The EIFEL rules create issues for the financing of CCPCs
From the perspective of a Canadian-controlled private corporation (CCPC) that has an active R&D program and financing needs (“Canco”), if a foreign investor is accorded an option to convert debt into equity representing at least 25% of votes or value, Canco would fall offside the para. (c) branch of the “excluded entity” definition in s. 18.2(2)(c) (and, in typical circumstances, would not fit within any of the other “excluded entity” categories.) This 25% threshold for (likely) engaging the (s. 18.2) EIFEL interest deductibility limitations is lower than the 50% threshold relevant to maintaining CCPC status and, therefore, may present additional challenges.
If Canco is a member of a larger (related or affiliated) group, the presence of a specified non-resident investor in any member of the group will impose EIFEL limitations on Canco.
A further concern is that any significant financing costs paid to non-residents (who are “tax-indifferent investors”) will also result in the loss of Canco’s excluded entity status – so that substantially all of Canco’s financing costs must be paid to other types of entities if it is to remain an excluded entity. Canco could structure returns on non-resident debt to be non-deductible (for example, making them participating payments), so as to ensure that payments to tax-indifferent investors are non-deductible, and so that it might thereby remain an excluded entity.
Neal Armstrong. Summary of Balaji Katlai and Hugh Neilson, “Canadian Inbound Investment: The EIFEL Trap?” International Tax Highlights (IFA Canada), Vol. 1, No. 2, August 2022, p. 7 under s. 18.2(1) – excluded entity – (c).