Various oddities in the EIFEL rules are discussed

Comments on the EIFEL rules (respecting limitations on leverage) include:

• The inclusion in eligible group entities of resident corporations or trusts that are related to the taxpayer in the application of the “excluded entity” exemption has the effect of requiring corporate groups controlled by respective siblings to be aware of each other’s affairs.
• For example, a corporation group controlled by one sibling relying (under para. (b) of the excluded entity definition) on its annual interest and financing expenses being under $1 million would also need to take into account the IFE of the resident corporations in a group controlled by a second sibling.
• Similarly, if the first sibling group was relying on the para. (c) exclusion, it would be offside if there was relevant participation in the structure of the second sibling’s group by a family trust one of whose related beneficiaries had ceased to be a resident.
• S. 95(2)(f.11)(ii)(D) provides, respecting s. 95(2)(f)(ii) (but not (i)) amounts included in the relevant affiliate IFE (RAIFE) of a controlled foreign affiliate (CFA) of a Canadian taxpayer for a taxation year, for a denial of such RAIFE amounts otherwise deductible in computing foreign accrual property income (FAPI) in proportion to the of overall denial (if any) computed under s. 18.2(2) – so that deduction of the RAIFE of the CFA is potentially subject to the same proportionate denial as for its Canadian parent in respect of the parent’s IFE.
• However, the rules do not seem to explicitly provide for situations where a foreign affiliate is a CFA of two or more Canadian taxpayers, each with a different potential denial proportion under s.18.2(2) so that it might be necessary to perform separate FAPI calculations for different Canadian taxpayers with a participating percentage in the same CFA.
• The election under s. 95(2)(f.11)(ii)(E) - to forego foreign accrual property losss (FAPL) amounts (derived from RAIFE) otherwise realized in a taxation year of a CFA of a Canadian taxpayer in exchange for non-inclusion of an equivalent amount in its RAIFE - can be beneficial where the FAPL for the year has more value in reducing the current year’s RAIFE (and thus IFE of the Canadian parent) than it would in a future or prior year as a FAPL carryforward or carryback.
• As the election is limited to the lesser of the CFA’s FAPL and RAIFE for the year, there appears to be no ability to elect to forego only a portion of FAPL for the year (i.e., the election is potentially an all or nothing proposition if the FAPL amount is the lesser amount in s. 95(2)(f.11)(ii)(E)(II)).
• The proposed definition of “exempt interest and financing expenses” (not subject to the EIFEL limitations) references inter alia the expenses that are reasonably attributable to the portion of the borrowing used by the taxpayer for the purpose of acquiring, building or converting a purpose-built residential rental.
• Since a “purpose-built residential rental” can refer to a part of a mixed-use building, there could be significant uncertainties associated with allocating a financing to such portion of the project.

Neal Armstrong. Summaries of Larry Nevsky, Brian Kearl and Aaron Chai, “Unexpected EIFEL Issues and Uncertainties,” Draft 2024 CTF Annual Conference paper under s. 18.2(1) – excluded entity, ATI – B (h), RAIFE, exempt interest and financing expenses, s. 95(2)(f.11)(ii)(D), s. 95(2)(f.11)(ii)(E) and s. 18.21(2).