International Tax Planning: EIFEL Beyond Canada—The Impact of the New Rules in the Foreign Affiliate Context

The introduction of the excessive interest and financing expenses limitation (EIFEL) rules marks a significant change in the interest deductibility landscape for Canadian taxpayers and their foreign affiliates. Interest and financing expenses of controlled foreign affiliates (CFAs) that are relevant in computing a CFA's foreign accrual property income or foreign accrual property loss can be rendered non-deductible by the EIFEL rules, and can also affect the amounts deductible by the Canadian taxpayer under these rules. This article reviews the specific implications of the new rules in the foreign affiliate context, as well as the impact of the rules on Canadian borrowings to invest in foreign affiliates. The authors use examples to demonstrate the complexity of the EIFEL calculations, which involve a combination of mandatory and elective rules, and which make the determination of the impact of CFAs on a taxpayer's EIFEL calculations a multi-step process. The authors also outline some of the key practical challenges in complying with the new rules. The complexity of the examples demonstrates the importance of carrying out detailed modelling calculations in order to achieve optimal results for Canadian taxpayers and their foreign affiliates.