18 November 2025 Roundtable, 2025-1082041C6 - TEI 2025 – Q. C.4 – Eligible group entity and excluded interest in subsection 18.2(1)

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 a corporation would be affiliated with itself, for the purpose of the "excluded interest" mechanism in subsection 18.2(1) of the Act?

Position: No.

Reasons: The law.

TEI – CRA Liaison Meeting – November 18, 2025

C. Administration of New Legislation

Question 4. - Eligible group entity and excluded interest in subsection 18.2(1)

Assume that two taxable Canadian corporations, A Co and its wholly-owned subsidiary B Co are the only partners to a partnership and A Co owes interest or lease financing amounts as defined in subsection 18.2(1) to the partnership. A Co is affiliated with the partnership and with B Co. Is it the CRA’s view that A Co is affiliated with itself such that the interest paid from A Co to the partnership is excluded interest pursuant to subsection 18.2(1)?

CRA Response to Question C4

The November 2023 Technical notes discuss the purpose of the “excluded interest” mechanism:

This election [to treat an amount as “excluded interest”] is principally intended to ensure that the EIFEL rules do not negatively impact on corporate transactions that are often undertaken within Canadian corporate groups to allow the losses of one group member to be offset against the income of another group member.

To qualify as “excluded interest”, an amount paid by a taxable Canadian corporation to a partnership needs to satisfy the conditions in paragraphs (a) to (e) of the definition in subsection 18.2(1) (the “Definition”). We will assume that the financing structure described in the question is legally effective, and that the conditions in paragraphs (a) to (c) and (e) of the Definition would otherwise be satisfied.

In the present case, the payer would be a taxable Canadian corporation, such that the requirement in division (d)(i)(A) of the Definition could be satisfied. No member of the payee partnership would be a natural person, a trust or a corporation that is not a taxable Canadian corporation, such that the requirement in division (d)(i)(B) could also be satisfied.

In addition, division (d)(ii)(A) of the Definition requires that all the members of the payee partnership (other than another partnership) be eligible group entities in respect of the payer corporation, throughout the “relevant period” and at the time of payment (the “Condition”).

Subsection 18.2(1) defines an “eligible group entity”:

[…] in respect of a taxpayer resident in Canada, at any time, means a corporation, or a trust, resident in Canada

(a) that is, at that time, related (other than because of a right referred to in paragraph 251(5)(b)) to the taxpayer;

(b) that would, at that time, be affiliated with the taxpayer if section 251.1 were read without reference to the definition "controlled" in subsection 251.1(3);

[…]

Hence, the Condition requires that the members of the payee partnership be either related or affiliated with the payer corporation. The relationship that is relevant is the one between the partners of the payee partnership and the payer.

Subsection 251.1(1) delineates the meaning of “affiliated persons” or “persons affiliated with each other”, for the purposes of the Act. It does not deem a corporation to be affiliated with itself. For the purpose of applying section 251.1, to establish whether two different entities or persons are affiliated, paragraph 251.1(4)(a) states that “persons are affiliated with themselves”. There is no specific rule deeming a corporation to be affiliated with itself, for the purpose of the “excluded interest” election. Therefore, in the present case, the Condition would not be satisfied.

In reaching this conclusion, we kept in mind the main rationale of the “excluded interest” election, namely the facilitation of typical loss consolidation transactions. The situation described in the question involves a corporation making payments to a partnership of which it is a partner. We understand that any deductible expenses of the corporate payer would be partially offset by any corresponding income allocated by the partnership. At first glance, this does not appear to be the typical loss consolidation transaction, for which the “excluded interest” mechanism has been mainly designed.