How the proposed new EIFEL rules will affect Canadian taxpayers

The federal government introduced proposed rules that may impact taxpayers’ ability to deduct a portion of their interest and financing expenses. The Excessive Interest and Financing Expenses Limitation (EIFEL) rules are part of Bill C-59, which received first reading on November 30, 2023. These changes align Canadian policy with recommendations in the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting Project (commonly referred to as BEPS). 

Where the EIFEL rules apply, the deduction of interest and financing expenses is limited to a percentage of the taxpayer’s annual “adjusted taxable income.” Generally, this is taxable income with adjustments to add back interest expense and certain other deductions. The percentage is:

• 40 percent for taxpayers with taxation years beginning after September 30, 2023, and before January 1, 2024; and
• 30 percent for taxation years beginning on or after January 1, 2024.

If enacted, the rules would apply to tax years beginning on or after October 1, 2023.

Are you affected by the EIFEL rules?

The EIFEL rules will apply to corporations and trusts earning income from business or property in a year unless they meet one of the specific exclusions noted below to be considered an excluded entity.

1. The taxpayer is a Canadian-controlled private corporation (CCPC) with less than $50 million of taxable capital employed in Canada. This can be either on a standalone basis or together with associated corporations. This is intended to exclude Canadian-controlled small or medium-sized businesses from the EIFEL rules.
2. The taxpayer’s aggregate interest and financing expenses for the year amount to $1 million or less. This can either be alone or with other taxpayers that are eligible group entities* in respect of the taxpayer.
3. The taxpayer is a business that — alone or as part of a group — carries on substantially all its business in Canada, with no material foreign affiliate.**

*Eligible group entity in respect of a taxpayer: A corporation or trust, resident in Canada, related to or affiliated with the taxpayer.

**Foreign affiliate: A foreign corporation whereby the taxpayer holds at least one percent interest in the foreign corporation, and the taxpayer and related persons to the taxpayer hold no less than a 10 percent interest. A material foreign affiliate is one whose aggregate cost base exceeds C$5 million as calculated per the Canadian generally accepted accounting principles (GAAP), and the fair market value (FMV) of the foreign affiliate’s assets cost base exceeds C$5 million.

The EIFEL rules are expected to impact public corporations, large CCPCs, and foreign-controlled Canadian corporations.

What are the next steps?

Taxpayers should work with their advisors to review their structures and determine whether they can meet one of three categories of excluded entities.

Taxpayers who meet the definition of an excluded entity for the year should continue to monitor their situation carefully. Future changes in structure could impact their excluded status.

Taxpayers who do not meet the definition of an excluded entity and are unable to change their corporate structure should consider:

1. modelling their non-deductible interest (if any), and
2. examining its impact on their cash flows (i.e., taxes payable).

In some cases, it will be possible to manage the issue by transferring unused capacity between group members to reduce the amount of restricted interest and financing expenses in a taxation year.