Significant changes have been made to the draft EIFEL rules
Observations on the revised EIFEL rules include:
- The amounts that would be the interest and financing revenues (IFRs) or interest and financing expenses (IFEs) of a controlled foreign affiliate (CFA) in computing its capital gain or foreign accrual property income are to be included in the taxpayer’s IFR (net of foreign accrual tax deductions) or IFE, and the FAPI of such CFA remaining after such carve-outs of the CFA’s “relevant affiliate IFR” or “relevant affiliate IFE” is simply included in the taxpayer’s adjusted taxable income (ATI) (i.e., generally the tax EBITDA amount to which the 30% deductibility limitation in s. 18.2(2) is applied).
- Furthermore, per s. 95(2)(f.11)(ii)(A), the EIFEL rules should not restrict the IFE of the CFA for the purposes of calculating its FAPI.
- Per s. 95(2)(f.11)(ii)(D), where a portion of a taxpayer’s IFE for a taxation year is denied under s. 18.2(2), the same proportion of a CFA’s relevant affiliate IFE is similarly denied for purposes of computing its FAPI for the relevant taxation year – but, unlike the treatment of restricted IFE (which may be carried forward to a subsequent year depending on the availability of excess capacity), the denied deduction for purposes of computing FAPI of a foreign affiliate apparently cannot be carried forward.
- “Earnings” under para. (b) of the Reg. 5907 definition (essentially, FAPI recharacterized as active business income) is unaffected under the revised EIFEL rules.
- Given the potential to carry forward losses from pre-EIFEL years, taxpayers may be required to determine what their hypothetical IFE and IFR, as well as other ATI adjustments would have been, respecting all pre-regime loss years.
- The EIFEL revisions have removed the requirement that cumulative unused excess capacity could only be transferred between eligible group corporations that have the same functional currency – and transfers of capacity respecting a “fixed interest commercial trusts” (e.g., most REITS) can now be made.
- Like the previous version, where the designated amount exceeds the cumulative unused excess capacity by even $1, the entire transfer election apparently is invalidated.
- Unlike the previous version, all interest received or receivable from nonresident corporations is included in IFR.
Neal Armstrong. Summaries of EY, “Revised EIFEL proposals,” Tax Alert 2022 No. 43, 10 November 2022 under s. 18.2(1) - relevant affiliate interest and financing expenses, interest and financing revenues, adjusted taxable income – B - (h), s. 18.2(4), s. 95(2)(f.11)(ii)(A), s. 95(2)(f.11)(ii)(D), Reg. 5907 – earnings – (b), s. 18.21(1) – group ratio, s. 18.21(2)(a).