Preparing for EIFEL legislation in Canada

Canadian corporations and trusts should act now to determine how they may be affected by new rules that limit the amount of net interest and financing expenses (IFE) that they can deduct for income tax purposes. These changes, known as the Excessive Interest and Financing Expenses Limitation (EIFEL) rules apply to taxation years beginning on or after October 1, 2023. The legislation is part of Bill C-59, which passed into law on June 20, 2024. Businesses are advised to begin their assessments and tax planning now to prepare for potential impacts and ensure compliance, particularly with respect to the pre-regime years.

What you need to know about EIFEL Rules

EIFEL rules in Canada

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. The Canadian EIFEL legislation, part of Bill C-59, received Royal Assent on June 20, 2024. The legislation aligns with similar rules in other countries, including the UK, the US, and elsewhere.

Determining eligibility

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. Additionally, August 2024 proposed amendments include measures to ensure the EIFEL rules will not apply to purpose-built rental housing providers and regulated utility providers serving Canadians.

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.

Preparing for EIFEL rules

With the regime now in effect, organizations must determine eligibility and lay the groundwork for compliance. 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.