Canada: Preparing for excessive interest and financing expenses limitation (EIFEL) legislation

Legislation is expected in 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 would 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 tax years on or after 1 October 2023. Businesses may need to begin their assessments and tax planning to prepare for potential effects and compliance, particularly with respect to the pre-regime years.

EIFEL legislation responds to recommendations by the Organisation 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 and the United States. The Department of Finance released a revised version of the proposed rules on 3 November 2022. Read TaxNewsFlash

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 would 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 tax year
• 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 may need to consider:

• Undertaking a high-level EIFEL impact assessment to understand the organization’s pre-regime capacity
• Mechanisms to manage EIFEL outcomes
• Implications for existing internal or external financing, as well as possible restructuring transactions before the rules take effect

Read an April 2023 report prepared by the KPMG member firm in Canada