EIFEL Rules May Affect Your Ability to Deduct Interest and Financing Costs Going Forward

Written by John Grummett FCPA, FCA, Taylor Leibow LLP

New rules are now in effect related to the deductibility of interest and financing costs.  The rules are referred to as “Excess Interest and Financing Expenses Limitation” or EIFEL.

In general, the rules limit net interest and financing expenses to 30% of Adjusted Taxable Income (“ATI”) for taxation years beginning on or after January 1, 2024.  In addition, there was a limitation to 40% of ATI for taxation years beginning after September 30, 2023 and before January 1, 2024.

Excluded Entities

The new EIFEL rules apply to all corporations and trusts except for those that are considered to be excluded entities.  An excluded entity is:

• A Canadian Controlled Private Corporation (“CCPC”) that, when combined with associated corporations, has taxable capital employed in Canada of less than $50 Million.
• Groups with financing and interest expenses in Canada of less than $1 Million.

or

• A taxpayer resident in Canada that:
  • carries on all or substantially all of their undertakings and activity in Canada.
  • has no non-resident specified shareholders,
  • all or substantially all of the interest and financing costs are paid to persons that are not a non-arms length tax-indifferent investor, and
  • The greater of the accounting cost of shareholdings of foreign affiliates and the proportionate share of the fair market value of foreign affiliate properties, must be less than $5 million.

Limitations

The legislation related to EIFEL is quite complex, but in simple terms the rule limits a person’s net interest and financing expenses to 30% of ATI.  As a starting point, ATI is calculated as taxable income, minus non-capital losses and foreign accrual property losses of a controlled foreign affiliate.  This result is then adjusted to reverse various deductions and income inclusions made in the determination of taxable income. Notably, capital cost allowance and interest and financing expenses (net of interest and financing income) which were deducted in the calculation of taxable income are two of the amounts which are added back to get an ATI.  Net interest and financing expenses are then limited to 30% of ATI.  Any interest amounts that are denied, can be carried forward to offset against future taxable income in a year when there are no excess interest and financing costs.

Elections

A joint election can be filed to allow two members of a corporate group to excluded intragroup interest from the EIFEL calculations.  The election must be filed by both the payee and the payor.

Cumulative Excess Capacity

A taxpayer’s excess capacity represents the difference between the taxpayer’s capacity to deduct interest and financing costs for the year and the actual net financing costs incurred in the year.  A taxpayer’s cumulative excess capacity is the  unused excess capacity for the current year and the three immediately preceding taxation years.  This cumulative excess capacity can be carried forward and used by the taxpayer or transferred to an eligible corporation within the group.  When the EIFEL rules came into effect, a taxpayer would not have any cumulative excess capacity, but the taxpayer may elect to calculate the prior year excess capacity for the three years prior to the introduction of the rules.