 and was formed by the merger of the Canadian Vehicle Leasing Association and the Equipment Leasing Association. CFLA has more than 200 members in Canada, most of which are equipment and vehicle leasing companies operating in Canada, including large multinational corporations and domestic small regional enterprises, covering financial services for manufacturer finance companies, independent leasing companies, banks, insurance companies, and industry suppliers. The industry's clients include small, medium, and large enterprises in Canada as well as consumers.
In its heyday in 2007, the value of assets financed by the industry reached as high as 105.4 billion CAD. However, during the global economic crisis of 2008-2009, its total assets in Canada fell to 80.8 billion CAD.
CFLA members are key partners for Canadian businesses and consumers. Asset-based financing touches almost every business and consumer in Canada. By promoting corporate investment in new machinery, equipment, and vehicles, CFLA has enhanced the country's productivity and improved the standard of living for Canadians.
CFLA's main functions are in four areas: 1. Promoting the industry to the government, media, other financial services associations, and the public; 2. Providing members with timely industry-related information and issuing warnings about important information that may directly affect members' business; 3. Providing services for members to communicate, exchange information, and learn advanced experience by organizing industry forums; 4. Providing professional training services for employees of member companies and holding thematic seminars from time to time.
CFLA members include three types: 1. Regular members, i.e., enterprises engaged in finance leasing; 2. Associate members, i.e., institutions providing services to the finance leasing industry, such as lawyers, accounting firms, software developers, auction houses, etc.; 3. Overseas members, i.e., foreign institutions interested in the Canadian finance leasing industry.
CFLA's board members are drawn from its members, with a two-year term, and are usually served by business leaders in the industry in different regions. The executive committee is appointed by the board of directors and has a chairman, vice-chairman, secretary-general of finance, and staff, who are responsible for the daily execution of the association's work, including accounting, training, government relations, legal affairs, taxation, etc.
CFLA holds an annual meeting every autumn and also organizes a golf tournament for members every June.
CFLA's latest operational method is through the association's website. The association upgraded and revised its website in February 2012, publishing a large amount of relevant industry information online, 90% of which is exclusive to members and requires a password to browse or download. The information provided on the website includes government policy adjustments, relevant laws and regulations, accounting, taxation, insurance, economic data, etc. The website has a dedicated communication area where you can query providers of industry-related services online, find financing partners, and find providers of relevant legal and technical services. The CFLA website has also established its unique online training system—the Canadian Leasing Industry On-Demand Training Program, which contains 11 video teaching materials to help members learn about finance leasing, equipment leasing, and vehicle leasing in Canada. The CFLA website also has an electronic message board, will also transmit information to members via email, and provides members-only annual industry survey reports online. Its website has become an electronic information resource center for the industry.