Context: As part of the avalanche of new draft legislation, the Department of Finance has released revised excessive interest and financing expenses limitation (EIFEL) rules. The attached Excel is a high-level and technical summary of the new EIFEL regime. The changes released last month are highlighted in red in the technical summaries (at the numbered tabs).
Effective dates and elections: The new EIFEL rules are far-reaching, difficult to digest, and fast approaching. The rules will apply to many corporations for their taxation years beginning after October 1, 2023 (see Tab 2 – Excluded Entities), and several important elections will need to be considered:
- An election to exclude financing expenses between two Canadian group members, which allows a carve-out (but is not limited to) loss-consolidation transactions (see Tab 4 – Excluded Interest).
- An election to treat a loss as a “specified pre-regime loss”, in which event a flat 25% of that loss is added back in the computation of the taxpayer’s ATI (see Tab 7 – ATI).
- An election to transfer cumulative unused excess capacity between group members, which allows group members to effectively maximize their available deduction room in a year (see Tab 11 – Transferred Capacity).
- An election to forgo claiming a foreign accrual property loss (FAPL) in a controlled foreign affiliate (CFA), to avoid including that CFA’s financing expenses in the taxpayer’s own financing expenses (see Tab 13 – CFAs).
- An election to use a consolidated “group ratio”, as opposed the 40% or 30% “fixed ratio”, in the formula that restricts the deduction of financing expenses (see Tab 19 – Group Ratio Rules). This allows certain corporate groups to potentially benefit from more deduction room where the group is highly leveraged.
- An election to apply a three-year carryforward of excess capacity determined for years before the introduction of the EIFEL regime (see Tab 20 – CIF & Transitional Rules). This pre-regime excess capacity would be included in the applicable group members’ cumulative unused excess capacity for the years in which the new rules apply.
The takeaway: If you thought interest deductibility issues can be a challenge under the existing rules – just wait. These new EIFEL rules are next level in their complexity.
