On 4 February 2022, the Canadian Department of Finance released a proposed set of rules (“EIFEL Rules”) intended to address concerns that Canadian taxpayers that are part of a multinational group are deducting excessive interest and other financing costs. The EIFEL Rules restrict the deductibility of net interest and other financing expenses (IFE). Although technical amendments are expected, it is anticipated that the EIFEL Rules will begin to apply for tax years that begin in 2023, as broadly described below. Multinational groups with Canadian members are encouraged to consider the impact of the EIFEL Rules, and potential mitigation and optimization strategies, now.
The EIFEL Rules are complicated. Very generally speaking, the EIFEL Rules would apply as follows:
Although the EIFEL Rules conceptually overlap with the existing thin capitalization rules, the draft legislation confirms that the thin capitalization rules will remain in place and apply in priority to the EIFEL Rules.
The EIFEL rules will apply to Canadian corporations and trusts, other than “excluded entities”. Excluded entities are: certain Canadian-controlled private corporations; members of certain groups with total IFE that is less than CAD 250,000; and members of certain groups consisting solely of Canadian-resident corporations and trusts.
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