3 December 2024 CTF Roundtable Q. 4, 2024-1038161C6 - EIFEL and the Excluded Entity Exception

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Based on the scenario submitted, whether B Co would meet the “all or substantially all” standard of carrying on its business in Canada for the purpose of meeting the definition of "excluded entity" in paragraph 18.2(1)(c).

Position: General comments provided; question of facts.

Reasons: Based on the limited hypothetical set of facts provided, it is not possible to conclusively determine whether B Co would meet that standard.

2024 CTF Annual CRA Round Table – December 3, 2024

Question 4: EIFEL and the Excluded Entity Exception

Under paragraph (c) of the definition of “excluded entity” in section 18.2, a taxpayer resident in Canada may be excluded from the EIFEL regime where certain requirements are satisfied, including that “all or substantially all of the businesses … and undertakings and activities of the taxpayer are … carried on in Canada.”

The Department of Finance (DOF) explanatory notes to the provision indicate that this requirement to the exemption “is intended to ensure that all or substantially all of the aggregate economic activity of the taxpayer and each group member is carried on in Canada, regardless of whether that activity is carried on through one or more businesses and regardless of whether that activity rises to the level of carrying on a business.”

Can the CRA consider the following example, where A Co and B Co have taxable capital employed in Canada in excess of $50M and net interest and financing expenses in aggregate of $1M:

Assume that B Co generates substantially all of its revenue from sales to U.S. customers. B Co has Canadian employees, which travel to the U.S., and B Co stores its goods physically in the U.S. for sale to U.S. customers but does not otherwise have any physical presence in the U.S. While B Co is subject to U.S. State tax, it does not have a permanent establishment in the U.S. such that the Canada-U.S. Tax Treaty allocates taxing rights to Canada.

In this scenario – where Canada maintains full ability to tax – are the businesses, undertakings and activities of B Co carried on in Canada?

CRA Response

Under the EIFEL rules as provided by sections 18.2 and 18.21, a taxpayer may qualify as an excluded entity for a particular taxation year if it satisfies the conditions in any of the three alternative tests provided in paragraphs (a) to (c) of the definition of that expression in subsection 18.2(1). As the question is phrased, paragraphs (a) and (b) are not relevant. The question focuses on one of the conditions under paragraph (c). As such, our comments will be limited to the requirements of subparagraph (c)(i).

This specific provision provides that a taxpayer resident in Canada would be an excluded entity for a particular taxation year only if, amongst other conditions:

“(i) all or substantially all of the businesses, if any, and all or substantially all of the undertakings and activities of

(A) the taxpayer are, throughout the particular year, carried on in Canada, and

(B) each eligible group entity in respect of the taxpayer are, throughout the eligible group entity's taxation year that ends in the particular year, carried on in Canada, (…)”.

Businesses, undertakings and activities have to be considered altogether distinctly for each of the relevant taxpayer and any eligible group entity, as this expression is defined under subsection 18.2(1). Although the DOF explanatory notes quote in the question describe the outcome from an aggregate perspective, the wording of the Act clearly indicates that such outcome is achieved through each entity forming the group individually meeting the threshold. The “all or substantially all” standard must be met in respect of undertakings and activities carried on in Canada by the taxpayer and each relevant entity in respect of the taxpayer, resulting in the aggregate of their respective undertakings and activities meeting it.

Subsection 248(1) states that a business:

“includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment”.

If all or substantially all of B Co’s business is not carried on in Canada, B Co would not be an excluded entity and neither would its parent, A Co.

The phrase “all or substantially all” is used in many provisions in the Act in respect of different elements (e.g.: assets used, property, liabilities or obligations, considerations received, revenue, income or loss, expenses or expenditures, businesses, activities, accounts, amounts, risks of loss and opportunities for gain or profit, outputs from businesses, proceeds from the issue of an obligation or the settlement of a debt, fair market values, time periods, duties, uses, members, benefits, and terms and conditions of shares). It is the longstanding position of the CRA that it generally refers to at least 90%. However, the CRA recognizes that this expression might not be interpreted as referring to that percentage in certain cases.

The element in respect of which the “all or substantially all” standard applies can be of such a nature that it leaves no doubt on the relevant criterion subject to the standard. This would generally be the case with elements such as liabilities or fair market values, which would generally imply that the standard be applied to relevant amounts. However, when it comes to elements such as the location of undertakings or activities, the relevant criteria might be highly fact specific as well as time-related.

Income Tax Folio S5-F2-C1, Foreign Tax Credit, paragraphs 1.53 to 1.56, concerning the determination of the location of a business, may provide useful guidance in evaluating particular situations. This determination depends upon all the relevant facts. However, it is generally the place where the operations in substance, or the profit generating activities, take place and it is possible that it occurs in more than one jurisdiction.

In a situation involving a distribution subsidiary, the place where sales efforts occur, the place where purchase and sale decisions are made, the location of the stock, the places of shipment, transit and receipt, the place of payment, and the intent of the taxpayer to do business in the particular jurisdiction, would be relevant factors to be considered. Where the subsidiary is subject to taxation by various states in the U.S., the foreign tax credits it claims on its Canadian return might reflect the location of its undertakings or activities.

B Co seems to have a significant presence in the U.S., and substantially all of its revenue is derived from sales in the U.S. However, with the limited information provided above, it is not possible to conclusively determine whether B Co would meet or fail the “all or substantially all” requirement set for in subparagraph (c)(i) of the excluded entity definition in subsection 18.2(1).

Should B Co not meet the “all or substantially all” standard of carrying on its business in Canada, the answer to the substantive question asked is that neither A Co nor B Co would qualify as an excluded entity under paragraph (c) of that definition.

Yannick Roulier
2024-103816
December 3, 2024