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Tax News and Developments September 2022

In brief

On 4 February 2022, the Canadian Department of Finance released a proposed set of rules (“EIFEL Rules”) intended to address concerns that Canadian taxpayers that are part of a multinational group are deducting excessive interest and other financing costs. The EIFEL Rules restrict the deductibility of net interest and other financing expenses (IFE). Although technical amendments are expected, it is anticipated that the EIFEL Rules will begin to apply for tax years that begin in 2023, as broadly described below. Multinational groups with Canadian members are encouraged to consider the impact of the EIFEL Rules, and potential mitigation and optimization strategies, now.

In more detail

The EIFEL Rules are complicated. Very generally speaking, the EIFEL Rules would apply as follows:

  • IFE will include interest and certain other financing expenses paid or payable in respect of a year (plus certain other financing expenses), net of certain interest and financing revenues (including income from guarantee and similar fees, and certain lease revenues).
  • A taxpayer’s deductions in respect of IFE will be limited to a fixed percentage of the taxpayer’s “adjusted taxable income”, which will be the taxpayer’s tax-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the year. Notably, adjusted taxable income includes dividends received from Canadian corporations and foreign affiliates.
  • The fixed percentage will be 40% for years beginning after 31 December 2022 and 30% for years beginning after 1 January 2023. Where certain conditions are met, the group ratio rules may allow a taxpayer to deduct IFE in excess of these ratios, provided that the taxpayer is a member of an accounting consolidated group and can demonstrate based on audited consolidated financial statements that the ratio of net third-party interest expense to book EBITDA exceeds the fixed ratio.
  • A taxpayer may carry forward excess capacity (i.e., where IFE is less than the amount allowed under the fixed ratios) from one year to a later year. A taxpayer may transfer excess capacity to other group members.

Although the EIFEL Rules conceptually overlap with the existing thin capitalization rules, the draft legislation confirms that the thin capitalization rules will remain in place and apply in priority to the EIFEL Rules.

The EIFEL rules will apply to Canadian corporations and trusts, other than “excluded entities”. Excluded entities are: certain Canadian-controlled private corporations; members of certain groups with total IFE that is less than CAD 250,000; and members of certain groups consisting solely of Canadian-resident corporations and trusts. 


Alex is a partner in Baker McKenzie’s Tax Practice Group in Toronto with over 20 years of experience. He is both a lawyer and a Chartered Professional Accountant.


Bryan Horrigan is a partner in Baker McKenzie's Tax Practice Group in Toronto. Prior to joining the Firm in 2018, Bryan was a lawyer with a boutique tax law firm in Toronto, providing advice on indirect tax and trade matters in both planning and dispute resolution contexts. He started his career as an articling student and associate at a national law firm.


Andrew Morreale is a partner in Baker McKenzie's Tax Practice Group in Toronto. Prior to joining the Firm, Andrew clerked for the judges of the Tax Court of Canada, was a corporate tax instructor at the University of Windsor, Faculty of Law and practiced in the international tax services group at a major accounting firm.

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