Tax alert

What are the proposed EIFEL rules and how will they affect Canadian businesses?

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Updated: August 24, 2023

Certain corporations and trusts should be aware of the proposed excessive interest and financing expenses limitation (EIFEL) rules1 to understand potential impacts to their business. Under these rules, the tax-deductible amount of interest and financing expenses (IFE) could be restricted. The Department of Finance (Finance) released updated draft legislation, which includes several changes, like a new requirement for taxpayers to file a prescribed form with their tax return to support the deductibility of their IFE, and an election after the EIFEL rules take effect allowing taxpayers to count their three pre-EIFEL regime taxation years towards their IFE deduction capacity. These proposed changes were released on August 4, 2023 and if enacted, the rules will be effective for taxation years starting on or after October 1, 2023 (revised from January 1, 2023 as originally proposed). 

The EIFEL rules were originally introduced in Budget 2021, consistent with similar rules introduced in other G20 jurisdictions, based on the OECD’s “Base Erosion and Profit Shifiting” (BEPS) initiative2

1. Proposed new sections 18.2 and 18.21 of the Income Tax Act (the Act). 

2. BEPS refers to the Inclusive Framework on Base Erosion and Profit Shifting led by the OECD and the G20 group of nations. EIFEL is based on the objectives recommended under Action 4 of the BEPS project.  

Who’s impacted?

EIFEL would generally apply to corporations and trusts, other than an excluded entity. 

Excluded entities: 

  1. Canadian-controlled private corporations (CCPCs)—which along with any associated corporations—have taxable capital employed in Canada of less than $50 million 
  2. certain eligible groups of Canadian resident corporations and trusts whose aggregate net IFE among their Canadian members is $1,000,000 or less 
  3. certain Canadian corporations and trusts (alone or in eligible groups) consisting solely of Canadian corporations and trusts that carry on all or substantially all3 of their businesses, undertakings, and activities in Canada provided the following conditions are met: 
    • the greater of the book cost4 of shares or fair market value (FMV) of property of all foreign affiliate holdings is $5 million or less throughout the year 
    • no non-resident is a specified beneficiary or specified shareholder of any group member  
    • all or substantially all of any group member’s IFE is payable to persons or partnerships other than those that are non-arm’s length and “tax- indifferent” (i.e., generally includes entities exempt from tax and non-residents of Canada)
    • no partnership with over 50% of the FMV of its interests held by non-residents own 25% or more of the FMV of the interests or the voting rights in any group member     

3. In this article, the phrase “all or substantially all” means 90% or more, the interpretation usually given by the CRA.  

4. For this purpose, the book cost of the shares of an affiliate is determined based on only the taxpayer’s (or the taxpayer’s group’s) ownership interest in the affiliate.)   

Members of partnerships

When corporations and trusts subject to EIFEL are members of a partnership, they may be indirectly impacted based on their proportionate share of the partnership’s income. Under the proposed EIFEL rules, excessive IFE incurred by a partnership is subject to a deemed income inclusion in the hands of the corporation and trust members, rather than being treated as a denied deduction at the partnership level5

5. Proposed new paragraph 12(1)(l.2) of the Act. 

Excluded interest and exempt IFE

Certain Canadian corporations that are related or affiliated can jointly elect under the new rules so that EIFEL doesn’t apply to certain “excluded interest” including certain lease financing payments made by one to the other. The purpose of the election is to ensure that EIFEL wouldn’t adversely impact transactions that commonly occur within Canadian groups that allow the losses of one group member to be offset against the income of another group member. 

In addition, “exempt IFE” related to certain Canadian public-private partnership infrastructure projects are exempt from most EIFEL rules.

How do the rules work?

An impacted taxpayer’s net IFE would generally be limited by a calculation that incorporates a certain “fixed ratio” of their adjusted taxable income, under the proposed rules. 

Period of application  Fixed ratio
Taxation years beginning on or after October 1, 2023 and before January 1, 2024 (transitional period)  40%
Taxation years beginning after the transitional period 30%

In certain circumstances, an election may be available to use a “group ratio” instead of the fixed ratio. 

