Introduction
Group ratio
Comment


Introduction

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 fourth of a five-part series explaining the changes, and how they will affect the Canadian tax sector, focusing specifically on the use of group ratio as opposed to fixed.(1)

Group ratio

Certain groups may be able to elect to deduct interest and financing expenses using their group ratio instead of the fixed ratio, where certain conditions are met. Under this rule, affected corporations and trusts may use their group ratio, which may be higher than the 30% (or 40%) fixed ratio. To determine its group ratio, a consolidated group must calculate its ratio of net third-party interest expense to book earnings before interest, taxes, depreciation and amortisation (EBITDA), as determined based on the group's audited consolidated financial statements. Corporations and trusts that are residents of Canada and members of the same consolidated group may elect to allocate amounts to each other under the group ratio.

Comment

Finance's revised legislation provides additional relief by relaxing some of the conditions that must be met to access the group ratio election. Affected corporations or trusts in a Canadian group are no longer required to have the same tax year or the same reporting currency and are also allowed to have a relevant financial institution as a group member.

For purposes of computing the group ratio, the new rules also provide for a one-time election to exclude fair market value adjustments when computing the group's adjusted book EBITDA.

In addition, the revised legislation removes previously proposed restrictions that limited the group ratio where it was above 40%.

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 www.kpmg.com.

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

This article was originally published by KPMG Canada.

Endnotes

(1) For earlier articles in this series, see: