New Canadian Interest Limitation Rules

New Canadian interest limitation draft legislative rules, known as the Excessive Interest and Financing Expenses Limitation Regime (EIFEL), were released on February 4, 2022, by the Department of Finance (“Finance”). The EIFEL rules will limit the amount of net interest and financing expenses that certain taxpayers may deduct in computing their taxable income, based on a fixed percentage of earnings before interest, taxes, depreciation and amortization (EBITDA). These rules, when enacted, would limit the net interest and financing deductions to either a fixed ratio of 30% (or 40% for taxation years beginning after December 31, 2022, and prior to January 1, 2024), or in certain situation, to a higher percentage based on the group/entity’s net third-party interest expense to EBITDA ratio (group ratio).

These new EIFEL rules are expected to take effect for taxation years beginning after December 31, 2022. We note that with the introduction of those rules, Canada follows other jurisdictions in implementing a regime that is consistent with the recommendations of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan (Action 4).  

The public consultation launched by the Federal government is now closed and we note that the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada (Joint Committee) shared their comments with respect to the EIFEL proposals, and made suggestions to clarify and improve the provisions of the rules as currently drafted. The EIFEL regime will apply to any taxpayer, defined as a corporation or trust, that is not considered to be an “excluded entity.” Excluded entities are generally:

  • Canadian-controlled private corporations (CCPCs) that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million (we note that Finance recently mentioned that it was contemplated increasing that threshold to $50 million);
  • Taxpayers (corporations and trusts) whose aggregate net interest expense among their Canadian members is $250,000 or less (that threshold may also be increased by Finance in future versions of the rules); and
  • Taxpayers (certain standalone Canadian-resident corporations and trusts), and eligible group entities consisting exclusively of Canadian resident corporations and trusts, that carry on substantially all of their business in Canada, provided that:
    • substantially all of the business of the taxpayer and its eligible group is carried on in Canada;
    • no foreign affiliates are in the corporate group;
    • no non-resident owns more than 25% of the votes or fair market value of the taxpayer; and
    • all or substantially all of their interest and financing expenses are payable to persons or partnerships that are not “tax-indifferent investors” (such as tax-exempt entities or non-residents).

As currently drafted, the new EIFEL rules may indirectly apply to partnerships since the interest and financing expenses and income of a partnership are attributed to the members of the partnership that are corporations or trusts based on their percentage interests in the partnership.

Finally, it is unclear at this stage on the new EIFEL rules would apply in the foreign affiliate context.

We’re Here to Help

Unclear if the EIFEL rules apply or what is their impact on you, your corporation or trust? Please do not hesitate to contact one of our Tax team members for more information.

 

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2022-09-15

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