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: What is the effect of amalgamations and wind-ups on various balances referred to in the coming into force provisions ("excess capacity otherwise determined", "excess interest", "group net excess capacity", "net excess capacity") where an election has been made for the transitional rules to apply to eligible pre-regime group entities.
Position: Based on the policy objectives set out in the explanatory notes for the transition rules and the amendments to section 87 and 88 and the coming into force of the amendments it is reasonable to extend the application of paragraph 87(2.1)(a.1) and subsection 88(1.11) to the transitional amounts applicable in the pre-regime period notwithstanding these provisions do not explicitly refer to the terms used in the pre-regime transition rules.
2024 CTF Annual Tax Conference
CRA Roundtable
Question 6 – EIFEL - Pre-Regime Election and Amalgamations and Liquidations
The legislation enacting sections 18.2 and 18.21 of the Act (which are the main provisions of the Excessive Interest and Financing Expenses Limitation Regime or EIFEL rules) includes a pre-regime election (footnote 1) in the coming into force provision that allows a taxpayer to elect to calculate its excess capacity for each of the three taxation years (the pre-regime years) immediately preceding its first taxation year (the first regime year) in respect of which the EIFEL rules apply. Where there have been amalgamations or winding-ups in the pre-regime years, or the first regime year, please confirm that the deeming rules in paragraph 87(2.1)(a.1) of the Act or subsection 88(1.11) of the Act apply to take into account the pre-regime “excess capacity otherwise determined” and “excess interest” of the predecessor corporations for the purposes of determining the “net excess capacity” of the amalgamated corporation or parent corporation (the particular taxpayer), as the case may be, and the “group net excess capacity” in respect of the particular taxpayer, as well as for the purposes of determining those same amounts for other taxpayers in respect of which the particular taxpayer is an eligible pre-regime group entity.
Consider the following scenarios:
Scenario A (Amalgamations):
Facts:
a) YCo and ZCo are eligible pre-regime group entities on December 31, 2024, the taxation year-end of the first regime year for both taxpayers. YCo and ZCo jointly file a pre-regime election.
b) On July 1, 2024, there was a horizontal amalgamation of Z1Co and Z2Co to form ZCo.
c) On July 1, 2023, there was a horizontal amalgamation of Y1Co and Y2Co to form YCo.
d) On July 1, 2023, there was a horizontal amalgamation of Z1ACo and Z1BCo to form Z1Co.
e) On Jan 1, 2023, there was a horizontal amalgamation of Y1ACo and Y1BCo to form Y1Co.
f) Paragraph 87(2.1)(a.1) applied to all amalgamations.
g) All entities normally have December 31 taxation year-ends.
h) There have been no loss restriction events.
Please confirm the following:
1. When determining the “net excess capacity” of YCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of YCo, Y1Co, Y2Co, Y1ACo, and Y1BCo for the taxation years noted in the chart below should be taken into account.
2. When determining the “group net excess capacity” in respect of YCo and ZCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of YCo, Y1Co, Y2Co, Y1ACo, Y1BCo, Z1Co, Z2Co, Z1ACo, and Z1BCo for the taxation years noted in the chart below should be taken into account.
3. When determining the “net excess capacity” of ZCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of Z1Co, Z2Co, Z1ACo, and Z1BCo for the taxation years noted in the chart below should be taken into account.
Pre-Regime Taxation Pre-Regime Taxation Pre-Regime Taxation
Year 1 Year 2 Year 3
YCo N/A N/A December 31, 2023
Y1Co N/A June 30, 2023 N/A
Y2Co December 31, 2022 June 30, 2023 N/A
Y1ACo December 31, 2022 N/A N/A
Y1BCo December 31, 2022 N/A N/A
ZCo N/A N/A N/A
Z1Co N/A N/A December 31, 2023
Z2Co December 31, 2021 December 31, 2022 December 31, 2023
Z1ACo December 31, 2022 June 30, 2023 N/A
Z1BCo December 31, 2022 JUne 30, 2023 N/A
Scenario B (Winding-ups):
Facts:
a) YCo and ZCo are eligible pre-regime group entities on December 31, 2024, the taxation year-end of the first regime year for both taxpayers. YCo and ZCo jointly file a pre-regime election.
b) On June 30, 2024, Z1Co wound up into ZCo.
c) On June 30, 2023, Y1Co wound up into YCo and dissolved.
d) On June 30, 2023, Z1ACo wound up into Z1Co and dissolved.
e) On December 31, 2022, Y1ACo wound up into Y1Co and dissolved.
f) Subsection 88(1.11) applied to all winding-ups.
g) All entities normally have December 31 taxation year-ends.
h) There have been no loss restriction events.
