On February 4, 2022, the Department of Finance proposed important changes that will affect the amount of interest and financing expenses deductible by certain taxpayers. These new restrictions are known as the Excessive Interest and Financing Expenses Limitation (“EIFEL”) regime.
In general terms, the new EIFEL rules will limit the amount of net interest and financing expenses (being the taxpayer’s interest and financing expenses net of its interest and financing revenues) that may be deducted in computing their income to no more than a ratio of earnings before interest, taxes, depreciation and amortization (“EBITDA”) for tax, as adjusted by the new rules. The default will be a “fixed ratio” of 30% of EBITDA (or 40% during the transitional phase). When certain conditions are met, Canadian members of a group (and certain standalone entities) can jointly elect into the “group ratio” rules, which may allow a taxpayer to deduct interest and financing expenses in excess of the fixed ratio.
Scope of the New EIFEL Regime
The new regime will apply to corporations and trusts. It will also apply indirectly to partnerships which have corporations and/or trusts as members. The draft proposals are broad in scope but will not apply to an “excluded entity”, which is generally defined as:
- Canadian-controlled private corporations that, together with any associated corporations, have taxable capital employed in Canada of less than $50 million;
- Groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $1,000,000 or less; and
- Certain standalone Canadian-resident corporations and trusts, and groups consisting exclusively of Canadian-resident corporations and trusts that carry on substantially all of their business in Canada. Generally, this exclusion applies only if no non-resident is a foreign affiliate of, or holds a significant interest in, any group member, and no group member has any significant amount of interest and financing expenses payable to a “tax-indifferent investor”.
New Implementation Date
On November 3, 2022, the Department of Finance released revised draft legislation and announced that the proposed coming-into-force date for this legislation is now for taxation years beginning on or after October 1, 2023.
A new consultation period on the proposed changes will end on January 6, 2023.
If you would like to know more about how these proposed changes, if adopted as drafted, might affect you, please contact us.