Many corporations and trusts will be affected by proposed rules to limit the amount of interest and other financing expenses that businesses may deduct for Canadian income tax purposes. These proposals, known as the excessive interest and financing expenses limitation (EIFEL) rules, generally limit the amount of net interest and financing expenses that may be deducted by affected corporations and trusts. Finance recently released a revised version of these proposals, which narrows their applicability in some cases, provides new rules to address controlled foreign affiliates, and delays their implementation date to taxation years beginning on or after October 1, 2023. Finance is accepting comments on the revised draft legislation until January 6, 2023.
The revised rules, which were released November 3, 2022, provide some welcome changes, but not all of the revisions are relieving, and the rules will still significantly affect many corporations and trusts. Corporations and trusts should review the revisions to the EIFEL rules to determine whether they may be affected and model potential impacts, including on after-tax cashflows, especially due to the recent increase in interest rates. These corporations and trusts should also consider any available elections or designations to maximize allowable interest and financing expenses. In addition, these taxpayers may want to look at whether it makes sense to modify any existing internal or external financing, or undertake restructuring transactions before the rules take effect.
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