The combined operation of the EIFEL rules on a Canco and CFA with FAPI is illustrated

A simple example has been provided to illustrate how the revised draft excessive interest and financing expenses limitation (EIFEL) rules operate in a somewhat consolidated manner where a Canadian corporation has a controlled foreign affiliate (CFA) that generates foreign accrual property income (FAPI).

Canco, which has business income of $1,100 after deducting interest expense of $1,400, also has a wholly-owned CFA that has income from property of $400 after deducting interest expense of $600, and pays no tax – so that Canco’s income including FAPI is $1,500. The interest and financing expense (IFE) of Canco is $1,400 plus its share of the relevant affiliate IFE (RAIFE) of the CFA of $600, or $2,000. Its adjusted taxable income (ATI) is its income of $1,500 plus the IFE of $2,000, or $3,500.

A percentage EIFEL denial is determined by comparing the IFE of $2,000 to 30% of ATI (0.3*$3,500), resulting in an aggregate denial of $950, being 47.5% of the $2,000 IFE. 47.5% of Canco’s $1,400 interest expense, or $665, is denied under s. 18.2(2). 47.5% of the RAIFE of $600, or $285, is denied under s. 95(2)(f.11)(ii)(D), increasing the FAPI inclusion accordingly. These two additions of $665 and $285 increase Canco’s income by $950 from $1,500 to $2,450.

The $950 of denied interest is added to the restricted interest and financing expense (RIFE) of Canco, which can be carried forward indefinitely and deducted by Canco, generally having regard to its capacity to deduct interest under the EIFEL rules in those future years.

If the CFA had incurred a foreign accrual property loss (FAPL) instead of FAPI, the RAIFE of the CFA would nonetheless be included in the IFE of Canco – even though that FAPL might never be deducted in computing Canco’s income.

Neal Armstrong. Summary of Nat Boidman and Eivan Sulaiman, “The EIFEL Proposals and Controlled Foreign Affiliates,” International Tax Highlights, Vol. 2, No. 1, February 2023, p. 5 under s. 95(2)(f.11)(ii)(D).