Please confirm the following:
1. When determining the “net excess capacity” of YCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of YCo, Y1Co, and Y1ACo for the taxation years noted in the chart below should be taken into account.
2. When determining the “group net excess capacity” in respect of YCo and ZCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of YCo, Y1Co, Y1ACo, ZCo, Z1Co, and Z1ACo for the taxation years noted in the chart below should be taken into account.
3. When determining the “net excess capacity” of ZCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of ZCo, Z1Co, and Z1ACo for the taxation years noted in the chart below should be taken into account.
Pre-Regime Taxation Pre-Regime Taxation Pre-Regime Taxation
Year 1 Year 2 Year 3
YCo December 31, 2021 December 31, 2022 December 31, 2023
Y1Co December 31, 2021 December 31, 2022 June 30, 2023
Y1ACo December 31, 2021 December 31, 2022 N/A
ZCo December 31, 2021 December 31, 2022 December 31, 2023
Z1Co December 31, 2021 December 31, 2022 December 31, 2023
Z1ACo December 31, 2021 December 31, 2022 June 30, 2023
CRA Response (A)
The coming into force provision for the legislation enacting the EIFEL rules contains transitional rules for the purpose of determining the cumulative unused excess capacity of a taxpayer that is a corporation or fixed interest commercial trust for a taxation year, determined based on the taxpayer’s excess capacity for the year plus its excess capacity for the three immediately preceding taxation years. These transitional rules, in effect, allow taxpayers to elect to determine their excess capacity for the pre-regime years in accordance with special rules and carry forward excess capacity so determined for a pre-regime year for three taxation years, by including it in computing their cumulative unused excess capacity. In order to benefit from these transitional rules, a taxpayer and all eligible group entities in respect of the taxpayer that are also corporations or fixed interest commercial trusts (referred to as eligible pre-regime group entities) must jointly elect to have these rules apply. Absent a valid election, the taxpayer’s excess capacity for all its pre-regime years is deemed to be nil.
The transition rules seek to replicate, in a relatively simple and administrable way, the extent to which the excess capacity of the taxpayer and eligible pre-regime group entities for pre-regime years would have been used to allow for the deduction of the excess interest and financing expenses of the taxpayer and eligible pre-regime group entities for pre-regime years. Pursuant to the transitional rules a taxpayer’s excess capacity for each pre-regime year (which is, notionally, the unused portion of its excess capacity) can be broken down into three main steps.
The first step is to determine the “excess capacity otherwise determined” or “excess interest” of the taxpayer and each eligible pre-regime group entity for each pre-regime year. A taxpayer’s “excess capacity otherwise determined” for a pre-regime year is the amount that would be determined as its excess capacity for that year if that definition applied in respect of the pre-regime year. A taxpayer’s “excess interest” for a pre-regime year is the amount by which its interest and financing expenses for the year exceed the amount of interest and financing expenses that it would have been permitted to deduct for that year had subsection 18.2(2) applied in respect of that year. Specifically, the “excess interest” is defined as the amount that would be determined for the pre-regime year under paragraph (b) of the definition “absorbed capacity” is subsection 18.2(1) of the Act.
The second step is to determine the “group net excess capacity” for the pre-regime years, which is the total of the excess capacity otherwise determined of the taxpayer and all eligible pre-regime group entities for all pre-regime years, net of the total of the excess interest of the taxpayer and eligible pre-regime group entities for all pre-regime years. Thus, the group net excess capacity represents the net excess capacity of the corporate group for the period spanning the pre-regime years. Consistent with the approach under the EIFEL rules more generally, the excess interest or excess capacity otherwise determined of any financial institution group entity or any tax exempt person is excluded in the determination of group net excess capacity.
The third step is to allocate, in the joint election under the transitional rules, the group net excess capacity to the taxpayer and the eligible pre-regime group entities for specific pre-regime years. The portion of the group net excess capacity that is allocated to a taxpayer or eligible pre-regime group entity for a pre-regime year is deemed to be the excess capacity of the taxpayer or eligible pre-regime group entity, as the case may be, for that pre-regime year. The allocated amount for a given pre-regime year thus effectively replaces the amount that would otherwise have been determined as the taxpayer’s excess capacity (the taxpayer’s “excess capacity otherwise determined”) for the given pre-regime year under the definition “excess capacity” in subsection 18.2(1), if that definition applied in respect of pre-regime years. The taxpayer’s deemed excess capacity for a pre-regime year is, in effect, subject to both the usual three-year carry-forward by virtue of being included in the taxpayer’s cumulative unused excess capacity, and the ordinary rules under that definition that reduce excess capacity to reflect its utilization in the form of amounts of transferred capacity and absorbed capacity.
