The domestic exception for an EIFEL excluded entity contains potential traps

The third condition in the “domestic exception” in para. (c) of the definition of “excluded entity” regarding the EIFEL rules is essentially that (i) no non-resident “specified shareholder” or “specified beneficiary” of the taxpayer or any eligible group entity, and (ii) no partnership, the majority of the FMV of the interests in which are owned by non-residents, may own more than 25% of the equity in the taxpayer or any eligible group entity.

This condition would apply, for instance, if:

• a non-resident person is the beneficiary of a discretionary family trust that is an eligible group entity, given that the “specified beneficiary” definition in s. 18(5) generally deems a beneficiary of a discretionary trust to own a 100% interest in the trust.
• a non-resident family member owns one share of an eligible group entity and, together with other family members, has 25% of the votes or value in respect of the eligible group entity (by virtue of being a non-resident “specified shareholder” of the eligible group entity).
• a large, wholly domestic CCPC with a relatively small subsidiary (but whose shares have an FMV exceeding $5 million) sells a 25% interest in the subsidiary to a non-resident investor (but this result would be avoided if the non-resident were to invest through a Canadian acquisition company).

Neal Armstrong. Summary of Kyle A. Ross and Trent J. Blanchette, “Issues with the ‘Excluded Entity’ Exception to the EIFEL Rules,” Tax for the Owner-Manager, Vol. 23, No. 4, October 2023, p. 4 under s. 18.2(1) – excluded entity – (c).