Excessive interest and financing expenses limitation (EIFEL)
The excessive interest and financing expenses limitation (EIFEL) rules, in section 18.2 of the Income Tax Act, limit how much of an affected corporation’s or trust’s interest and financing expenses it can deduct. The cap is a fixed ratio of adjusted taxable income or, if a group ratio election is filed, an allocated group ratio amount.
Leveraged buyers meet EIFEL when acquisition debt carries interest the buyer wants to deduct. The CRA says the rules limit the deductibility of interest and financing expenses by affected corporations and trusts, and that the cap on net interest and financing expenses is a fixed ratio of adjusted taxable income, as defined in subsection 18.2(1). See deducting interest on a loan to buy a business.
Who is not affected
The CRA says the rules do not affect an excluded entity, a term defined in subsection 18.2(1). One paragraph covers a corporation that is a CCPC throughout the year and whose amount for C in paragraph 125(5.1)(a) is below a stated limit, which ties to the taxable capital reduction. Another covers a taxpayer resident in Canada whose interest and financing expenses, net of revenues and combined with those of its eligible group entities resident in Canada, do not exceed a stated amount. A third covers certain taxpayers whose businesses, and those of their group, are carried on all or substantially all in Canada. The CRA’s page also covers Form T2SCH130 filing.
What to ask
- Whether the buyer and its group are excluded entities, and under which paragraph
- How much interest the structure would carry, including related-party debt
- Whether the lender’s terms assume the interest is deductible
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentExcessive interest and financing expenses limitation rules
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