A taxpayer’s net excess capacity for its pre-regime years is the amount, if any, by which the total of all amounts each of which is its excess capacity otherwise determined for any pre-regime year exceeds the total of all amounts each of which is its excess interest for any pre-regime year. Thus, if a taxpayer’s total excess interest for its pre-regime years is greater than or equal to its total excess capacity otherwise determined for its pre-regime years, then it cannot be allocated any excess capacity for any pre-regime years, and thus its excess capacity for each of those years will be nil for the purpose of determining its cumulative unused excess capacity for any taxation year. In that case, any net group excess capacity for the pre-regime years can be allocated only to eligible pre-regime group entities in respect of the taxpayer that have net excess capacity for the pre-regime years.
Subsection 87(2.1) of the Act allows a corporation formed on an amalgamation of two or more other corporations (referred to as a new corporation and the predecessor corporations, respectively) to deduct the unclaimed losses of its predecessor corporations, subject to the restrictions on the use of losses imposed by section 111 and subsection 149(10) of the Act.
Paragraph 87(2.1)(a.1), which was also introduced as a part of the EIFEL rules, provides a similar continuity treatment in respect of the various amounts that are relevant in computing a taxpayer’s cumulative unused excess capacity, which is defined in new subsection 18.2(1) and essentially reflects the three-year carry-forward of a taxpayer’s excess capacity (as also defined in that subsection). Specifically, the amounts referred to in paragraph 87(2.1)(a.1) are the new corporation’s “absorbed capacity”, “excess capacity” and “transferred capacity” in determining “cumulative unused excess capacity” and its “interest and financing expenses” and “interest and financing revenues” for the purposes of paragraph (g) in the description of B in adjusted taxable income. The explanatory notes indicate that this is intended to allow the cumulative unused excess capacity of the new corporation to be determined as though the new corporation were the same corporation as, and a continuation of, the predecessor corporations.
Paragraph 87(2.1)(d) was also amended to ensure that the general rule that subsection 87(2.1) has no effect on the income of the new corporation does not prevent an amount in respect of interest and financing expenses from being deductible in a post-amalgamation year where the new corporation has cumulative unused excess capacity resulting from subparagraph 87(2.1)(a.1).
The amendments introducing new paragraph 87(2.1)(a.1) and amended paragraph 87(2.1)(d) indicate that these provisions apply in respect of amalgamations that occur in any taxation year.
For the purposes of this responses it is assumed that each of YCo, Y1Co, Y2Co, Y1ACo, Y1BCo, ZCo, Z1Co, Z2Co, Z1ACo and Z1BCo are taxable Canadian corporations, are not financial institution group entities or persons exempt from tax under Part I of the Act and that YCo and ZCo have made the required joint election under the transition rule within the filing deadline.
Notwithstanding that paragraph 87(2.1)(a.1) does not contain a specific reference to the terms used in the transitional rules, the balances described in the transitional rules (“excess capacity otherwise determined” and “excess interest”) are modified descriptions of the balances described in paragraph 87(2.1)(a.1) (“excess capacity” and “absorbed capacity”). Applying a textual, contextual and purposive interpretation suggests paragraph 87(2.1)(a.1) should provide a similar continuity treatment for these balances of the predecessor corporations in the transitional period for a corporation formed on an amalgamation. Therefore, in determining an amalgamated corporation’s “net excess capacity” and “groups net excess capacity” for pre-regime years it would be reasonable to apply paragraph 87(2.1)(a.1) to provide continuity of treatment of the predecessor corporations’ “excess capacity otherwise determined” and “excess interest” following an amalgamation. Given the above, our response is as follows:
1. The “net excess capacity” of YCo for the pre-regime years will take into account the pre-regime “excess capacity otherwise determined” and “excess interest” of
a. Y2Co, Y1ACo and Y1BCo for the taxation year ending December 31, 2022;
b. Y1Co, and Y2Co, for the taxation year ending June 30, 2023; and
c. YCo for the taxation year ending December 31, 2023.
