Canada proposes wider EIFEL relief for indirect group financing

Relief where another group entity uses the funds

Canada's EIFEL regime generally restricts net interest and financing deductions for in-scope taxpayers by reference to adjusted taxable income, using a 30% ratio for taxation years beginning from 2024. Finance had previously announced exceptions for borrowings used directly for Canadian purpose-built rental housing and regulated energy utilities, but says neither exception has been enacted.^[2][4]

The new motion would allow relief where the borrower uses funds, directly or indirectly, for eligible activity carried on by an eligible group entity or an 'extended eligible group entity'. The extended category covers affiliated persons or partnerships and a partnership in which the borrower, affiliates and eligible group entities together hold a specified proportion of at least 40%. Partnership interests held through another partnership would be traced proportionately.^[2][3]

For rental housing, the interest must be paid or payable before 2036 to an arm's-length lender and relate to acquiring, building or converting a qualifying Canadian rental property. The property must be owned by the borrower or qualifying group entity and generally contain at least four self-contained rental units or ten rental units, with all or substantially all units offered for continuous periods of at least 28 days. The taxpayer would make a year-specific election by its filing-due date.^[3]

Utility election would continue

For regulated energy utilities, the borrowing must be from an arm's-length person and finance income-producing Canadian electricity, natural-gas, steam or related energy activity whose prices are government-established, approved or guaranteed, or set through a qualifying government-operated market. The election would apply for the chosen year and each subsequent year, rather than being a fresh annual election.^[3]

The amendments are proposed for taxation years beginning on or after 1 October 2023. For an affected past year, the election deadline would be the later of the ordinary filing-due date and 90 days after Royal Assent. Section 18.2 already requires prescribed EIFEL information with the income-tax return, so groups should map the legal borrower, use of funds, property or utility operator, ownership and partnership percentages, arm's-length lender and relevant tax years. Relief should remain provisional until enactment, and any amended-return process should be confirmed after final forms and administrative guidance appear.^[3][4]