2025 Ruling 2025-1063831R3 - EIFEL Ruling

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: Whether the Financing Cost Losses are included in the definition of the IFE, and therefore, the IFE of the Taxpayer, whereas the Sale Losses are not an amount described in paragraph (e) of variable “A” of the definition of the IFE in subsection 18.2(1) and should therefore not be included in the IFE of the Taxpayer under that provision.

Position: Yes.

Reasons: Consistent with the context and purpose of the EIFEL rules.

XXXXXXXXXX 2025-106383

XXXXXXXXXX, 2025

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer (the “Taxpayer”).

To the best of your knowledge and that of the Taxpayer involved, none of the subject transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:

i. in a previously filed tax return of the Taxpayer or a related person and:

A. being considered by the CRA in connection with such return;

B. under objection by the Taxpayer or a related person; or

C. the subject of a current or completed court process involving the Taxpayer or a related person; or

ii. the subject of a Ruling request previously considered by the Income Tax Rulings Directorate.

Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”), and all references to monetary amounts are in Canadian dollars.

This document is based solely on the facts described below. Any documentation submitted with your request does not form part of the facts except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

DEFINITIONS

In this letter, the following terms or expressions have the meanings specified:

“Act” means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), c.1, as amended to the date of this letter; and the regulations enacted thereunder;

"arm's length" has the meaning assigned by section 251;

“Committed Commodity” refers to XXXXXXXXXX in the aggregate amount of XXXXXXXXXX to be delivered by the Taxpayer to the XXXXXXXXXX pursuant to the Trade Agreements;

“controlled foreign affiliate” has the meaning assigned by subsection 95(1);

“CRA” refers to the Canada Revenue Agency;

“Delivery Dates” means the dates by which the Taxpayer is required to deliver the Committed Commodity to the XXXXXXXXXX under the Trade Agreements;

“EIFEL rules” mean the excessive interest and financing expenses limitation rules generally set out in section 18.2;

“fair market value” means the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm's length and under no compulsion to act, expressed in terms of cash;

XXXXXXXXXX;

“Financing Cost” has the meaning set out in Paragraph 8(f) of this Ruling;

“Financing Cost Losses” has the meaning set out in Paragraph 15 of this Ruling;

XXXXXXXXXX;

“Forward Price” refers to the forward price agreed between the Taxpayer and the XXXXXXXXXX for the Committed Commodity for purposes of the Trade Agreements;

“Forward Rate” has the meaning set out in Paragraph 8(e) of this Ruling;

“Future Spot Price” has the meaning set out in Paragraph 12(b) of this Ruling;

“IFE” refers to interest and financing expenses as defined in subsection 18.2(1);

“IFRS” refers to International Financial Reporting Standards;

“Intercompany Purchase Agreements” are the XXXXXXXXXX purchase and sales agreements between the Taxpayer and the Subsidiaries that have been entered into or will be entered into in XXXXXXXXXX;

“Paragraph” means a numbered paragraph of this Ruling;

“Prepayment Date” means the prepayment date of XXXXXXXXXX, as the case may be, under the Trade Agreements;

“Prepayments” mean the cash prepayments in the aggregate amount of $XXXXXXXXXX made to the Taxpayer by the XXXXXXXXXX on the Prepayment Date to satisfy the XXXXXXXXXX’ obligations under the Trade Agreements;

“public corporation” has the meaning assigned to that term by subsection 89(1);

“Sale Losses” has the meaning set out in Paragraph 15 of this Ruling;

“SOFR” is the Secured Overnight Financing Rate;

“Subject Transactions” has the meaning set out in Paragraph 13 of this Ruling;

“Subsidiaries” are XXXXXXXXXX;

“taxable Canadian corporation” has the meaning assigned to that term by subsection 89(1);

“Taxpayer” refers to XXXXXXXXXX;

“Trade Agreements” means the XXXXXXXXXX trade agreements between the Taxpayer and each of the XXXXXXXXXX in respect of the sale of the Committed Commodity which were entered into in XXXXXXXXXX; and

“Trade Date” means the trade date of XXXXXXXXXX, as the case may be, under the Trade Agreements.

FACTS

1. The Taxpayer is a public corporation listed on the XXXXXXXXXX. It is a taxable Canadian corporation.

2. The Taxpayer, through its Subsidiaries, operates a XXXXXXXXXX business. The Taxpayer does not own or operate any XXXXXXXXXX. The Taxpayer provides head office and operational support to its subsidiaries such as XXXXXXXXXX.

3. The Taxpayer directly or indirectly owns interests in the Subsidiaries, inter alia, as follows:

a. XXXXXXXXXX% interest in XXXXXXXXXX of the Taxpayer, which operates the XXXXXXXXXX,

b. XXXXXXXXXX% interest in XXXXXXXXXX, a controlled foreign affiliate of the Taxpayer, which XXXXXXXXXX XXXXXXXXXX, and

c. XXXXXXXXXX% interest in XXXXXXXXXX, a taxable Canadian corporation, which XXXXXXXXXX.

