5 November 2025 External T.I. 2025-1066661E5 - IFE & CAPITALIZED INTEREST

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 INTEREST CAPITALIZED IN ACCORDANCE WITH SUBSECTION 18(3.1) IS DESCRIBED IN VARIABLE A, PARAGRAPH (A) OF IFE, IN THE YEAR INVENTORY IS SOLD.

Position: NO.

XXXXXXXXXX									2025-106666
										Anna Flisfeder

November 5, 2025

Dear XXXXXXXXXX:

Re: IFE and Capitalized Interest

This is in reply to your letter dated May 27, 2025, regarding the application of the Excessive Interest and Financing Expenses Limitation (EIFEL) rules in the context of capitalized interest that forms part of the cost of goods sold for real property inventory.

This technical interpretation provides general comments about the provisions of 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.

Unless otherwise stated, all references to a statute are to the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Question

A taxpayer is in the business of constructing buildings for resale. Prior to the completion of a construction project, the taxpayer adds an amount of interest expense incurred to finance the project to the cost of the building, in accordance with paragraph 18(3.1)(b). When the taxpayer sells the completed building and deducts its cost of goods sold to determine its profit, will the taxpayer be considered to have deducted an amount that is described in the definition of “interest and financing expenses” (“IFE”) under subsection 18.2(1)? In particular, does the language in subparagraph (a)(i) of Variable A of the definition of IFE in subsection 18.2(1) capture capitalized interest related to real property inventory?

Our Comments

Subsection 18.2(1) defines IFE. Among other things, subparagraph (a)(ii) of Variable A of the definition requires that an amount described under paragraph (a) must otherwise be deductible in computing the taxpayer’s income for the particular year. Together with the accompanying explanatory notes, it is clear that while certain amounts may be paid or payable in respect of, on account of, in lieu of payment of or in satisfaction of interest, only those amounts that are deducted in computing the taxpayer’s income for the particular year will be considered IFE under paragraph (a) of Variable A of the definition.

Several cases have established that the cost of inventory is not considered to be a deductible expense in computing a taxpayer’s income in the year in which the inventory is sold (Oryx Realty Corporation v MNR, 74 DTC 6352 (FCAD), MNR v Shofar Investment Corp, [1980] 1 S.C.R. 350 (SCC), Easter Law Trust (Trustee of) v MNR, 2004 TCC 689 (TCC)). Rather, those cases treat the cost of goods sold as a factor in the computation of a taxpayer’s gross profit under section 9.

Accordingly, interest that has been capitalized in accordance with subsection 18(3.1) is not described in paragraph (a) of Variable A of the definition of “interest and financing expenses” under subsection 18.2(1).

We trust these comments will be of assistance.

Yours truly,

Tobias Witteveen
Manager
Partnerships and Corporate Financing Section
Reorganization Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch