Other countries use higher and flexible safe harbour limits (pp. 7-8)
- The de minimis exception in para. (a) for a taxpayer which, together with other Canadian group members, has total net IFE of $250,000 or less contrasts with the deduction limits in Germany, France and the UK, which equal to the greater of a particular threshold of €3 million or £2 million and (ii) 30% of tax EBITDA.
Exclusion of IFR of RFIs (p. 8)
- If the IFR of a RFI are to be excluded under B(ii), then it would be appropriate to only exclude such revenues to the extent they exceeded the RFI’s IFE, e.g., if a group investment corp had IFR and IFE both of $250K, it would not disqualify the group.
Impact of s. 18.2(12) (p. 8)
- IFR should not be excluded for these purposes under s. 18.2(12).
Securitization vehicles (pp. 12-13)
- Although securitization vehicles earn a nominal profit each year so that in that sense they should be excluded entities, certain portions of their revenues may be amounts (such as membership fees and early repayment premiums) which do not qualify as IFR so that, in fact, they may not so qualify.
“Substantially all” test must be satisfied for each business (p. 9)
- All or substantially all of “each” business of the taxpayer and of each eligible group entity in respect of the taxpayer must be carried on in Canada throughout the year, so that even a minor business with a U.S. sales branch representing more than 10% of its activity would cause this test to be failed. It would be appropriate to base the “all or substantially” all requirement on the overall business activities.
Exclusion for FAs even with nominal income (pp. 9-10)
- The exclusion for any foreign affiliate could apply, for instance, to a dormant foreign affiliate indirectly acquired as part of an acquisition where it was not possible to wind up it up for some time because of foreign jurisdiction delays, or to a foreign affiliate with nominal net income which was required to serve as a collection agent in a particular jurisdiction.
Reason for specified shareholder exclusion (p. 10)
- It is understood that the policy concern being addressed arises where interest or financing expenses are paid to a non-resident specified shareholder/beneficiary. To address this more narrow concern, it would be appropriate to allow an entity to have a non-resident specified shareholder or specified beneficiary provided no material IFE is paid by the entity, or any Canadian entity dealing not at arm’s length with it, to that specified shareholder or specified beneficiary, either directly or indirectly.
Exclusion for Canadian tax exempts, difficulties for publicly traded debt and level of aggregation (pp. 10-12)
- Regarding the requirement that all or substantially all of the IFE of the taxpayer and each eligible group entity in respect of the taxpayer be paid or payable to persons or partnerships that are not tax-indifferent investors, it is unclear why payments made to s. 149 tax exempts) should disqualify an entity from this exception.
- This requirement could be problematic, for instance, where a purely domestic corporate group has publicly issued debt (so that a portion of the debt may become held by non-resident persons or tax-exempts without the issuer’s knowledge.)
- Also, consideration should be given to adding a look-through test, for example, if 11% of an entity’s IFE is paid to a partnership with an 11% non-resident partner, it would be disqualified even though, on a look-through basis, only 1.21% of the IFE was ultimately allocable to that non-resident.
- In addition, “tax-indifferent investor” in this context should not include a non-resident earning interest income through a Canadian permanent establishment.
- It is unclear whether the (c)(iv) requirement applies to the eligible group entities viewed together or to each eligible group entity separately.
Restriction to corps (pp. 14-16)
- The excluded interest provision should be expanded to apply where either or both of the parties to a loan are partnerships, all of the members of which are, directly or indirectly, eligible group corporations, and where either or both of the parties to a loan are trusts, all of the beneficiaries of which are, directly or indirectly, eligible group corporations. Consideration should be given to ways in which the rules canbe further adjusted to accommodate circumstances such as a joint-venture scenario in which each joint venturer funds its contribution to the venture mostly with loans from what is an eligible group corporation respecting it, with such loans being proportionate to their respective interests.
Restriction to interest (pp. 15-16)
- It also should be extended to payments other than of interest. For instance, hedging payments between eligible group members that relate to excluded interest loans and lease financing amounts should be encompassed.
Exclusion of individuals (pp. 15-16)
- Comparable rules should be available for interest paid by a resident corporation to a resident related individual (determined without reference to s. 251(5)(b)) or who would be affiliated on a de jure basis.
Issues with election filing requirements (pp. 16-17)
- The requirement excluded interest election language that the amount of the debt be specified should be clarified to take into account fluctuating loan balances, e.g., for revolvers or where there have been partial repayments.
- A single “blanket” election should be permitted (but not required) respecting all excluded interest for a year between any two (or more) eligible group members.
- The deadline for filing the election being based on when interest becomes due generates complications where such interest has accrued over a number of years.
S. 80 should be extended to RIFEs
- Restricted interest and financing expenses should be treated similarly to non-capital losses so that, for example, s. 80 should be extended so that a “forgiven amount” can reduce an RIFE balance.
Creation of non-capital loss in carryback or carryforward year (pp. 18-19)
- An example is provided where a portion of a non-capital loss that is carried back from 2025 to 2024 is effectively converted from a non-capital loss to an RIFE.
- It is recommended that it be clarified that variable A of the ATI definition "can be a non-capital loss created from the carry forward or carry back of losses, provided that this does not result in an actual non-capital loss in the taxation year to which the non-capital loss is carried forward or carried back."
Net capital losses can effect double reduction of ATI (pp. 20-21)
- A current year net capital loss will reduce the taxpayer’s ATI in that year under E(b) of Variable A. If that net capital loss is used to offset a taxable capital gain in a future taxation year, the taxpayer’s taxable income in that future year will also be reduced by virtue of this application of the capital loss, resulting in in a double ATI reduction respecting the net capital loss.
- “To avoid double counting of a capital loss, a net capital loss realized by a taxpayer should only reduce the taxpayer's ATI in the taxation year in which the taxpayer's taxable income (determined without regard to proposed subsection 18.2(2)) is reduced by virtue of the deduction of a net capital loss (whether as a result of a loss carry forward or loss carry back).”
No addback of terminal losses (p. 21)
- Variable B of the ATI formula should include an addback for any terminal loss deduction under s. 20(16) (which arises directly from there being unused capital cost).
No addback of resource deductions (pp. 21-22)
- The same as for CCA deductions, variable B should contain an addback for deductions made under any of s. 66(4), 66.1(2) or (3), 66.2(2), 66.21(4), 66.4(2), 66.7(1), (2), (2.3), (3), (4), or (5).
- Finance appears to have concerns arising to the extent that resource pools include amounts that would otherwise be deductible on a current basis.
Application to pre-effective date losses (pp. 22-24)
- To avoid the retroactive application of the EIFEL regime respecting pre-effective date losses, the addbacks under variable B of ATI should be expanded to include all pre-effective date non-capital loss carry forwards.
- Para. (g) of variable B should be extended so that the addback includes the portion of a non-capital loss for another taxation year that the taxpayer deducted under s. 111(1)(a) to the extent that the loss arose from any amounts deducted by the taxpayer in the other year that would otherwise have been added back in that other year under variable B.
Need to properly flow through trust attributes to corporate or trust beneficiaries (pp. 24-26)
- Para. (e) of variable C reduces ATI by an amount included in a taxpayer’s income under s. 104(13) on the basis, per the Explanatory Notes, to reflect that this amount is effectively included in the ATI of the trust by virtue of the addback for s. 104(6) amounts under para. (f) of variable B.
- However, where a taxable dividend received by a trust is allocated and designated under s. 104(19) to a corporate beneficiary, so that such beneficiary includes the amount in its income under s. 104(13) and claims an offsetting deduction in computing taxable income under s. 112(1), para. (e) of variable C requires the beneficiary to deduct the dividend amount in computing ATI, even though the dividend amount was not actually included in taxable income.
- Furthermore, trusts should be able to allocate their excess ATI to their beneficiaries (who may be trusts or corporations subject to the EIFEL regime) pro rata in accordance with the amounts of trust income for the year made payable to the beneficiaries pursuant to subsection 104(13).
Email this Content