Revisions to earlier draft legislation on the Excessive Interest and Finance Expenses Limitation (EIFEL) regime were released by the Department of Finance on November 3, 2022. Lawson Lundell submitted comments on the government’s first round of consultations, raising concerns about the overly broad scope of the rules. A copy of our earlier submission can be found at the end of our April 29, 2022 blog.
The government’s latest revisions address various issues identified by taxpayers with respect to the initial draft of the rules, including relaxing the rules to exclude arm’s length financing (albeit based on a high threshold test that requires “all or substantially all” debt to be from arm’s length lenders). There remain, however, technical and policy concerns regarding the rules. Lawson Lundell submitted comments again on January 6, 2023 as part of the Federal Government’s second round of consultations.
Our submission focused on the “excluded entity” concept under the rules that generally exempts a taxpayer from the EIFEL rules. Not surprisingly, the excluded entity definition contains multiple tests that have to be satisfied before a taxpayer may qualify for exemption from the EIFEL rules, including testing how much interest is paid to lenders that are considered “tax-indifferent investors”. This term understandably includes non-resident persons but also captures:
- Canadian resident tax-exempt entities (which we noted again in the submission should be excluded from what are designed to be international base erosion rules); and
- any trust or partnership, more than 10% of the interests in which are held by non-residents or Canadian resident tax-exempts.
On the last category of tax-indifferent investors, not only is the 10% test a troublingly low bar but the presence of partnerships (which are not separate legal entities) in the analysis can create considerable uncertainty for taxpayers in determining whether the taxpayer qualifies as an excluded entity.
For a copy of our submission, please click here.
Nancy Diep is a partner in the Calgary office of Lawson Lundell. Nancy's practice focuses primarily on the tax aspects of mergers, acquisitions and reorganizations, including cross-border transactions or financings and ...
Gareth is a partner with our Tax Group. He brings more than 15 years of tax experience to the group having worked at Deloitte & Touche LLP, PricewaterhouseCoopers LLP and as the Director of Tax for a private real estate company.
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