2024 Federal Budget – International tax measures

Interest Deductibility  

On November 3, 2022, the government released its latest version of draft legislation relating to Excessive Interest and Financing Expenses Limitation (EIFEL) which will affect multinational corporations, cross-border investments and other Canadian public and private enterprises. As currently proposed, the EIFEL rules will limit the deductibility of net interest expense to a fixed ratio, ultimately to be 30% of taxable income before interest, taxes, depreciation, and amortization (referred to as tax EBITDA). This legislation was included as part of Bill C-59 which received its second reading on March 18, 2024. It is expected this legislation will receive royal assent later this year. 

The EIFEL rules provide an exemption for interest and financing expenses incurred in respect of arm’s length financing for certain public-private partnership infrastructure projects.  Budget 2024 proposes expanding this exemption to also include an elective exemption for certain interest and financing expenses incurred before January 1, 2036, in respect of arm’s length financing used to build or acquire eligible purpose-built rental housing in Canada.   

These rules are currently set to apply for taxation years beginning on or after October 1, 2022. For more details on how the EIFEL rules will impact your organization, read our Tax Alert:

Simplification of regulation 105 waivers

Existing income tax rules require a person who pays a non-resident for services provided in Canada to withhold 15 per cent of the payment and remit it to the Canada Revenue Agency (CRA). This acts as a pre-payment of any Canadian tax that the non-resident may ultimately owe. However, many non-resident service providers do not ultimately owe Canadian tax because they do not have a permanent establishment in Canada under an applicable tax treaty.  

These non-resident service providers may apply to the CRA for an advance waiver of the withholding requirement for a specific planned transaction. Alternatively, they may apply for a refund of the withheld amounts. 

However, many non-resident service providers instead pass the cost of the withholding requirement on to the payors, and this increases costs for Canadians. This budget proposes to provide the CRA with the legislative authority to waive the withholding requirement, over a specified period, for payments to a non-resident service provider if either of the following conditions are met:  

• the non-resident would not be subject to Canadian income tax in respect of the payments because of a tax treaty between its country of residence and Canada; or 
• the income from providing the services is exempt income from international shipping or from operating an aircraft in international traffic.  

This measure would come into force on royal assent of the enacting legislation.

Transfer pricing

The 2024 Budget reaffirms the government’s pledge to modernize existing transfer pricing regulations. Originally announced in the 2021 Budget, the Department of Finance expressed interest in a public discussion regarding Canada's transfer pricing rules. Stakeholders were invited to submit their feedback in July 2023, following the release of a consultation paper with draft legislation in June 2023. These proposed changes are designed to clarify the application of the arm's-length principle and ensure Canada's transfer pricing rules are in line with evolving international standards and the OECD's transfer pricing guidance. No changes to these proposals were announced in the Budget.