The Future for Interest Deductibility in Canada: The New EIFEL Regime

On February 4, 2022, draft legislative proposals were released regarding the new excessive interest and financing expenses limitation (EIFEL) rules; these proposals were open for consultation until May 5, 2022.

The rules limit the deduction of a taxpayer’s interest and financing expenses (IFE), net of interest and financing revenues (IFR) (together, “net IFE”), to a fixed percentage of the taxpayer’s adjusted taxable income (ATI), which is based on a tax version of the accounting concept of earnings before interest, taxes, depreciation, and amortization (EBITDA). The fixed percentage starts at 40 percent of ATI for taxation years beginning in 2023, decreasing to 30 percent for taxation years beginning thereafter. There is also a “group ratio” rule applicable in certain cases, allowing a higher ratio.

The rules apply to all corporations and trusts, except for (1) Canadian-controlled private corporations with less than $15 million of capital employed in Canada; (2) groups with Canadian net IFE of $250,000 or less; and (3) certain groups that operate almost entirely in Canada. The de minimis exclusion for group net interest expense is notably lower in Canada than in other countries that have adopted interest limitations based on OECD BEPS action 4. The rules will indirectly apply to partnerships, owing to the inclusion of partnership interest expenses and other amounts within the calculations of corporations and trusts that hold partnership interests.

ATI is used to determine a taxpayer’s capacity to deduct net IFE in a year, and it uses “taxable income” (TI) as the starting point. ATI adjusts TI for various items, including (1) IFE and IFR; (2) non-capital losses and net capital losses for the year; (3) deductions for part VI.1 tax; (4) capital cost allowance (CCA) deductions; (5) foreign-source income sheltered by Canadian foreign tax credits; and (6) other adjustments specific to partnerships and trusts.

The IFE and IFR that are covered by the rules are broadly defined. Both definitions include a catch-all provision for interest expense/revenue amounts and specifically include other financing-related amounts, such as financing expenses that are otherwise deductible under the Act and more general amounts related to the “cost of funding.” These amounts specifically include (1) financing components of leases; (2) interest expense and revenues that are recognized in a partnership (prorated on the basis of the corporation’s or trust’s share of partnership income); and (3) CCA or resource pool deductions that specifically relate to financing.

“Excluded interest”—that is (broadly speaking), interest on a debt between two taxable Canadian corporations that are in a group relationship—may be excluded from the rules through a joint election. The explanatory notes comment that this exclusion is intended to prevent the EIFEL rules from having a negative impact on transactions that Canadian corporate groups commonly undertake in order to allow the losses of one group member to be offset against the income of another group member.

When a group’s external interest expense is high compared with its group EBITDA, it may be beneficial for the group to elect into the “group ratio” rules. An electing group may deduct IFE on the basis of a higher percentage of ATI; this percentage is based on group net interest expense (GNIE) over group adjusted net book income (GANBI) (subject to formulaic restrictions on the resulting percentage). The formulaic restrictions mean that the ratio of GNIE/GANBI would need to be 260 percent before a deduction equal to 100 percent of ATI could be achieved. When groups elect into these rules, they are required to allocate the group’s total capacity for deductions among group members. These rules use consolidated financial statements as their basis, requiring IFRS-compliant financial statements or a number of “acceptable” local GAAPs, which exclude any European GAAPs.

The EIFEL rules allow taxpayers to carry forward to later taxation years certain amounts arising in a particular taxation year. Specifically, taxpayers can carry forward

  • excess capacity (EC) to deduct IFE (that is, where permissible IFE deductions exceed actual net IFE for the year) for 3 years as cumulative unused excess capacity (CUEC); and
  • restricted interest and financing expenses (RIFE) (that is, IFE that is not deductible in the year) for 20 years.


In addition, a corporation can generally elect to transfer EC to other corporations within the same group. This rule does not apply to trusts.

Transitional provisions enable taxpayers to jointly elect to determine EC for the three “pre-regime years” immediately prior to the first year for which EIFEL applies to the taxpayer, thereby enabling the calculation of a carried-forward CUEC amount that would otherwise be nil.

Groups need to pay attention to any future loss-restriction events under section 111 of the Act, because (1) RIFE is deductible in future years only if it relates to interest from a business, and that business has continued after the loss-restriction event; and (2) CUEC expires after a loss-restriction event, meaning that it can no longer be utilized, which appears particularly restrictive.

As currently drafted, the proposed EIFEL rules have several features that need to be addressed, including the following:

  • The proposals do not clearly indicate whether the rules should be applied when the income of a foreign affiliate is being computed.
  • If the current-year losses (capital losses and non-capital losses) that are adjusted in a taxpayer’s determination of ATI are applied in a future taxation year to reduce the taxpayer’s taxable income for that year, there is no subsequent adjustment to the ATI calculation in that later period, which results in a double reduction in ATI (except for any partial addback of the portion of a non-capital loss that reasonably relates to the net IFE of the taxpayer).
  • The rules include several very broadly drafted anti-avoidance rules that could arguably produce inappropriate results in some circumstances. In particular, a rule designed to ensure “symmetrical treatment” of interest paid between non-arm’s-length parties appears to be overly restrictive in respect of loans to foreign affiliates (or other non-arm’s-length non-residents), particularly when these loans are funded by the Canadian taxpayer’s borrowings.
  • The rules apply industry-specific restrictions to prevent financial institutions from transferring excess capacity or applying the group ratio rule. The current proposals could significantly impair some financial institutions’ ability to effectively conduct business, given the regulatory restrictions and other restrictions faced by these companies.


The EIFEL rules add additional complexity to the obtaining of an interest deduction in Canada, and there are no plans to simplify the current rules restricting interest deductibility—for example, the thin capitalization rules. Although the rules are formula-driven, groups have some informed choices to make because of the elections available to them. Canadian groups subject to the rules should undertake financial modelling prior to the introduction of the EIFEL rules so as to be in a position both to apply the rules as advantageously as possible and to consider the impact of these rules, because there is no grandfathering for existing financing arrangements.

Alex Cook and Ken Buttenham
PwC LLP, Toronto

International Tax Highlights

Volume 1, Number 1, May 2022

©2022, Canadian Tax Foundation and IFA Canada

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