Proposed Limitations on Excessive Interest and Financing Expenses in Canada

The deductibility of interest payments and other financing costs is limited by the EIFEL Rules (IFE). It is expected that the EIFEL Rules will start to apply for tax years that begin in 2023, as roughly detailed below, even if technical modifications are foreseen. International organizations having Canadian members are urged to think about the EIFEL Rules’ effects right away, as well as any relevant prevention and efficiency measures.

The EIFEL Regulations are intricate. In a broad sense, the EIFEL Rules would be as follows:

  • The term “IFE” refers to interest and various other financing expenditures paid or due in relation to a year (plus some other financing expenditures), net of certain interest, and financing earnings.
  • IFE deductions for a taxpayer are restricted to a set proportion of their “adjusted taxable income,” which is their EBITDA (earnings before interest, taxes, depreciation, and amortization) for the tax year. Significantly, profits from Canadian corporations and international affiliates are included in modified taxable income.
  • After December 31, 2022, the fixed percentage will be 40%, and after January 1, 2023, it will be 30%. If specific requirements are met, the group proportion regulations may permit a taxpayer to deduct IFE above these percentages if they are a portion of a financial reporting consolidated entity and can prove through audited consolidated financial statements that the percentage of net third-party interest costs to reserve EBITDA surpasses the fixed magnitude relation.
  • A taxpayer can transfer over extra capacity from one year to the next (i.e., when IFE is lower than the maximum permitted under the set ratios). Taxpayers are permitted to distribute surplus capacity to other team members.

The proposed legislation affirms that the macro-prudential rules will continue to be in effect and take precedence over the EIFEL Regulations even if the EIFEL Rules essentially coincide with the current macro-prudential rules.

Except for “excluded entities,” Canadian businesses and trusts must abide by the EIFEL standards. The following institutions are precluded: a few private firms with Canadian ownership; members of a few groupings with IFE totals under CAD 250,000; and participants in a few organizations made up entirely of trusts and corporations with Canadian residents.

Information from Global Compliance News

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