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Published on April 22, 2025
The EIFEL rules limit the deduction of interest and other financing costs of affected Canadian corporations and trusts to a ratio of their earnings before interest, taxes, and depreciation and amortization expenses. Any corporation or trust resident in Canada is subject to these rules unless it is considered an “excluded entity.”
Three exclusion criteria are provided, as described below.
The first criterion excludes small CCPCs and is assessed based on the taxable capital of associated corporations, a known figure used for tax return purposes.
If the entity does not fall within this first exclusion, it must turn to the other two criteria, which are assessed based on the income, expenses, and other characteristics (foreign activities, non-resident shareholders or beneficiaries, etc.) of all corporations and trusts related to or affiliated with the taxpayer.
This broader criterion means that groups owned by two brothers-in-law (or other family members) should take each other into account to determine whether they are subject to the rules.
Due to the broad related entities test, analyzing the concept of excluded entities may require obtaining multiple factual and financial information from entities that do not normally share information with each other. This results in inherent risks of missing or erroneous information used for the purposes of this analysis, particularly for groups of associated corporations whose taxable capital employed in Canada exceeds $50M. For example, such a group could be subject to the rules because of related entities whose existence or details are unknown, or an election made could be deemed incomplete if certain entities are not part of it.
Excluded entities
The following corporations and trusts are considered “excluded entities”:
- Small CCPC Exclusion: A Canadian-controlled private corporations (CCPC) whose taxable capital employed in Canada in the previous year is less than $50M (including that of associated corporations);
- De-minimis Exclusion: A taxpayer resident in Canada whose net interest and financing expenses (including exempt expenses), within the Canadian group,do not exceed $1M in a taxation year; Caution: If the entity is a trust, this condition is assessed from the perspective of its beneficiaries and a discretionary beneficiary is deemed to hold 100% of the trust. Therefore, that the presence of a non-resident beneficiary may cause the entire group to lose the benefit of this exclusion. Special attention must also be paid to non-resident shareholders, since the 25% holding takes into account the shares held by all persons who are not dealing at arms’ length with each other.
- Domestic Exclusion: A Canadian-resident corporation or trust or a group consisting exclusively of Canadian-resident corporations or trusts that satisfies all of the following conditions:
- All or substantially allof each eligible entity of the group’s businesses, activities and undertakings are carried on in Canada;
- The book cost of all foreign affiliate shares held by the Canadian group and the fair market value of the assets of all foreign affiliates held by the group do not exceed $5M;
- No non-resident owns more than 25% (in votes or value) of an entity in the Canadian group; [5]
- All or substantially all of any eligible group member’s interest and financing expenses is payable to persons or partnerships other than a non-arm’s length “tax- indifferent” person.
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Download the document Excessive_Interest_Financing_Expenses_Limitations
Excessive interest and financing expenses limitation rules