Preparing for EIFEL legislation in Canada

Legislation is coming to Canada that may affect the deduction of interest and financing expenses (IFE) for Canadian corporations and trusts. The Excessive Interest and Financing Expenses Limitation (EIFEL) rules will restrict the amount of IFE that corporations and trusts can deduct for Canadian income tax purposes.

The rules are complex and are expected to apply to taxation years on or after October 1, 2023. Businesses are advised to begin their assessments and tax planning to prepare for potential impacts and compliance, particularly with respect to the pre-regime years.

EIFEL legislation responds to recommendations by the Organization for Economic Cooperation and Development (OECD) to reduce base erosion and profit shifting by limiting the deduction of IFE generally to a fixed ratio of 30% of adjusted taxable income. When passed, Canadian legislation will align with similar rules in other countries, including the UK, the US, and elsewhere. Finance released a revised version of the proposed rules on November 3, 2022.

The EIFEL rules are expected to apply to Canadian resident corporations and trusts with more than $1 million of IFE, net of interest and financing revenue. They also apply to non-residents that conduct business in Canada with deductible IFE. One exception is for IFE that relates to certain Canadian public-private partnership infrastructure projects.

Entities that may be excluded from the rules include:

• Canadian Controlled Private Corporations (CCPCs) with less than $50 million of taxable capital employed in Canada.
• Eligible groups of corporations and trusts resident in Canada that have $1 million or less of aggregate net interest and financing expenses in a taxation year, and
• Corporations and trusts resident in Canada that, along with any other eligible group entities, have limited operations outside of Canada, subject to certain conditions.

Determining eligibility early on and laying the groundwork for compliance is important. Canadian corporations, trusts and non-resident entities that conduct business in Canada should:

• Undertake a high-level EIFEL impact assessment and understand the organization’s pre-regime capacity
• Consider mechanisms to manage EIFEL outcomes
• Consider effects on existing internal or external financing, or consider restructuring certain transactions before the rules take effect

KPMG tax professionals can assist corporations and trusts navigate the EIFEL rules. Our experienced consultants can help affected entities by assessing the impact of the EIFEL rules, understanding the application of the transitional rules and by making recommendations to help ensure reporting and tax compliance.

To learn more about how the EIFEL rules may impact your business or trust, speak to one of our tax leaders today.