2. The “group net excess capacity” in respect of YCo and ZCo for the pre-regime years will take into account the pre-regime “excess capacity otherwise determined” and “excess interest” of
a. Z2Co for the taxation year ending December 31, 2021;
b. Y2Co, Y1ACo, Y1BCo, Z2Co, Z1ACo and Z1BCo for the taxation year ending December 31, 2022;
c. Y1Co, Y2Co, Z1ACo and Z1BCo for the taxation year ending June 30, 2023; and
d. YCo, Z1Co and Z2Co for the taxation year ending December 31, 2023 will be taken into account.
3. The “net excess capacity” in respect of ZCo for the pre-regime years will take into account the pre-regime “excess capacity otherwise determined” and “excess interest” of
a. Z2Co for the taxation year ending December 31, 2021;
b. Z2Co, Z1ACo and Z1BCo for the taxation year ending December 31, 2022; and
c. Z1Co and Z2Co for the taxation year ending December 31, 2023.
CRA Response (B)
Subsection 88(1.11) provides that if a subsidiary corporation has been wound up in circumstances described in subsection 88(1.1), new subsection 88(1.11) applies for the purposes of determining the parent’s cumulative unused excess capacity, which is defined in new subsection 18.2(1) and essentially reflects a three-year carry-forward of excess capacity (as also defined in that subsection). This subsection was introduced to provide continuity treatment to the parent in respect of the subsidiary’s cumulative unused excess capacity. This is achieved by attributing to the parent the principal amounts that are relevant in determining the subsidiary’s cumulative unused excess capacity. In particular, any absorbed capacity, excess capacity or transferred capacity (each as defined in subsection 18.2(1)) of the subsidiary for a taxation year is deemed to be absorbed capacity, excess capacity or transferred capacity, respectively, of the parent for its taxation year in which the subsidiary’s year ends. By attributing to the parent not only the subsidiary’s excess capacity, but also its absorbed capacity and transferred capacity, this rule, in effect, provides continuity in the parent only in respect of the subsidiary’s excess capacity that is not “used” by the subsidiary before the winding-up. Notably, if new subsection 111(5.01) applies on a loss restriction event to restrict the cumulative unused excess capacity of the subsidiary, that restriction will also apply to the parent because that subsection provides that the restriction applies in respect of all taxpayers for all taxation years ending after the loss restriction event. Subsection 88(1.11) applies in respect of windings-up that begin in any taxation year.
It is assumed for the purposes of this question that YCo, ZCo, Z1Co, Y1Co, Z1ACo and Y1ACo are Canadian corporations are not a financial institution group entities or persons exempt from tax under Part I of the Act and that YCo and ZCo have made the required joint election under the transition rule within the filing deadline.
Similar to the analysis in respect of paragraph 87(2.1)(a.1), applying a textual, contextual and purposive interpretation to the application of subsection 88(1.11), in determining a parent’s “net excess capacity” and “group net excess capacity” for pre-regime years following a winding-up of a subsidiary into parent it would be reasonable to apply the amendments in subsection 88(1.11) to take into account the subsidiary’s “excess capacity otherwise determined” and “excess interest”. Given the above, our response is as follows:
1. The “net excess capacity” of YCo for the pre-regime years will take into account the pre-regime “excess capacity otherwise determined” and “excess interest” of
a. YCo, Y1Co and Y1ACo for the taxation year ending December 31, 2021;
b. YCo, Y1Co and Y1ACo for the taxation year ending December 31, 2022;
c. Y1Co for the taxation year ending June 30, 2023; and
d. YCo for the taxation year ending December 31, 2023.
2. The “group net excess capacity” in respect of YCo and ZCo for the pre-regime years will take into account the pre-regime “excess capacity otherwise determined” and “excess interest” for
a. YCo, Y1Co, Y1ACo, ZCo, Z1Co and Z1ACo for the taxation year ending December 31, 2021;
b. YCo, Y1Co, Y1ACo, ZCo, Z1Co and Z1ACo for the taxation year ending December 31, 2022;
c. Y1Co and Z1ACo for the taxation year ending June 30, 2023; and
d. YCo, ZCo and Z1Co for the taxation year ending December 31, 2023.
3. The “net excess capacity” of ZCo for the pre-regime years will take into account the pre-regime “excess capacity otherwise determined” and “excess interest” for
a. ZCo, Z1Co and Z1ACo for the taxation year ending December 31, 2021;
b. ZCo, Z1Co and Z1ACo for the taxation year ending December 31, 2022;
c. Z1ACo for the taxation year ending June 30, 2023; and
d. ZCo and Z1Co for the taxation year ending December 31, 2023.
Tobias Witteveen
2024-103825
December 3, 2024
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Clause 7(2)(c) of An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023.
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