News of Note

The Joint Committee has made numerous comments on the revised draft excessive interest and financing expenses limitation (EIFEL) rules released November 22. To focus on a few of the comments made regarding their application to foreign affiliates:

A controlled foreign affiliate’s interest and financing expenses (“IFE”) that is deductible in computing its income (or loss) and that is re-characterized under s. 95(2)(a), or interest described in s. 95(2)(a)(ii)(D) that is paid by the affiliate to another affiliate (and thus is not deductible in computing the FAPI of the payer affiliate), could still be included in computing the relevant affiliate interest and financing expense (“RAIFE”) respecting a foreign affiliate despite the active business treatment of such amounts. The Committee recommends that the rules should clarify the exclusion from RAIFE any IFE of a controlled foreign affiliate that is (i) included in computing its income or loss from an active business under s. 95(2)(a); and (ii) not included in computing its FAPI by virtue of that amount constituting, to the recipient of the interest, income from an active business under s. 95(2)(a)(ii)(D).

RAIFE can arise where the affiliate otherwise has no FAPI revenues or IFE exceeding such revenues, so that there can nonetheless be a denial of deductions to the taxpayer under the EIFEL rules.

It is unclear how the EIFEL rules apply where a partnership (“LP”) is interposed between controlled foreign affiliates - e.g., where two controlled foreign affiliates (“CFA1” and “CFA2”); of Canco wholly-own LP, which wholly owns “CFA3,” with CFA3 incurring interest expense that is otherwise deductible in computing its FAPI relative to LP – given, inter alia, that LP is not a “taxpayer (as defined in draft s. 18.2(1)) for EIFEL purposes and draft s. 95(2)(f.11)(ii)(A) provides that s. 18.2(2) does not apply for purposes of computing FAPI of a foreign affiliate.

A partnership not being wholly-owned by a taxpayer group could result in a significant administrative burden. For example, where Canco (subject to the EIFEL rules) owns, say, a 9% interest in a partnership (“LP”) owning a controlled foreign affiliate (“CFA”) that earns FAPI (and incurs interest expense that is otherwise deductible in computing that FAPI) then, notwithstanding that Canco only has an indirect minority interest in CFA, and CFA likely would not be a controlled foreign affiliate of Canco had Canco instead directly owned shares of CFA, the effect of the structure is that LP becomes a “FAPI aggregator” in that CFA is required to compute its FAPI vis-à-vis LP, with that FAPI being allocated by LP to its partners.

It is inappropriate to reduce the relevant affiliate interest and financing revenues (RAIFR) of a CFA by an amount deducted under s. 91(4) regarding Canadian withholding taxes. For example, where an interest-bearing upstream loan by a CFA to wholly-owning Canco is subject to Canadian withholding tax of 25%, this scenario is neutral from an EIFEL perspective since there is IFE (in Canada) and corresponding IFR (in a wholly-owned CFA) – yet, Canco would recognize IFE but no interest and financing revenues (IFR) since the RAIFR of the CFA would be fully offset by a FAT deduction, being the grossed-up deduction for the 25% Canadian withholding tax.

Neal Armstrong. Summaries of Joint Committee, “Summary of Issues Raised with the Department of Finance in Respect of the Excessive Interest and Financing Expenses Limitation (EIFEL) Proposals,” 22 March 2023 Joint Committee letter under s. 18.2(1) - relevant affiliate interest and financing expenses, relevant affiliate interest and financing revenues and s. 95(2)(f.11)(ii)(A).

A builder who constructs an “addition” to a multiple unit residential complex (“MURC”) may be required to self-assess for the fair market value of the addition pursuant to s. 191(4). CRA indicated that where there is an internal reconfiguration of units within a MURC resulting in new residential units but not in an expansion of the building envelope, it does not consider there to be the construction of an addition to a MURC (so that there is no self-supply under s. 191(4).)

Conversely, CRA considers that where there is an addition of residential units through an expansion of the MURC building envelope, there will be the construction of one or more “residential units” for s. 191(4) purposes. In this regard, it indicated that the fair market value of the addition would not include that of the land if the addition was constructed on land contiguous to the existing building and that was reasonably necessary for the use and enjoyment of that building as a place of residence for individuals.

Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.8 under ETA s. 191(4).

The s. 94(1) definition of “electing trust” provides that, with a non-resident trust’s return for the first taxation year in which it is deemed by s. 94(3)(a) to be a resident trust, the trust can elect to reduce its taxable income by being deemed by s. 94(3)(f) to be a “non-resident trust” respecting a portion of its property.

CRA indicated that where it is proposing to assess a non-resident trust on the basis that it has been deemed by s. 94(3)(a) to be a resident trust from Year X onwards, the trust is still entitled to make such election on filing a return for that year, even if filed many years after Year X. Even if CRA first made an arbitrary assessment under s. 152(7) of Year X, CRA noted that such arbitrary assessment did not eliminate the obligation to file a return - with the implication that, again, such late return could be accompanied by a valid election.

CRA also indicated that the above interpretation – effectively, that the non-resident trust can lie in the grass for some time, and still be permitted to file a late election (with a late return) when CRA catches up to it – was contrary to what Finance intended, as reflected in the Explanatory Notes.

Summaries of 8 September 2022 Internal T.I. 2021-0892791I7 under s. 94(3)(f) and s. 152(7).

This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.