4. In the XXXXXXXXXX financial year, the consolidated XXXXXXXXXX production from the XXXXXXXXXX owned by the Subsidiaries was XXXXXXXXXX, of which, XXXXXXXXXX were produced from the XXXXXXXXXX and XXXXXXXXXX from the XXXXXXXXXX. The XXXXXXXXXX commenced XXXXXXXXXX. The total XXXXXXXXXX.

5. In the XXXXXXXXXX financial year, the Taxpayer had consolidated XXXXXXXXXX revenue of approximately $XXXXXXXXXX in respect of the sale of XXXXXXXXXX at an average realized XXXXXXXXXX.

6. The elected functional currency of the Taxpayer for the purposes of the Act for its taxation year ended XXXXXXXXXX and subsequent taxation years is the XXXXXXXXXX dollar.

7. The Taxpayer has a taxation year-end of XXXXXXXXXX.

Trade Agreements

8. In XXXXXXXXXX, the Taxpayer entered into the Trade Agreements with each of the XXXXXXXXXX. The key details of the Trade Agreements are below:

a. The Taxpayer agreed to deliver the Committed Commodity to the XXXXXXXXXX in equal monthly deliveries for the period from XXXXXXXXXX. Due to the requirement of the Taxpayer to deliver the Committed Commodity, the Trade Agreements are considered to require “physical” settlement.

b. The XXXXXXXXXX agreed to make the Prepayments in cash to the Taxpayer on the Prepayment Date.

c. The amount of the Prepayments was agreed between the Taxpayer and each of the XXXXXXXXXX by determining the Forward Price of the Committed Commodity and discounting the Forward Price to the Prepayment Date at an annualized rate of approximately XXXXXXXXXX% (which in general represented the SOFR plus a credit spread to reflect the Taxpayer’s credit rating). The Prepayment has no effect on the Forward Rate.

d. The Forward Price of the Committed Commodity was agreed upon between the Taxpayer and each of the XXXXXXXXXX by (i) agreeing on the XXXXXXXXXX on the Trade Date and (ii) increasing the XXXXXXXXXX to the applicable Delivery Dates by an agreed Forward Rate.

e. The amounts agreed with the XXXXXXXXXX varied slightly but were approximately $XXXXXXXXXX in respect of the XXXXXXXXXX on the Trade Date increasing by an annualized forward rate of approximately XXXXXXXXXX% to the Delivery Dates (the “Forward Rate”), resulting in an average Forward Price of approximately $XXXXXXXXXX.

f. The difference between the Prepayments and the Forward Price represents the cost (the “Financing Cost”) to obtain the cash proceeds for the Committed Commodity on the Prepayment Date rather than on the Delivery Dates.

g. The Committed Commodity, Prepayments, Forward Price and Financing Cost under each of the Trade Agreements are summarized in the table below:

XXXXXXXXXX

Accounting Treatment of the Trade Agreements

9. In accordance with IFRS, the Taxpayer treated the Prepayments as deferred revenue on its balance sheet, and the Financing Cost is being recognized in the income statement as an interest and financing expense over the term of the Trade Agreements. The Financing Cost is added as an offsetting entry to the deferred revenue balance on the balance sheet over the term of the Trade Agreements as it accrues. The result is that the deferred revenue accretes to the Forward Price over the term of the Trade Agreements. The deferred revenue will be recognized as revenue on the Delivery Dates.

10. The accounting treatment described above is the applicable treatment because the Trade Agreements are not considered “financial instruments” under IFRS 9 but rather are considered contracts with customers under IFRS 15. Consequently, the Taxpayer does not account for the Trade Agreements as a financial liability and no mark-to-market gains or losses will be recorded in the financial statements. The Trade Agreements are not considered financial liabilities because: (i) the number of XXXXXXXXXX to be delivered under the Trade Agreements is fixed at inception, (ii) the Trade Agreements require the physical delivery of the Committed Commodity, and (iii) the Taxpayer will be able to satisfy the amount of the Committed Commodity required through the production of its Subsidiaries.

11. Although the Trade Agreements are treated as contracts with customers under IFRS 15, they are considered to include a significant financing component due to the time duration between the receipt of the Prepayments and the Delivery Dates which then requires the financing component to be recognized separately as described in Paragraph 10 above.

Intercompany Purchase Agreements

12. The Taxpayer has commenced to satisfy its obligations to deliver the Committed Commodity under the Trade Agreements by purchasing the Committed Commodity from its Subsidiaries on XXXXXXXXXX. The Taxpayer entered into Intercompany Purchase Agreements with each Subsidiary in XXXXXXXXXX. The key details of the Intercompany Purchase Agreements are below:

a. the Subsidiaries agree to sell XXXXXXXXXX produced from their respective XXXXXXXXXX to the Taxpayer, in the amounts requested by the Taxpayer from time to time pursuant to purchase orders made by the Taxpayer; and

b. the purchase price per XXXXXXXXXX shall be the XXXXXXXXXX Price (i.e., the fair market value) on or around the date of the purchase order (the “Future Spot Price”).

