What is a Capital Lease?
Capital leases are a particular form of lease agreement that allows an individual or company to enter into a relationship with a supplier in which there is an excellent chance that the lessee will wish to acquire full ownership of the product at the end of the lease agreement. Typically, there are specific conditions that must exist and are documented within the terms of the lease. A capital lease is sometimes referred to as a conditional sales contract. The advantage to the lessee or buyer is the fact that the product can be paid for over time, without the need for taking out a loan to handle the transaction. Along with making it possible for the lessee to acquire and begin to enjoy the product immediately, a capital lease also usually includes some stipulations for terminating the agreement early. Those clauses help to provide the lessor with a reasonable level of protection, in the event that the lessee has a change of heart after the agreement has been in place for only a short tim
A capital lease is any lease where (a.) the sum of all payments is $25,000 or more, and (b.) the capital lease criteria in (Section A.1.a) Statement of Financial Accounting Standards No. 13 (SFAS 13) is met (see summary criteria under B.6 below). The most common capital lease is referred to as a “lease purchase” whereby ownership is transferred to USNH at the end of the lease term. • What is an operating lease? An operating lease is any lease which does not meet the definition of a capital lease as stated in A.1.a. above. Examples include copiers and computers where the sum of all lease payments is less than $25,000, or rental of office space from a third party. • Authority to enter into a lease agreement. A department that wishes to lease property or equipment must contact their campus Purchasing Department. If the lease is to be charged to a sponsored program, UNH and CLL departments need to submit the agreement to the Office of Sponsored Research for approval prior to contacting the
From Revenue Canada’s stand point, a capital lease is just a different method of financing a piece of equipment you intend to own in the end. For income tax purposes, Revenue Canada treats a capital lease the same as a purchase. When is a lease considered a capital lease? When one of the following exists: 1. Title automatically passes after a certain number of payments 2. The Lesee is required to buy the asset at some point or guarantee full option price 3. The option to buy is at less than fair market value (FMV) 4. The option to buy is at a price or under conditions such that no responsible party would fail to exercise that option. In our John Smith example it is a capital lease because the buy out was for a nominal amount, $100.00, and this is at less than fair market value.
