The revised EIFEL rules require attention to detail
Observations on the revised draft EIFEL rules include:
- Under the excluded entity definition, the test of all or substantially all of the businesses, undertakings and activities of each eligible group entity in respect of the taxpayer being carried on in Canada throughout the entity’s taxation year appears to apply on an entity-by-entity basis, so that the failure of the test by even an insignificant group entity will cause the whole group to not qualify for the domestic exception.
- Also under the excluded interest definition, the test of the total fair market value of all property of a foreign affiliate of the taxpayer or of an eligible group entity in respect of the taxpayer not exceeding $5 million applies irrespective of whether the taxpayer has a 10% interest or 100% interest in the foreign affiliate – and even an insignificant interest in a special class of shares causing a non-resident corporation to be a foreign affiliate, would require the fair market value of its property to be considered in applying the $5 million threshold.
- The anti-avoidance rule in s. 18.2(9) would be engaged where a Canadian-resident subsidiary with a foreign business or holding of a significant foreign affiliate was sold by the taxpayer so that the excluded entity test could be met, whereas a direct sale by the subsidiary of its non-Canadian business or of its shares of the foreign affiliate would not engage s. 18.2(9).
- The inclusion under para. (g) of the interest and financing revenues definition of the relevant affiliate interest and financing revenues (“RAIFR”) of a controlled foreign affiliate of the taxpayer, is generally reduced by any deduction under s. 91(4) in respect of foreign accrual tax to the extent that it relates to the RAIFR, even where there is a deduction under s. 91(4) in a subsequent taxation year – so that taxpayers may be required to estimate their foreign accrual tax deductions that will be claimed in subsequent years.
- Any over-designation, including an immaterial one, will invalidate a transfer of excess capacity under s. 18.2(4). An amended transfer election may be filed, but only as provided in s. 18.2(4)(i).
- Under s. 18.21(2), if an election is made that allocates an amount greater than the specified limits, the allocated group ratio amount will be deemed to be nil – a potentially punitive result for what might be a small error.
Neal Armstrong. Summaries of Saira Bhojani and Eivan Sulaiman, “EIFEL Rules,” Draft 2022 CTF Annual Conference paper under s. 18.2(1) – excluded entity – (c)(i), (c)(ii), (c)(iii)(A). s. 18.2(9), s. 18.2(1) – interest and financing revenue – (g), excess capacity, s. 18.2(4), and s. 18.21(2).