In the final part of our four-part series, we explore the most recent updates and announcements concerning the excessive interest and financing expense limitation (EIFEL) rules. Despite numerous lobbying efforts during the proposal stage, an industry exception was originally only granted for certain public-private partnership infrastructure projects. However, the 2024 federal budget has introduced the possibility of introducing another industry exception for purpose-build rental housing, which we will cover in more detail below.
Advisors have also been closely watching for updates on the required prescribed form filings under the EIFEL rules. Recently, the CRA launched a new webpage on EIFEL and announced schedule 130, which we will discuss further below.
Navigating the evolution of EIFEL rules: Part III
Part III of this series focuses on the taxpayer’s EIFEL position.
Read morePart IV – Recent updates
On April 16, 2024, Canada’s Finance Minister, the Honorable Chrystia Freeland, introduced the 2024 federal budget, which included important updates to the Income Tax Act and provided more details about previous tax measures.
The EIFEL rules generally apply to all taxpayers. However, there are exceptions, like for certain public-private infrastructure projects or if an excluded entity exception test is met. Budget 2024 proposes expanding these exceptions to include an elective exemption related to purpose-built rental housing.
The proposed purpose-built rental housing exception applies where interest and financing expenses are incurred before Jan. 1, 2036, for the construction, conversion or purchase of purpose-build rental housing. Purpose-build rental housing refers to buildings in Canada with at least four private apartments or 10 rooms, where 90% of units are for long-term rental.
This exception, if enacted, would apply to taxation years that begin on or after Oct. 1, 2023.
On Sept. 24, 2024, the Canada Revenue Agency (CRA) released some instructions on how to comply with the EIFEL rules with the introduction of Schedule 130. This form will be part of corporate or trust income tax returns. However, at the time of writing, this form has not yet been released.
Schedule 130 will ask taxpayers to report various details, including interest and financing expenses (IFE), interest and financing revenues (IFR), adjusted taxable income, absorbed capacity, and other relevant calculations. If a corporation or trust is a partner of a partnership, the taxpayer will need to include their share of the partnership's interest and financing expenses and revenues. The same applies for relevant affiliate interest and financing expenses and relevant affiliate interest and financing revenues.
Where a corporation or trust is a partner of a partnership, the partnership must include details of how the partnership calculated its interest and financing expenses and interest and financing revenues in schedule 130 of its partnership return.
There are several elections under the EIFEL rules, and the CRA is currently preparing the forms for those elections. We expect them to be available soon.
As taxpayers and advisors begin to work through the EIFEL rules, they may face some areas that require careful judgment. These areas include, but are not limited to, how to calculate interest expenses included in non-capital losses and how to determine the proportion of capital cost allowance deductions that relate to capitalized interest. We hope to get more guidance from the CRA soon.
Key takeaways and next steps
The EIFEL rules are complex and likely to evolve over the coming years. Taxpayers impacted by these rules should consider the following next steps:
- If you are a partnership with a corporation or a trust as a member, you should prepare and provide each member with:
- Detailed calculations of the partnership’s IFE and IFR
- Detailed calculations of the relevant affiliate IFE and relevant affiliate IFR (discussed in Part III) of any controlled foreign affiliates of the partnership
- Written notification of each members allocated share of IFE in Canadian exploration expenses, Canadian development expenses, Canadian oil and gas expenses, and foreign resource expenses
- Written notification of each members allocated share of the income or loss that can reasonably be considered to come from activities funded by a borrowing or other financing that results in exempt interest and financing expenses
- While the CRA works on releasing schedule 130, if a taxpayer needs to file their income tax return, they should submit a letter reporting the relevant attributes outlined on the CRA webpage. Maintaining detailed calculations to support the taxpayer's EIFEL position is essential.
- Similarly, while waiting for the release of the election forms, if a taxpayer intends to make an election, they must send a letter containing the required information as per the applicable election provision in the Income Tax Act. The letter must include signatures from all taxpayers or partnerships involved in the election.
Contact your BDO advisor to learn more about how we can help you manage the impact of these proposals on your business.
Harry Chana,
International and Cross-Border Tax Services Leader
Jaskirit Randhawa,
Senior Manager, International Tax
The information in this publication is current as of October 17, 2024.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.