Interest Expense and Other Financing Costs Reasonable interest expense on funds borrowed or indebtedness incurred for the purpose of earning income from business or property is deductible on an accrual or cash basis (depending on the method regularly followed by the taxpayer) (subject to the EIFEL rules described below). Non-interest costs, including commissions and fees, incurred to borrow money or incur debt for an income- earning purpose or to issue treasury shares are generally deductible on a straight-line basis over five years. Québec has legislation that limits the deductibility of financing costs to the amount of income generated by the investment. This rule applies only to individuals subject to tax in Québec. Proposed rules regarding excessive interest and financing expenses limitation The rules regarding excessive interest and financing expenses limitation (EIFEL) are expected to apply to taxation years beginning on or after October 1, 2023, to limit the deductibility of net interest and financing expenses of corporations and trusts (that are not “excluded entities,” as described below) to a fixed percentage of 40% of EBITDA. For taxation years that begin on or after January 1, 2024, the limitation will be equal to a fixed percentage of 30% of EBITDA. However, these rules will not apply to the following excluded entities: – Canadian-controlled private corporations, and any associated corporations, with less than C$50 million of taxable capital employed in Canada; – corporations and trusts resident in Canada with less than C$1 million of net interest and financing expenses in a taxation year; or
– corporations and trusts resident in Canada if > substantially all of the businesses, undertakings and activities of the taxpayer’s group are carried on in Canada; > no non-resident person or partnership (i) owns more than 25% of the votes or fair market value of the taxpayer, or (ii) is a partnership with more than 50% of its fair market value held by non-residents, and the property of the partnership includes more than 25% of the votes or fair market value in the taxpayer
or an eligible corporate group member; and > substantially all of its interest and financing
expenses are payable to persons or partnerships that are not “tax-indifferent investors” (e.g., non- residents or tax-exempt entities) that do not deal at arm’s length with the taxpayer or a corporate group member of the taxpayer. The rules also contain a specific exemption for public- private partnerships. The EIFEL rules include a group ratio rule intended to provide qualifying taxpayers with an elective alternative regime to calculate the amount of deductible interest and financing expenses. In particular, provided that certain conditions are satisfied, Canadian taxpayers can elect to use the group ratio to compute the EIFEL limitation in lieu of the 30% fixed ratio rule. The group ratio rule is intended to provide relief to groups that are highly leveraged with third-party debt (however, as a practical matter, relief under the group ratio may be limited).
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Doing Business in Canada
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