Section 18.2

Issues with computing trust ATI (p. 36)

• The adjusted taxable income (ATI) definition in relation to a trust requires adding back (under Variable B(g)) the s. 104(6) deductions of the trust except to the extent of any portion designated under s. 104(19) in respect of taxable dividends, and Variable C(h) deducts any s. 104(13) inclusion to the trust except to the extent of the portion designated under s. 104(19).
• A trust with interest and financing expenses of $30 (e.g., loan interest) which invested in Canadian equities, received $100 of taxable dividends and distributed $70 to its unitholders which it designated under s. 104(19) would have an ATI of $30 (reflecting the add-back of the IFE, but not the add-back of the $70 under B(g) because of the s. 104(19) designation) so that the trust could deduct no more than $9 of interest in the year, thereby requiring a further distribution of $21 of income.
• A trust receiving all of its income (being $100 of ordinary income) from a trust investment would have an ATI of nil - since, although it would have an addback of its $30 of IFE under B(a) and of $70 under B(g) for its s. 104(6) deduction, the $100 of income received from the subtrust and included in its income under s. 104(13) would be deducted under C(h), so that the IFE could not be deducted.

Recognition of CUEC when becoming subject to EIFEL (pp. 3-4)

• Schedule 130 should accommodate taxpayers that become subject to the EIFEL rules being able to recognize a balance of cumulative unused excess capacity (CUEC) without the need for amending the three preceding tax returns.

Eligible group entity status in bank-controlled ETF group (pp. 31-32)

In the scenario where the asset manager for a mutual fund corporation (MFC) is a Canadian bank subsidiary, and an exchange-traded mutual fund trust (the Fund) has the same asset manager and another bank subsidiary is the Fund’s designated broker and market maker:

• If the voting shares of the MFC are held by the asset manager, the MFC will be related to the asset manager and bank, so that they will be eligible group entities.
• Per s. 18.2(16)(a), the Fund will not be related for eligible group entity to the asset manager or bank by virtue only of the asset manager being its trustee.
• If either the asset manager (by virtue of providing seed capital) or the broker-dealer (by virtue of its market-maker function) owns more than 50% of the FMV of the Fund units, then it will be a majority-interest beneficiary, and thereby affiliated so as to generate eligible group entity status.

Application of RIFE first (p. 30)

• A taxpayer’s excess capacity (generally arising where the maximum amount a taxpayer is permitted to deduct in respect of IFE for the year exceeds its actual IFE for the year) and received capacity (representing the cumulative unused excess capacity of eligible group entities that has been transferred to it under s. 18.2(4)) are reduced automatically to the extent of its restricted interest expense, or RIFE (tracking the IFE of a taxpayer that has been denied under
• the EIFEL rules).
• Effectively, this means that such excess and received capacity must be applied against prior-year RIFE before the taxpayer can transfer its excess capacity to another group member or use its received capacity to deduct its excess IFE for the current year.

Tainting of excluded entity status by individuals (pp. 2-7)

• The inclusion in eligible group entities of resident corporations or trusts that are related to the taxpayer in the application of the “excluded entity” exemption has the effect of requiring corporate groups controlled by respective siblings to be aware of each other’s affairs.
• For example, a corporation group controlled by one sibling relying (under para. (b) of the excluded entity definition) on its annual interest and financing expenses being under $1 million would also need to take into account the IFE of the resident corporations in a group controlled by a second sibling.
• Similarly, if the first sibling group was instead relying on the para. (c) exclusion, it would be offside if there was relevant participation in the structure of the second sibling’s group by a family trust one of whose related beneficiaries had ceased to be a resident.

25% threshold re non-resident equity rights (pp. 7-8)

• From the perspective of a Canadian-controlled private corporation (CCPC) that has an active R&D program and financing needs (“Canco”), if a foreign investor is accorded an option to convert debt into equity representing at least 25% of votes or value, Canco would fall offside the para. (c) branch of the “excluded entity” definition in s. 18.2(2)(c) (and, in typical circumstances, would not fit within any of the other “excluded entity” categories.
• This 25% threshold for (likely) engaging the EIFEL interest deductibility limitations is lower than the 50% threshold relevant to maintaining CCPC status and, therefore, may present additional challenges.
• If Canco is a member of a larger (related or affiliated) group, the presence of a specified non-resident investor in any member of the group will impose EIFEL limitations on Canco.
• Although it is such presence of a non-resident investor that causes Canco to be subject to the EIFEL regime, all of Canco’s financing costs will then become restricted, not just those paid to non-residents or other tax-indifferent investors.

