Finance notes areas of potential change to the EIFEL rules

At Tuesday's IFA Finance Roundtable, Finance did not have time to list all the areas where it is considering (or has decided) to recommend changes or refinements to the “EIFEL” (interest-deductibility) rules.

Before getting to those areas, Finance indicated that it had a distinct preference for not providing sector-specific exemptions, e.g., for real estate, infrastructure, utilities, or P3 projects. It also indicated skepticism that deferral of the implementation date by one year was needed.

Potential changes listed were:

• Finance is considering requests to increase, under the “excluded entity” rules, the threshold limit for CCPCs that are exempted from the EIFEL rules from the existing limit of $15 million of taxable capital employed in Canada to $50 million - and also to increase the de minimis threshold for application of the rules from the proposed annual group-wide net interest expense limit of $250,000 to something higher that would be more in line with the de minimis threshold in other countries under their Action 4 regimes.
• Finance is aware that the draft “excluded entity” exemption from the EIFEL rules for domestic entities or groups is quite narrow, e.g., the requirement that all or substantially all of the interest and financing expenses of an entity be paid to persons other than tax-indifferent investors, and is exploring some ways that they could be potentially relaxed without compromising the integrity of the rules – and is also interested in exploring whether most of the requests for specific carve-outs, for sectors or types of businesses, could be appropriately dealt with, through an expansion of the excluded entity definition, and of the availability of the group ratio rule.
• Regarding requests for relief regarding the haircut that applies in the case of ratios over 40% under the group ratio rules, Finance noted that the haircut was intended to address inflated ratios that can result where there are loss or negative entities in a consolidated group, and indicated that it will explore whether that particular concern can be addressed in a more targeted way.
• It is considering how financial institutions might potentially be permitted to transfer their excess capacity to other group entities in some circumstances.
• Finance is amenable to providing some guidance in the Explanatory Notes as to transactions targeted by the specific EIFEL anti-avoidance rules, and also recognizes the need to clarify that certain transactions are not intended to be caught, such as typical loss consolidations.
• Finance is now considering potentially providing an add-back in respect of resource expense pool deductions in determining adjusted taxable income.
• Finance has received helpful submissions on potential design options for the application of the EIFEL rules in relation to foreign affiliates and indicated that it was always its intention to add specific rules addressing this issue in the final legislation, and is now working on this.
• The draft EIFEL rules were not intended to interfere with a group borrowing from an arm’s length lender at the parent level, and on-lending to, e.g., a foreign subsidiary to fund the subsidiary’s active business, with the resulting interest income reducing the parent’s net interest expense. Draft s. 18.2(12) had an unintended result in this regard, which Finance intends to correct.

2022 IFA Finance Roundtable.