What do the EIFEL rules do?
Affected corporations and trusts


Many corporations and trusts will be affected by proposed rules to limit the amount of interest and other financing expenses that businesses may deduct for Canadian income tax purposes. These proposals, known as the excessive interest and financing expenses limitation (EIFEL) rules, generally limit the amount of net interest and financing expenses that may be deducted by affected corporations and trusts. This article is the first of a five-part series explaining the changes, and how they will affect the Canadian tax sector, namely the background of the revisions and the affected corporations.

Finance recently released a revised version of these proposals, which:

  • narrows their applicability in some cases;
  • provides new rules to address controlled foreign affiliates; and
  • delays their implementation date to taxation years beginning on or after 1 October 2023.

Finance is accepting comments on the revised draft legislation until 6 January 2023.

The revised rules, which were released on 3 November 2022, provide some welcome changes, but not all of the revisions will provide relief. Corporations and trusts should review the revisions to the EIFEL rules to determine whether they may be affected and model potential impacts, including on after-tax cashflows, especially due to the recent increase in interest rates. These corporations and trusts should also consider any available elections or designations to maximise allowable interest and financing expenses. In addition, these taxpayers may want to look at whether it makes sense to modify any existing internal or external financing or undertake restructuring transactions before the rules take effect.


Finance released the draft legislation for the EIFEL rules on 4 February 2022 for public consultation. The rules were originally announced in the 2021 federal budget.(1) Once these rules are enacted, Canada will join several other countries with similar rules including the United States, the United Kingdom and several countries across the European Union that have also introduced rules that are generally consistent with the Organisation for Economic Co-operation and Development's (OECD's) 2015 recommendations in its base erosion and profit shifting (BEPS) Action 4 report, "Limiting Base Erosion Involving Interest Deductions and Other Financial Payments".

What do the EIFEL rules do?

In general, the EIFEL rules apply to corporations and trusts (with certain look-through rules for partnerships), for taxation years beginning on or after 1 October 2023. These rules generally limit the amount of net interest and financing expenses that may be deducted by corporations and trusts for Canadian income tax purposes to a fixed ratio of 30% (40% if the taxation year begins on or after 1 October 2023 and before 2024) of adjusted taxable income, subject to certain exceptions and the group ratio rule.

Affected corporations and trusts

Corporations and trusts may be affected by the EIFEL rules unless they qualify as an excluded entity for a given year. Under the revised proposals, entities may qualify under any one of the following exclusions below.

Small CCPC exclusion
This exclusion applies to Canadian-controlled private corporations (CCPCs) that, combined with any associated corporations, have less than C$50 million of taxable capital employed in Canada.

De minimis exclusion
This exclusion applies to eligible groups of corporations and trusts resident in Canada that have C$1 million or less of aggregate net interest and financing expenses in a taxation year.

Domestic exclusion
This exclusion may apply to a Canadian-resident corporation or trust so long as that entity, along with any other eligible group entities (generally, Canadian-resident related or affiliated entities):

  • carries on all or substantially all of its businesses, activities and undertakings in Canada or does not have a "material" foreign affiliate (ie, the greater of the book cost of all foreign affiliate shares and the fair market value (FMV) of assets held by all foreign affiliates does not exceed C$5 million);
  • does not have a non-resident specified shareholder or non-resident specified beneficiary;
  • has interest and financing expenses, all or substantially all of which are paid or payable to persons or partnerships other than non-arm's length "tax-indifferent investors" such as non-residents (subject to certain exceptions) and tax-exempt persons (previously, this condition also restricted amounts paid or payable to arm's length tax-indifferent investors); and
  • does not have more than 25% of the votes or (FMV) of its shares (in the case of a corporation) held by a partnership, where more than 50% of the FMV of the interests in that partnership are held by non-residents.


Finance's latest proposals include certain changes to the excluded entity exception in response to submissions to broaden the exception and better target the rules towards larger corporations. Specifically, Finance has increased the taxable capital threshold for the small CCPC exclusion from C$15 million to C$50 million and raised the threshold for the de minimis exclusion to C$1 million or less of net interest and financing expenses (previously C$250,000).

Further, affected Canadian-resident corporations or trusts who pay more than 10% of their interest or financing fees to arm's-length "tax-indifferent investors", such as non-residents and pension funds, will no longer be automatically disqualified from the domestic exclusion. In addition, affected corporations or trusts with "immaterial" foreign affiliates that do not exceed the new C$5 million test may also be able to benefit from the domestic exclusion (although the test examines both the amount of the investment by the corporation or trust in the foreign affiliate, as well as the value of the affiliate's own property).

Note that Finance previously stated that increasing the de minimis exclusion threshold could better align with other countries that have enacted similar rules similar based on the OECD's BEPS Action 4 report. However, Finance's proposed C$1 million threshold is still significantly less than certain thresholds that apply in other countries, including the United Kingdom (£2 million).

The revised domestic exclusion now appears broader, as it removes the requirement that each business must be carried on all or substantially all in Canada. Instead, corporations and trusts must assess whether all or substantially all of their businesses, activities and undertakings are in Canada. However, there remains some uncertainty about how to apply the "all or substantially all" test within this provision. In addition, the revised rules add a new condition that must now be met to qualify for the domestic exclusion, in certain cases where a partnership with non-resident partners owns (or has a right to acquire) shares of a corporation in the eligible group.

Nadia Virani and Brian Ernewein assisted in the preparation of this article.

For further information on this topic please contact Sabrina Wong at KPMG Law by telephone (‚Äč+1 416 777 8899) or email ([email protected]). The KPMG Law website can be accessed at

This article was originally published by KPMG Canada

(1) For further information, see "New Interest Expense Rules", "Finance Issues Outstanding Interest Expense Rules & More" and "2021 Federal Budget Highlights".