Exclusion arising from financing costs paid to non-residents (pp. 8-9)

• A further concern is that any significant financing costs paid to non-residents (who are “tax-indifferent investors”) will also result in the loss of Canco’s excluded entity status – so that substantially all of Canco’s financing costs must be paid to other types of entities if it is to remain an excluded entity.
• Canco could structure returns on non-resident debt to be non-deductible (for example, making them participating payments), so as to ensure that payments to tax-indifferent investors are non-deductible, and so that it could thereby remain an excluded entity.

Low de minimis threshold

• The “excluded entity” definition in draft s. 18.2(1), which includes groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less, thus provides a lower “de minimis” threshold than, for example, the U.K. (£2m) and Germany (€3m).

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.

Exclusion of excluded interest from interest and financing revenues/expenses (IFR/IFE) accommodates loss consolidations (p .4)

Excluded interest is not to be included as IFR to the recipient, nor as IFE to the payor (and would thus remain within the computation of ATI). This ensures that a particular amount of interest is not denied to the taxpayer (and would create no additional capacity to the recipient), which may be useful in the context of implementing traditional intra-group loss planning arrangements, by effectively allowing a transfer of ATI between group members.

General scope of excluded interest rules

• The “excluded interest” rules depart from the 2021 federal budget proposals (which stated that interest income and expense between Canadian members of a corporate group would be generally excluded) by requiring an election between two eligible group corporations.
• These rules (unlike the unused capacity rules) do not exclude financial institutions, but they are unavailable to trusts and partnerships.

Allocation of financing to purpose-built residential rental (pp. 18-19)

• The proposed definition of “exempt interest and financing expenses” references inter alia the expenses that are reasonably attributable to the portion of the borrowing used by the taxpayer for the purpose of acquiring, building or converting a purpose-built residential rental.
• Since a “purpose-built residential rental” can refer to a part of a mixed-use building, there could be significant uncertainties associated with allocating a financing to such portion of the project.

Various imputed amounts not included (p.6)

• The IFR definition will not be amended to include amounts under ss. 16.1, 17 and 247(2), and draft s.12.7, or 113(5).

Inclusion of interest from FAs in IFR (p. 9)

• Unlike the previous version, all interest received or receivable from nonresident corporations is included in IFR.

Potential inclusion in RAIFE of capital losses from excluded property (p. 11)

• Notwithstanding the Explanatory Notes’ statement that the RAIFE/RAIFR definitions are only applicable respecting amounts relating to FAPI and FAPL, such definitions encompass any amounts included in ss. 95(2)(f)(i) and (ii) and, in this regard, there does not appear to be an exclusion for amounts computed under s. 95(2)(f)(i) for capital gains or losses in respect of dispositions of excluded property.
• A potential example is a capital loss arising under s. 95(2)(i) that is deemed to be from the disposition of excluded property.

No RAIFE carve-out for ss. 95(2)(a) and 95(2)(a)(ii)(D) amounts (p. 14)

• 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”) despite the active business treatment of such amounts.
• 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 even where no FAPI revenues (pp. 14-15)

• 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.

Separate flow-up of relevant affiliate IFE or relevant affiliate IFR (p. 4)

• The amounts that would be the interest and financing revenues (IFRs) or interest and financing expenses (IFEs) of a controlled foreign affiliate (CFA) in computing its capital gain or foreign accrual property income are to be included in the taxpayer’s IFR (net of foreign accrual tax deductions) or IFE, and the FAPI of such CFA remaining after such carve-outs of the CFA’s “relevant affiliate IFR” or “relevant affiliate IFE” is simply included in the taxpayer’s adjusted taxable income (ATI) (i.e., generally the tax EBITDA amount to which the 30% deductibility limitation in s. 18.2(2) is applied).

Inappropriate reduction of RAIFR for s. 91(4) deduction for Canadian withholding tax

• 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.

Difficulties for consolidated operation of financial services groups

• S. 18.2(4)(c), which effectively prevents a “relevant financial institution” from transferring any portion of its “cumulative unused excess capacity” for a year (as, for example, would typically be the case for a profitable bank with an excess of interest income over interest expense) to another member of its group having excessive interest and financing expenses, could cause significant difficulties for Canadian financial services groups, for example, where regulatory restrictions limit a regulated financial institution’s incurring of third party debt, leading other group members to incur such debt.