IFE deduction denial calculation

The core provision of EIFEL is a mechanical, multi-layered calculation that a taxpayer must work through to arrive at the “excessive” IFE for a taxation year, under proposed subsection 18.2(2). To determine the non-deductible amount of IFE, a taxpayer multiplies its IFE for the taxation year (except amounts incurred through a partnership6) by the following formula to arrive at the non-deductible amount of IFE, if any: 

(A – (B + C + D + E)) / F 

where for the taxation year, 

A = taxpayer’s IFE 

B = taxpayer’s “adjusted taxable income” multiplied by the fixed ratio, or taxpayer’s allocated group ratio amount 

C = taxpayer’s interest and financing revenues 

D = taxpayer’s “received capacity” 

E = taxpayer’s “absorbed capacity” 

F = taxpayer’s IFE with possible adjustments 

Below is a general summary of each of the above elements. 

Element A: IFE

Apart from “excluded interest” and “exempt IFE”, IFE broadly includes ordinary interest and financing expenditures otherwise deductible under the Act as well as various other items, including: 

  • interest and financing expenses paid or payable after February 4, 2022 that were capitalized and deducted as capital cost allowance, including those contributing to realized terminal losses; 
  • certain amounts paid or payable under certain agreements and arrangements, considered economically equivalent to interest; 
  • interest amounts embedded within certain lease payments; 
  • partnership level IFE attributable to a taxpayer in accordance with its share of partnership income or loss; and  
  • the taxpayer’s share of any IFE of a controlled foreign affiliate included in computing the affiliate’s foreign accrual property income (FAPI), foreign accrual property loss (FAPL) or capital gains or losses7.   

Element B:  Adjusted taxable income multiplied by the fixed ratio or an allocated group ratio amount 

Adjusted taxable income generally refers to earnings before interest, taxes, depreciation, and amortization (EBITDA), calculated for tax purposes as follows: 

  • start with taxable income for the taxation year (which already includes any intercorporate dividend deductions) before considering the EIFEL rules, less applied non-capital losses (with specified adjustments) and certain amounts regarding controlled foreign affiliates of the taxpayer; 
  • add back amounts such as IFE, capital cost allowance (including any pro-rata share from a partnership) or trust amounts allocated to beneficiaries, resource pool and terminal loss deductions, certain government assistance, certain FAPI amounts not included in the IFE or interest and financing revenue of a controlled foreign affiliate, and a portion of non-capital losses claimed including specified amounts carried forward from a pre-EIFEL year8; and 
  • deduct certain amounts, such as interest and financing revenues, foreign source income offset by foreign tax credits or amounts allocated from a trust. 

The adjusted taxable income would then be multiplied by the 30% fixed ratio (40% during the transition period) or the taxpayer’s allocated group ratio amount, where a valid joint election is made.

Group ratio amount 

Provided certain conditions are met, Canadian members of a consolidated group (and certain deemed “single member groups”) of corporations and/or trusts may be eligible to file a joint election to receive an allocated amount based on a group ratio instead of following the fixed ratio method. 

 The group ratio is calculated as follows: 

1.1 x     Group net interest expense                                                                                                 Group adjusted net book income 

Finance added a factor of 1.1 to provide relief for book-to-tax timing differences in the latest draft legislation revision. The numerator generally comprises the group’s net amount of third-party interest expense (calculated using acceptable accounting standards). The denominator is generally the group’s consolidated financial statement EBITDA amount as determined using acceptable accounting standards (however, the group may jointly elect to use fair values provided this is done the first time an election to apply the group ratio is made).  The group ratio is deemed to be nil where the group does not have an overall positive book EBITDA. 

Once the group ratio is determined—subject to certain limitations—the group would calculate the maximum amount of deductible IFE based on the group ratio multiplied by the adjusted taxable income of each of the Canadian group members. The group would then allocate the resulting amount of deductible IFE amongst the group members as part of the election. This potentially allows for the collective deduction capacity of the Canadian group to be allocated to group members that would benefit the most. The group ratio election is made on an annual basis; thus taxpayers may want to model how the group ratio and fixed ratio apply on an annual basis to determine which provides the most favourable treatment. 

Element C:  Interest and financing revenues 

This element includes a broad range of ordinary interest and financing revenues, other than “excluded interest”. It also includes other items such as: 

    • guarantee fees and similar amounts received for the repayment of debt; 
    • amounts received or receivable under certain agreements and arrangements economically equivalent to interest; 
    • certain lease financing amounts; 
    • partnership level interest and financing revenues attributable to a taxpayer in accordance with its share of partnership income or loss; 
    • the taxpayer’s share of any interest and financing revenues of a controlled foreign affiliate included in computing the affiliate’s FAPI/FAPL or capital gains or losses, less any deductions for certain amounts of foreign tax paid by the affiliate other than for Canadian withholding tax; and  
    • certain deemed interest amounts, such as amounts related to strip bond coupons. 

Elements D and E: “received capacity” and “absorbed capacity” amounts 

These two elements of the formula represent amounts that may allow a taxpayer to deduct net IFE in a taxation year where it would otherwise exceed the maximum allowable deduction under EIFEL. 

Received capacity 

Element D represents received capacity for the taxation year transferred to a recipient by a transferor that had available “cumulative unused excess capacity”. To be effective, a joint election is filed by the transferor and an information return is filed by each transferee regarding the amounts transferred. All transferor and transferee entities must be eligible group entities and be either a taxable Canadian corporation or a fixed interest commercial trust. The excess capacity eligible to be transferred is net of any restricted IFE denied to the transferor in a prior year (so that the transferor uses up its own capacity first). A group member’s cumulative unused excess capacity for a taxation year is unused excess capacity carryforwards from the three immediately preceding taxation years, plus any excess capacity it has for the year. Any received capacity must be fully utilized by the transferee in the taxation year of the transfer, and it is first applied against its restricted IFE carried forward from prior years. Note that financial institution group entities or financial holding corporations can only transfer unused excess capacity to other financial institution group entities, financial holding corporations or special purpose loss corporations (subject to certain restrictions). 

Absorbed capacity

Element E captures a taxpayer’s absorbed capacity for the year, comprising its own unused excess capacity carryforwards used in the year to reduce or eliminate denied deductions of IFE. Generally, a taxpayer has excess capacity in a given taxation year when the maximum amount of IFE that it’s allowed to deduct under EIFEL exceeds the actual amount of IFE incurred in the year. 

Cumulative unused excess capacity is the accumulation of a taxpayer’s unused excess capacity for the current taxation year and the immediately preceding three taxation years that hasn’t been used to deduct the taxpayer’s own IFE or transferred to another Canadian group member. When a taxpayer uses the group ratio approach for a taxation year, it’s considered to not have excess capacity for that taxation year. 

Proposed transitional rules would allow a taxpayer to jointly elect with other group members for the purpose of determining excess capacity for each of the three taxation years (pre-regime years) immediately preceding the first taxation year in which the EIFEL rules will apply. 

Element F: IFE with possible adjustments

This element generally equals the taxpayer’s IFE, but adding back any reductions allowed for income or gains reducing the taxpayer’s cost of funding. Where the taxpayer’s IFE includes an amount regarding IFE of a controlled foreign affiliate, that amount is similarly adjusted to exclude any reductions for income or gains reducing the cost of funding of the affiliate.  

Carryforwards of denied IFE

If a taxpayer’s net IFE are denied under EIFEL, they would be considered “restricted IFE” and could be carried forward (i.e., for use in a future taxation year where there is capacity available) indefinitely, subject to certain conditions. 

6. The potential income inclusion related to a partner’s share of the partnership’s IFE is determined under proposed paragraph 12(1)(l.2). 

7. Where advantageous, a taxpayer could file an election so that all or part of the foreign affiliate’s IFE will not be deductible from certain income, including FAPI from the affiliate. 

8. To reduce taxpayers’ compliance burden, a non-calculated ‘flat’ 25% of such non-capital losses is used for this purpose, provided the losses were incurred in a year ending before February 4, 2022 and an election is filed with the CRA.   

Example scenario

Consider a Canadian corporation (CanCorp) with a December 31 year-end that isn’t an excluded entity, isn’t a member of a partnership, doesn’t own any controlled foreign affiliates, and has no losses carried forward. For 2025, CanCorp has the following amounts for the year: 

  • IFE of $4M (which would otherwise be fully tax deductible) 
  • taxable income before considering EIFEL of $3.5M 
  • capital cost allowance of $1M 
  • interest and financing revenues of $500,000 

Let’s assume there are no other amounts that would impact CanCorp’s adjusted taxable income under EIFEL and IFE doesn’t include any adjustments relating to income or gains that reduce the cost of funding. CanCorp also doesn’t have any amounts of received capacity or absorbed capacity for the year and it isn’t eligible for the group ratio election. 

Analysis and Calculations: 

Since CanCorp isn’t an excluded entity, Canco must determine what portion, if any, of the $4M IFE isn’t deductible under EIFEL: 

(A – (B + C + D + E)) /  F 

  • A = $4M, the amount of CanCorp’s IFE 
  • B = $2.4M, calculated using the fixed ratio method, as follows: 
    • Adjusted Taxable Income = $8M ($3.5M (net taxable income) + $4M (IFE) +$1M (capital cost allowance) - $500,000 (interest and financing revenues)) 
    • Fixed ratio for 2025 = 30% 
    • Element B = $2.4M ($8M x 30%) 
  • C = $500,000, the amount of CanCorp’s interest and financing revenues 
  • D and E = zero, since there are nil amounts of received capacity or absorbed capacity for the year 
  • F = $4M (equals A based on the assumption no adjustments are required) 

The EIFEL calculation would result in a denial of $1.1M (27.5%) of CanCorp’s IFE, as follows: 

= ($4M – ($2.4M + $500,000)) / $4M 

= 27.5% 

Therefore, the non-deductible portion of the $4M IFE would be $1.1M ($4M x 27.5%). 


In this example, CanCorp’s taxable income for 2025 would be increased from $3.5M to $4.6M under EIFEL due to $1.1 million of CanCorp’s IFE being considered excessive. This $1.1M would become restricted IFE that would generally be carried forward to a future taxation year if there is capacity available in that year.

Other considerations

Extended reassessment period if new form not properly filed 

Taxpayers will be required to file a prescribed form with their tax return to report certain details on the deductibility of their IFE. The normal reassessment period for the EIFEL rules doesn’t begin until a complete form is filed.  

Continuity rules for new tax attributes 

Where a corporation goes through an amalgamation or winding-up, its carryforwards of restricted IFE and cumulative unused excess capacity would generally be inherited by the new corporation formed on the amalgamation or the parent corporation in the wind up. 

Furthermore, a taxpayer’s restricted IFE carryforward balances generally remain deductible following an acquisition of control if the taxpayer continues to carry on the same business after such time. However, the cumulative unused excess capacity of a taxpayer would no longer be available in post-acquisition taxation years. 

EIFEL and other existing rules 

EIFEL would apply in addition to, and after the application of other existing rules in the Act regarding the deductibility of interest and financing-related expenses, such as thin capitalization and transfer pricing rules. Any expenses denied as a tax deduction under other rules are excluded from a taxpayer’s IFE for EIFEL purposes.

Anti-avoidance rules 

The proposed EIFEL rules contain numerous anti-avoidance rules. For example, an amount may be included in IFE or excluded from interest and financing revenue where a taxpayer tries to avoid this result. Anti-avoidance rules may also apply to certain transactions involving non-controlled foreign affiliates, excluded entities or non-arm’s length natural persons that otherwise may result in an understatement of IFE or overstatement of interest and financing revenue. Furthermore, the higher 40% fixed rate may be denied where a taxpayer undertakes a transaction to extend the period in which it applies. 

Late-filed or amended elections

The proposed EIFEL rules allow the late-filing or amendment of the group ratio election or the election to transfer cumulative unused excess capacity, subject to certain conditions and CRA approval of the request. 


Once enacted, the EIFEL rules will have a significant impact on financing decisions and the tax compliance obligations of certain taxpayers. These rules are complex—but we can help you navigate them. 

Contact your local advisor or reach out to us here


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