Highlights of the Finance Round Table at IFA 2022

At the Finance round table at the 2022 IFA Canada Tax Conference, Finance Canada addressed a number of items. This article will highlight the most significant comments.


Finance started off the discussion by indicating that it had received over 60 submissions on the EIFEL rules and that it was hoping to release a revised version of the rules this summer.

In response to requests for specific exemptions from the EIFEL rules for certain groups of taxpayers, Finance stated that its preferred approach is to adjust the base rules so that they work in all circumstances without a need for any specific exclusions.

Finance is also considering revisions to the definition of “excluded entity,” with a view to bringing the definition in line with the 2022 budget, which included a proposal to increase the eligibility threshold for the small business deduction to $50 million of taxable capital employed in Canada. Finance is also exploring ways of relaxing the conditions for qualifying as an excluded entity, including the possibility of increasing the de minimis threshold from the proposed annual group-wide net interest expense limit of $250,000 to something higher.

In addressing the application of the EIFEL rules to financial institutions, Finance stated that it is considering how financial institutions might transfer some excess capacity and is considering a possible narrowing of the definition of a “relevant financial institution.”

Finance is considering what further guidance it can provide on specific anti-avoidance rules and has recognized the need to clarify that certain transactions are not intended to be caught—for example, typical loss-consolidation transactions.

Finance also confirmed that the omission of an addback for resource expense pools deductions in the “adjusted taxable income” computation was intentional, but that it is now considering including the addback. It also stated that it is working on design options for the application of the EIFEL rules in relation to foreign affiliates.

To conclude the discussion of the EIFEL rules, the panellists asked for Finance’s comments on proposed subsection 18.2(12). Under the provision as drafted, interest income received from related foreign entities may not be included in the Canadian entity’s “interest and financing revenues,” and this may have a significant impact when a Canadian parent company acts as the market-facing entity in the raising of debt for its wider multinational enterprise group. Finance responded by stating that the draft rules are not generally intended to prevent that type of structuring, and that it plans to make changes to clarify that intention.

Hybrid Mismatch Arrangement Rules

The panellists started off the discussion of the proposed rules on hybrid mismatch arrangements with a question about how the rules are expected to interact with Canada’s FA and FAPI regime.

Finance responded that the rules are generally intended to apply for the purposes of computing FAPI but are not intended to override either the recharacterization rules in paragraph 95(2)(a) or other provisions of the FA rules. For example, if a payment on an interaffiliate instrument is deductible in computing the payer’s active business income under foreign law but there is no inclusion in the payee affiliate’s income under foreign tax law, it is not intended that the rules will apply to include an amount in FAPI. The same would apply to non-interest-bearing (NIB) loans. Finance also stated that it was interested in receiving submissions that analyze how the rules apply to these structures, along with any technical drafting suggestions for ensuring appropriate outcomes.

Finance confirmed that in the case of an NIB loan, the intention is to apply the hybrid mismatch arrangement rules in respect of the deductible notional interest expense only to the extent that the interest accrued on or after July 1, 2022. However, when an actual payment is made on or after July 1, 2022, the entire amount should be subject to the rules, not just the notional portion of the interest that accrued after July 1, 2022.

To conclude the discussion, the panel asked for Finance’s views on substitute payment arrangements. Proposed subsection 18.4(14) does not include a hybridity or cross-border element condition that is like the conditions for hybrid financial instruments and transfer arrangements.

Finance responded that payments between two Canadian-resident taxpayers can fall within the scope of substitute payment arrangements. However, Finance is interested in hearing views on why the scope of the rules should be narrowed by (for example) adding a requirement that there be a foreign element.

It should also be noted that Finance is planning to release a second legislative package that will include the imported mismatch rules in plenty of time for an appropriate consultation. The rules should not be in effect before 2023.

Mandatory Disclosure Rules

In discussing the mandatory disclosure rules, Finance stated that it intended to remove the definition of “solicitor-client privilege” in subsection 237.3(1). As a result, the definition will in future be based on jurisprudence.

In responding to concerns that the proposed rules require multiple reporting of the same transaction, Finance reiterated that reporting is not required when the information is subject to solicitor-client privilege. However, the general aim of the rules is to have a broader category of people who are required to make disclosures, in order to help tax authorities with risk assessments and to help incentivize accurate reporting.

Update on Pillars 1 and 2

Finance provided an update on pillar 1, stating that intensive negotiations have been under way since the October agreement on pillar 1. This process includes the development of detailed model rules for national legislation and a multilateral convention to implement the new system.

In providing its update on pillar 2, Finance stated that the flexibility to deviate from the model rules is limited. Given the requirement for consistency with the model rules, the consultation is mainly focused on ensuring that the legislation anticipates any necessary adaptations of the model rules to the Canadian income tax context and that any necessary changes are made to Canadian tax laws to address interactions with pillar 2.

As the panellists indicated, Finance’s comments have left a lot of homework for everyone in the tax community.

Samantha D’Andrea
EY Law LLP, Montreal

International Tax Highlights

Volume 1, Number 2, August  2022

©2022, Canadian Tax Foundation and IFA Canada

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