Canada Introduces "Excessive Interest And Financing Expenses Limitation"

Multinational corporations, cross-border investments and many other Canadian public and private enterprises, will likely soon face a new and complex interest expense deduction limitation in Canada.

On February 4, 2022, the Canadian federal government released draft legislation to implement a variety of proposed tax measures including the new "Excessive Interest and Financing Expenses Limitation" (EIFE Limit) first announced in the April 2021 Federal Budget. The thrust of proposed EIFE Limit, which is contained primarily in proposed sections 18.2 and 18.21 of the Income Tax Act (Canada), is to limit a taxpayer's Canadian interest and financing expense deductions to an amount commensurate with the taxable income generated by its Canadian economic activity, based on tax-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). The EIFE Limit is aligned with the recommendations of the OECD relating to base erosion and profit shifting.