SUBJECT TRANSACTIONS

13. After the request for an advanced income tax ruling and from XXXXXXXXXX, the following transactions have taken place or will take place (the “Subject Transactions”):

a. The Taxpayer has purchased or will purchase the Committed Commodity from its Subsidiaries at the Future Spot Price pursuant to the relevant Intercompany Purchase Agreement. Specifically, XXXXXXXXXX the Taxpayer has already purchased XXXXXXXXXX of the Committed Commodity from the Subsidiaries pursuant to the Intercompany Purchase Agreements. The XXXXXXXXXX on or around the date of the purchase orders ranged from $XXXXXXXXXX. The aggregate cost of the purchased XXXXXXXXXX was $XXXXXXXXXX; and

b. The Taxpayer has delivered or will deliver the Committed Commodity to the XXXXXXXXXX. Specifically, the Taxpayer has already delivered XXXXXXXXXX of the Committed Commodity to the XXXXXXXXXX pursuant to the Trade Agreements. The Committed Commodity delivered during this period was related to $XXXXXXXXXX of the total Prepayment amount.

ADDITIONAL INFORMATION

14. Although the XXXXXXXXXX at the time that the Taxpayer entered into the Trade Agreements was close to the all-time highest price recorded, the XXXXXXXXXX continued to rise throughout XXXXXXXXXX, and has recently surpassed $XXXXXXXXXX. The amounts paid to the Subsidiaries based on the Future Spot Price significantly exceeded and are expected to exceed the Prepayments and the Forward Price.

15. The amount of the losses depends or will depend on the Future Spot Price. The total purchase price at the Future Spot Price paid by the Taxpayer to the Subsidiaries for the Committed Commodity is or is expected to be higher than the Prepayments and the Forward Price. Therefore, the Taxpayer incurred or is expected to incur losses from the purchase and sale of the Committed Commodity, attributable to (i) the increase in the purchase XXXXXXXXXX at the Future Spot Price to the extent it exceeds the Forward Price (the “Sale Losses”) and (ii) the Financing Cost (i.e. difference between the Forward Price and the Prepayments) (the “Financing Cost Losses”), respectively. Specifically, as a result of the purchase of the Committed Commodity from the Subsidiaries and its sale to the XXXXXXXXXX between XXXXXXXXXX, the Taxpayer has already incurred aggregate Sale Losses of $XXXXXXXXXX and Financing Cost Looses of $XXXXXXXXXX, summarized below.

XXXXXXXXXX

16. The Subject Transactions are legally effective.

REPRESENTATIONS

17. The Taxpayer represents that the agreed XXXXXXXXXX of approximately $XXXXXXXXXX on the Trade Date was close to the all-time highest price recorded for XXXXXXXXXX. By entering into the Trade Agreements, the Taxpayer also represented that it secured what appeared to be a favourable price for a portion of its XXXXXXXXXX, to have certainty with respect to at least a portion of its cashflow to (i) allow it to fund XXXXXXXXXX, and (ii) guarantee liquidity during the XXXXXXXXXX.

PURPOSES OF THE SUBJECT TRANSACTIONS

The purpose of the Subject Transactions is to satisfy the Taxpayer’s obligation to deliver the Committed Commodity to the XXXXXXXXXX under the Trade Agreements.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, representations, subject and proposed transactions, and purposes of the Subject Transactions and provided further that the Subject Transactions are carried out as described above, we rule as follows:

A. The Financing Cost Losses are included in the definition of the IFE in subsection 18.2(1) and, therefore, will be included in the IFE of the Taxpayer, but the Sale Losses are not an amount described in paragraph (e) of variable “A” of the definition of the IFE in subsection 18.2(1) and, therefore, will not be included in the IFE of the Taxpayer.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R12 dated April 1, 2022, and are binding on the CRA provided that the Subject Transactions, as described in Paragraph 13, are entered into on or before XXXXXXXXXX.

COMMENTS

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a) the fair market value or adjusted cost base of any property referred to herein;

(b) the reasonableness or fair market value of any fees or expenditures referred to herein;

(c) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein;

(e) the application or non-application of a general anti-avoidance provision;

(f) subject to Ruling A, the application of section 18.2, or any amendments thereto, to the Subject Transactions;

(g) any tax consequences relating to the Facts and Transactions described herein, other than those specifically described in the rulings given above; and

(h) the reasonableness of the Taxpayer’s expectations on the Prepayment Date in respect of the anticipated fair market value of the Committed Commodity at the time of delivery.

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate