Fleet in Canada is split into three main categories across approximately 350,000 units. The vast majority is short term rental volume at 65%, while between 20% and 25% are leased on longer terms by corporates, and the balance is government sector fleet.
Finance and leasing plays an integral role in the Canadian automotive industry with approximately 80% of all new vehicles funded in this way, according to a spokesperson for Scotiabank, one of the top three largest banks in the country.However, company car schemes are a largely unknown and unfamiliar concept.
Peter Birks, president of Auto Financial Group (AFG) Canada, said: “The corporate company car market in Canada is virtually non-existent due to the tax structure.
“There is no benefit to companies looking to lease vehicles on behalf of employees. The taxation system around the company car as a benefit is also very onerous.”
Birks said that generally, Canadian companies do not want the responsibility of looking after fleets of vehicles on contract hire and so instead offer cash allowances to employees as part of their employment contract as an alternative.
Rev. Dr. K. Bill Dost, group chief executive of DND Finance, an SME leasing specialist and finance house covering markets in both Canada and the UK, confirmed that while company cars are not a foreign discussion in Canada, companies prefer not to use traditional contract hire, due to the
taxable benefits associated with it. As a result, there is a greater preference to provide a car allowance that the employee receives.
This essentially turns the majority of Canadian company car drivers into retail customers, looking for their own deal, whether that is an outright purchase, personal contract hire or a hire purchase agreement.
All company mileage is always expensed. Dost said that most jobs, with the exclusion of sales related roles, do not require a vehicle for employees, so the concept of the company car in the sense of a vehicle with operational leasing/contract hire and added bundled services has not made its way into
the Canadian mindset.
Dost explained: “The choice for those that are looking to finance their vehicle really comes down
to the customers’ needs on whether they want to own the car at the end of the agreement or not.”
For drivers using their car for business, they can write off up to $840 a month from their lease of
finance payments each month against tax.
While traditional contract hire does not have traction in Canada, the leasing market is strong with most businesses looking to lease their vehicles and move into new product every three to four years.
AFG, a US-based company, entered the Canadian leasing market in August last year following its acquisition of Credit Union Leasing Administration of Canada. AFG provides an online, residual based, walk-away vehicle financing product called AFG Balloon Lending, as well as vehicle leasing
and vehicle remarketing.
The lender is not fully active in large fleet business. Its focus is on consumer leasing and small fleets, with a focus on customer service.
AFG president Birks said: “When the market crashed in 2007/2008 the leasing companies pulled out, Chrysler went bankrupt and the availability of lease financing disappeared.
“The Canadian Federal Bank Act prohibits banks from participating in personal automotive leasing business, providing an opportunity for Credit Unions, which are guided by a different set of regulations.”
The 2008 financial crash reshaped Canadian automotive finance, with the fleet market sustaining large consecutive drops over three years in 2007 (down 7.5%), 2008 (down 10.2%) and 2009 (down 23.2%).
The Canadian fleet market low of 181,896 units in 2009 has gradually recovered volumes to a peak of 350,667 units in 2016, with sales maintained around that level as of the end of 2018.
A downward turn over four years since 2007 saw captives’ large slice of finance market eroded to 45%, with the major banks increasing their share up to 50%.
Captives have since regained some market share due to a resurgence in leasing, getting back to 54%, but banks remain at 43%.
One of the reasons leasing has bounced back is that it offers a more cost effective tax option for customers.
When a vehicle is purchased in Canada, provincial and federal taxes must be paid in full at the time of purchase and factored in to the finance cost. Depending on the province, this can range between 5% to as high as 25%.
However, with leasing, provincial and federal taxes are only due on the monthly lease payment for the duration of the contract so customers are saving up front on taxes.
Lease payments are an allowable business expense (up to $840 a month) and it keeps a businesses credit lines open, rather than using up cash for outright purchase.
Captives before the crash had an 82% market share in Canada in the automotive finance market, leaving 14% for major banks and 4% for finance companies and credit unions.
Banks have been pushing for amendments to Canada’s Bank Act to allow them the opportunity to compete on an equal basis for a share of the vehicle financing market.
Opponents maintain that direct participation in the vehicle leasing market would place banks in a conflict of interest with dealers, who would be both customers and competitors.
Leasing offers an alternative funding method for Canadians as according to research by AFG, over 50% of new car loans are written for 84 months (seven years) or longer.
Customers are then tied in to long finance deals, tempted by the lower monthly payments, which initially prove attractive. However, according to Birks, drivers may find later that they are unable to easily switch out of that finance agreement if their circumstances change or they want a different
It can also lead to situations where a customer is in negative equity as the value of their vehicle has dropped below the outstanding balance on their loan.
CANADA VS EMEA
In Canada, unlike the UK and elsewhere in Europe, dealer networks facilitate 100% of retail and fleet sales for vehicle manufacturers.
Customers can appoint vehicle brokers, internet buying services and independent leasing companies, but these companies will essentially represent the consumer at the dealership.
These options give consumers potential access to fleet discounts, volume discounts, as well as handing over the element of negotiation aspect of buying a vehicle themselves to the dealer team.
As Bill Dost explains: “The dealer handles everything including often the credit check and then the dealership will create the contract. The leasing company simply funds the transactions in these cases.”
According to data from Dealertrack Canada, the average monthly retail finance payment was $619 for new cars and $448 on used.