30 June 2025 External T.I. 2025-1056861E5 - EIFEL - 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 Facts provided, whether the Trust would meet the requirement in subparagraph (c)(i) of the definition of “excluded entity” in subsection 18.2(1).

Position: No, the Trust would not meet the “all or substantially all” requirement in subparagraph (c)(i) of the “excluded entity” definition in subsection 18.2(1).

Reasons: Whether any particular undertaking or activity of a taxpayer takes place in Canada is a question of fact. Based on the facts provided, a significant portion of the Trust’s undertakings and activities take place outside of Canada.

XXXXXXXXXX									2025-105686
										Catherine Zhang

June 30, 2025

Dear XXXXXXXXXX:

Re: EIFEL Excluded Entity Exception and Cross-border Trust Holding Foreign Personal Use Property

This is in response to your letter dated April 21, 2025 in which you requested our interpretation of paragraph (c) of the definition of “excluded entity” in subsection 18.2(1). More specifically, in the context of the facts described below, you asked us whether a trust holding foreign property can meet the requirement in subparagraph (c)(i) of the definition of “excluded entity” in subsection 18.2(1).

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Facts

• Mr. X and Mrs. X are married with one adult child (“Child”). All of them are residents of Canada.
• Mr. X wholly owns and controls several Canadian corporations (collectively referred to as “Cancos”), each of which owns one or multiple Canadian real estate rental or development properties. All or substantially all of the undertakings and activities of all of the Cancos are carried on in Canada throughout the particular year.
• The total “taxable capital employed in Canada” as the term is defined in section 181.2, of the group of Cancos exceeds $50,000,000 in the particular year. The total “interest and financing expenses” as the term is defined in subsection 18.2(1), of all Cancos exceeds $1,000,000 in the particular year.
• None of the interest and financing expenses of the Cancos are paid to persons or partnerships that are “tax-indifferent” as the term is defined in subsection 18.2(1).
• Neither the above-mentioned individuals nor the Cancos own any shares of a foreign affiliate throughout the particular year.
• In 2022, Mr. X settled a Canadian-resident irrevocable trust (“the Trust”), contributing $1,000,000 in cash upon settlement. The Trust used the $1,000,000 cash to purchase a United States (“US”) residence (“the US Cottage”). Subsequent to the acquisition of the US Cottage, Mr. X occasionally contributed additional funds to the Trust to cover ongoing operating costs of the US Cottage. The Trust’s sole trustee is Mrs. X, and the Trust’s sole beneficiaries are Mrs. X and Child. The trustee, Mrs. X, has discretionary powers over the Trust.
• The sole assets of the Trust are the US Cottage and a US bank account containing funds necessary to operate the US Cottage. The Trust does not have any liabilities.
• Substantially all of the decisions regarding the US Cottage are made by the trustee while the trustee is in Canada.
• The trust ownership structure for the US Cottage was not motivated by Canadian tax considerations.
• Because of the trustee’s discretionary powers, Mrs. X is considered a “majority-interest beneficiary” of the Trust pursuant that definition in subsection 251.1(3) read in conjunction with subparagraph 251.1(4)(d)(i).
• Because Mrs. X is the spouse of Mr. X, the person who controls all of the Cancos, Mrs. X is affiliated with each of the Cancos pursuant to subparagraph 251.1(1)(b)(iii).
• Because each of the Cancos is affiliated with Mrs. X, each Canco is also affiliated with the Trust pursuant to subparagraph 251.1(1)(g)(ii). As a result, the Trust is an “eligible group entity” of each of the Cancos by virtue of paragraph (b) of the definition of “eligible group entity” in subsection 18.2(1). Besides the Trust and the other Cancos, the Cancos have no eligible group entities throughout the particular year.

Question

Could the ownership of the US Cottage cause the Trust (and therefore all Cancos) to fail to meet the requirement in subparagraph (c)(i) of the definition of “excluded entity” in subsection 18.2(1) because the Trust is an eligible group entity of each of the Cancos?

Our Comments

In general, the excessive interest and financing expense limitation (“EIFEL”) rules contained in sections 18.2 and 18.21 of the Act limit the deductibility of interest and financing expenses by affected corporations and trusts.

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). The question focuses on the requirements of subparagraph (c)(i) of the definition of “excluded entity”. As such, our comments are limited to the requirements of subparagraph (c)(i).

Specifically, a taxpayer resident in Canada is an “excluded entity” for a particular year if, amongst other conditions:

“(c)(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, (…)”

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 eligible group entity in respect of the taxpayer. Therefore, if the Trust’s undertakings and activities are not all or substantially all carried on in Canada, the Trust is not an “excluded entity” and neither would the Cancos.

As pointed out in CRA Document 2024-1038161C6, it is the longstanding position of the CRA that the phrase “all or substantially all” 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 location of undertakings or activities is a case by case determination that is informed by relevant facts and circumstances.

Where the undertaking and activities of a taxpayer include the holding of real estate, relevant factors to be considered would include the place where the property is situated and where related undertakings or activities occur like the operation and use of the property, its maintenance and upkeep, its management, administration and financial management.

In the case of a trust holding a real property that is situated in the US, it is reasonable to consider that the facts might indicate that significant activities related to the holding and operation of the property take place in the US. Given the Trust only owns the US Cottage and a US bank account containing funds necessary to operate the US Cottage, the Trust (and therefore all Cancos) would likely not meet the “all or substantially all” requirement in subparagraph (c)(i) of the “excluded entity” definition in subsection 18.2(1).

We trust that these comments will be of assistance to you.

Yours truly,

Angelina Argento
Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch