Explanatory notes of the Legislative Proposals relating to Income Tax Act and Other Legislation

These explanatory notes describe proposed amendments to the Income Tax Act and other legislation. These explanatory notes describe these proposed amendments, clause by clause, for the assistance of Members of Parliament, taxpayers and their professional advisors.

The Honourable Chrystia Freeland, P.C., M.P.
Deputy Prime Minister and Minister of Finance

These notes are intended for information purposes only and should not be construed as an official interpretation of the provisions they describe.

Income Tax Act and Other Acts and Regulations

Electronic Filing and Certification of Tax and Information Returns

Certificate of employer

Income Tax Act (ITA)
8(10)

Subsection 8(10) provides that a deduction will not be allowed to an employee under certain provisions unless the employee files with the return of income a prescribed form signed by the employer to the effect that the employee met the requirements of the relevant provisions.

Subsection 8(10) is amended to remove the requirement that the form be signed by the employer, to allow employers to use electronic signatures to confirm that the employee met the requirements of the relevant provisions.

This amendment comes into force on royal assent.

Clause 2

Definition of tax preparer

Subsection 150.1(2.2) defines a “tax preparer” for the purposes of the electronic filing requirement and the associated penalty for non-compliance under subsection 162(7.3). A person or partnership is a tax preparer for a calendar year if, in the year, they accept consideration to prepare more than 10 returns of income of corporations or more than 10 returns of income for individuals (other than trusts). An employee who prepares returns of income in the course of performing their employment duties is not a tax preparer.

Section 150.1(2.2) is amended to remove the exception for returns of income of trusts and estates, and to lower the exemption threshold to five returns. A person or partnership is a tax preparer for a calendar year if, in the year, they accept consideration to prepare more than five returns of income of corporations, more than five returns of income for individuals (other than trusts), or more than five returns of income of estates or trusts.

This amendment comes into force on January 1, 2022.

Electronic filing – tax preparer

Subsection 150.1(2.3) sets out a requirement for tax preparers that they electronically file any return of income that they prepare for consideration. This requirement is subject to the exception that a tax preparer may file in a calendar year by other means up to ten corporate returns and ten individual returns. The requirement is also subject to the exceptions set out in subsection (2.4).

Subsection 150.1(2.3) is amended to provide that a tax preparer may file in a calendar year by other means up to five corporate returns, five individual returns and five trust or estate returns.

This amendment comes into force on January 1, 2022.

Declaration

Section 150.1 provides for the use of electronic means for filing tax returns. Subsection 150.1(4) requires a person on whose behalf a return is filed electronically to complete an information return in prescribed form and containing prescribed information, to keep a copy, and to give the signed original to the person filing the return.

To facilitate the use of electronic signatures, subsection 150.1(4) is amended to remove the requirement for the information return to be signed by the person on whose behalf a return is filed.

This amendment comes into force on royal assent.

Electronic notice of assessment

Section 150.1 provides for the use of electronic means for filing tax returns.
New subsection 150.1(4.1) allows the Minister of National Revenue to provide a notice of assessment electronically to an individual for a return of income that the individual files electronically, and to a tax preparer that files a return of income electronically on behalf of an individual.

Under new subsection (4.1), the notice of assessment is presumed to have been sent to the individual and received by the individual on the day that it is made available to the individual or tax preparer, as appropriate, using electronic means.

This amendment comes into force on January 1, 2023.

Clause 3

Withholding

Subsection 153(1) requires the withholding of tax from any of the payments described in paragraphs 153(1)(a) to (u). The person making the payment is required to remit any tax so withheld to the Receiver General.

Subsection 153(1) is amended to modernize the language and to clarify that an electronic payment at or through a designated financial institution is permissible.

See also the commentary on new section 160.5 below, which requires all payments or remittances to the Receiver General greater than $10,000 to be made through electronic services offered by a designated financial institution, or by any electronic means specified by the Minister of National Revenue.

This amendment applies in respect of remittances made after 2021.

Exception – remittance to designated financial institution

Subsection 153(1.4) provides that the remittance of a prescribed person for purposes of subsection (1) is treated as having been made to the account of the Receiver General at a designated institution if it is remitted at least one day before the day upon which the amount is due.

Subsection (1.4) is amended consequential on the amendment to subsection 153(1) to align and modernize the language of the provision.

See also the commentary on new section 160.5 below, which requires all payments or remittances to the Receiver General greater than $10,000 to be made through electronic services offered by a designated financial institution, or by any electronic means specified by the Minister of National Revenue.

This amendment applies in respect of remittances made after 2021.

Clause 4

Electronic payments

New section 160.5imposes arequirement to make all payments or remittances to the Receiver General through electronic means, where the amount of the payment or remittance exceeds a certain monetary threshold.

This measure applies in respect of payments and remittances made after 2021.

Definitions

New subsection 160.5(1) provides definitions that are relevant to the electronic payments requirement under new subsection 160.5(2).

“designated financial institution”

New definition “designated financial institution” has the meaning assigned by subsection 153(6). For the purposes of new section 160.5, a designated financial institution means a bank (other than an authorized foreign bank subject to the restrictions in subsection 524(2) of the Bank Act —i.e. one which operates as a so-called lending branch), a trust company and a deposit-taking mortgage lender. The definition effectively includes only those authorized foreign banks that operate a so-called full-service branch in Canada.

“electronic payment”

New definition “electronic payment” means any payment or remittance to the Receiver General that is made through electronic services offered by a designated financial institution or by any electronic means specified by the Minister.

This measure applies in respect of payments and remittances made after 2021.

Requirement – electronic payments

ITA
160.5(2)

New subsection 160.5(2)imposes arequirement to make payments and remittances to the Receiver General through electronic means where the amount of the remittance or payment exceeds $10,000, unless the payor or remitter cannot reasonably remit or pay the amount in that manner.

See also the commentary on new subsection 162(7.4) below, which imposes a penalty of $100 for each failure to make a required payment or remittance electronically.

This measure applies in respect of payments and remittances made after 2021.

Clause 5

Failure to file in appropriate manner – prescribed information returns

Subsection 162(7.02) provides a penalty for a failure to file in the manner required by the Income Tax Regulations (the “Regulations”), an information return of a type prescribed for the purposes of this subsection. The penalty is based on the number of prescribed information returns of a particular type that are not filed in the appropriate manner.

Consequential on the amendment to subsection 205.1(1) of the Income Tax Regulations, which will require a taxpayer to file prescribed information returns electronically if more than five information returns of that type are required to be filed in a calendar year, subsection (7.02) is amended to provide a penalty for failing to file electronically equal to:

• $125 - where the taxpayer is required to file more than five and fewer than 51 returns;
• $250 - where the taxpayer is required to file more than 50 but fewer than 251 returns;
• $500 - where the taxpayer is required to file more than 250 but fewer than 501 returns;
• $1,500 - where the taxpayer is required to file more than 500 but fewer than 2,501 returns; and
• $2,500 - where the taxpayer is required to file more than 2,500 returns.

This amendment applies in respect of information returns filed after 2021.

Penalty – electronic payments

New subsection 162(7.4) provides a penalty of $100 for each failure to make an electronic payment or remittance as required under subsection 160.5(2).

This measure applies in respect of payments and remittances made after 2021.

Rules – partnership liable to a penalty

Subsection 162(8.1) allows various penalties imposed under section 162 to be assessed against a partnership and applies the provisions of the Income Tax Act (the “Act”) relating to assessments, objections and appeals with respect to those penalties as if the partnership were a corporation.

Subsection (8.1) is amended to apply in respect of the penalty under new subsection 162(7.4) for the failure to make a required payment or remittance electronically.

This amendment applies in respect of payments and remittances made after 2021.

Clause 6

Date when electronic notice sent

Subsection 244(14.1) allows for the electronic communication of certain notices.

For security reasons, a notice is conveyed electronically through secure portals such as My Account and My Business Account. Subsection 244(14.1) provides generally that for the purposes of the Act a notice or other communication will be presumed to be sent by the Minister of National Revenue and received by a person or partnership on the date that an electronic message, informing the person or partnership that a notice or other communication is available in their secure electronic account, is sent to the person or partnership's electronic address.

The notice or other communication is presumed to be sent and received on the date the electronic message is sent if the message is sent to the electronic address most recently provided by the person or partnership to the Minister of National Revenue before that date.

Consequential on the introduction of new subsection (14.2), subsection (14.1) is amended to limit its application to notices or other communications sent electronically by the Minister of National Revenue to individuals through the My Account for Individuals service.Subsection (14.1) is also amended to recognize that an individual’s electronic address maintained by the Minister of National Revenue may be updated on the same day as, but prior to the sending of the Minister’s electronic message to inform the individual of a notice or other communication made available in the individual’s secure electronic account (My Account for Individuals). For example, once an individual’s electronic address is updated through the electronic filing process, it is appropriate for the Minister to send subsequent electronic messages to the individual’s updated electronic address, including on the day that the address is updated with the Minister.

See also new subsection 150.1(4.1) which, notwithstanding subsection 244(14.1), allows the Minister of National Revenue to send by electronic means a notice of assessment in respect of an individual’s return of income in certain circumstances.
This amendment comes into force on royal assent.

Date when electronic notice sent – My Business Account

New subsection 244(14.2) changes the default method of correspondence for taxpayers that use the CRA's My Business Account service.

Subsection (14.2) provides that a notice or other communication that refers to the business number of a person of partnership is presumed to be sent and received by the person or partnership on the date that it is posted in the secure electronic account (My Business Account) in respect of the business number. With 30 days notice, a person or partnership may request in the prescribed manner that notices or other communications making reference to the business number be sent by mail.

This measure comes into force on royal assent.

Clause 7

Failure to file disclosure statement

Tax Rebate Discounting Act
4(2)

Subsection 4(2) of the Tax Rebate Discounting Act makes it an offence for a discounter to file a return on behalf of a client without including a true copy of a statement in prescribed form describing the discounting transaction, as provided to the client and signed by the client. It is also an offence for a discounter to file a return on behalf of a client without providing the signed true copy of the prescribed statement to such persons as the Minister of National Revenue may specify.

To facilitate the use of electronic signatures, paragraphs 4(2)(a) and (b) are amended to remove the requirement for the statement to be signed by the client.

This amendment comes into force on royal assent.

Clause 8

Electronic filing

Income Tax Regulations (ITR)
205.1(1)

Subsection 205.1(1) of the Regulations provides that where an information return is prescribed and where over 50 of one type of a prescribed information return are filed by a taxpayer in a calendar year, the returns must be filed electronically through the internet.

Subsection 205.1 is amended to provide that where over five of one type of a prescribed information return are filed by a taxpayer in a calendar year, the returns must be filed electronically. The reference to filing electronically is intended to modernize the language while remaining consistent with the existing subsection.

This amendment applies in respect of information returns filed after 2021.

Electronic filing

Subsection 205.1(2) of the Regulations defines a “prescribed corporation” for purpose of the electronic filing obligation under subsection 150.1(2.1) of the Act. For this purpose, a prescribed corporation is a corporation with gross revenue in excess of $1 million, with the exception of an insurance corporation, a non-resident corporation, a corporation reporting in functional currency, or a corporation exempt from tax under section 149 of the Act.

Subsection (2) is amended to remove the exception for corporations with gross revenue of $1 million or less. As a result, any corporation is required to file its return of income electronically under subsection 150.1(2.1) of the Act, with the exception of an insurance corporation, a non-resident corporation, a corporation reporting in functional currency, or a corporation exempt from tax under section 149 of the Act.

This amendment applies in respect of taxation years beginning after 2021.

Clause 9

Distribution of taxpayer’s portions of returns (information slips)

Subsection 209(5) permits the issuer of a T4 slip or Tuition and Enrolment Certificates to provide the information slip to a taxpayer electronically, without having received the taxpayer's express consent to receive the information slip in this format.

An issuer can provide an information slip electronically only if

• the issuer meets the criteria specified by the Minister of National Revenue pursuant to section 221.01 of the Act;
• the taxpayer has not requested that they be provided with a paper copy of the information slip; and
• at the time the information slip is required to be issued
  • the taxpayer can reasonably be expected to have access to the electronic information, and
  • in the case of a T4 slip, the taxpayer is a current employee, and is not on extended leave.

  Subsection 209(5) is amended to also permit issuers to electronically distribute the Statement of Pension, Retirement, Annuity, and Other Income (T4A) information return and the Statement of Investment Income (T5) information return.

  This amendment applies in respect of information returns sent after 2021.

  Immediate Expensing

  Clause 10

  Recapture – Class 10.1 Passenger Vehicle

  Subsection 13(2) provides that depreciation recapture in respect of a passenger vehicle is not required to be included in income under subsection 13(1) if the vehicle has a cost in excess of $20,000 or such other amount as may be prescribed. The excess amount is deemed to have been included in the taxpayer’s income to prevent recapture at a subsequent time of that excess.

  Subsection 13(2) is amended, consequential on the introduction of the immediate expensing measure announced in Budget 2021 permitting the immediate depreciation of the cost of a passenger vehicle (among other properties). Subsection 13(2) excludes a passenger vehicle that was, at any time, “designated immediate expensing property” as defined in subsection 1104(3.1) of the Regulations from the exception this provision provides in respect of subsection 13(1). Consequently, unlike a passenger vehicle that has never been “designated immediate expensing property”, depreciation recapture in respect of a passenger vehicle that was, at any time, “designated immediateexpensing property” will be required to be included in the taxpayer’s income for the year. This is consistent with the current recapture rules applicable to zero-emission vehicles, which are also eligible for immediate depreciation.

  This amendment applies to taxation years ending on or after April 19, 2021.

  Paragraph 13(7)(i) provides rules relating to the capital cost and proceeds of disposition of a taxpayer’s depreciable property that is a “zero-emission passenger vehicle”, the cost of which exceeds the prescribed amount.

  Consequential on the introduction of the immediate expensing measure announced in Budget 2021 permitting the immediate depreciation of the cost of a passenger vehicle (among other properties), paragraph 13(7)(i) is amended so that it also applies these rules (relating to the deemed capital cost and proceeds of disposition) to a passenger vehicle

  • with a cost in excess of $20,000 or the prescribed amount; and
  • that was, at any time, “designated immediate expensing property” as defined in subsection 1104(3.1) of the Regulations.

  This ensures consistent capital cost and proceeds of disposition rules apply to both “zero-emission passenger vehicles” and “passenger vehicles” that were, at any time, “designated immediate expensing property” where the cost of such property exceeds the prescribed amount.

  This amendment applies to taxation years ending on or after April 19, 2021.

  Clause 11

  Capital cost allowance

  Capital cost allowance (CCA) is a deduction for income tax purposes that recognizes the depreciation of capital property. The CCA rate for an asset determines the portion of the cost of the asset that can be deducted each year (generally on a declining-balance basis). CCA rates are generally intended to reflect the useful life of capital property. The deduction for CCA is based on the principle that depreciable capital assets are not consumed in the period in which they are acquired, but instead contribute to earnings and depreciate in value over several years. Therefore, the cost of depreciable assets should be allocated over the entire period that the asset contributes to earnings—that is, the asset’s useful life.

  The government reviews the appropriateness of CCA rates on an ongoing basis to ensure that they reflect the useful life of assets. This helps to ensure that the tax system accurately allocates the cost of depreciable property over the period the property is used to earn income. Accelerated CCA is provided as an explicit exception to the general practice of setting CCA rates based on the useful life of assets. Accelerated CCA provides a financial benefit by deferring taxation.

  Section 1100 provides rules relating to the deduction of CCA. Section 1100 is amended to introduce a new temporary accelerated CCA incentive announced in Budget 2021, the immediate expensing incentive. The objective of the immediate expensing incentive is to provide a temporary accelerated deduction to encourage investments by small and medium-sized Canadian businesses and thereby accelerate the economic recovery while supporting productivity growth in the longer term.

  The immediate expensing incentive is available for “designated immediate expensing property” acquired by an “eligible person or partnership” on or after one of two dates in 2021 (depending on the nature of the eligible person or partnership) and that becomes available for use before January 1, 2024 (or January 1, 2025 in the case of individuals and Canadian partnerships all the members of which are individuals), up to a maximum amount of $1.5 million per taxation year. If the eligible person or partnership is a Canadian-controlled private corporation, property can qualify as designated immediate expensing property if, among other conditions, it is acquired after April 18, 2021. If the eligible person or partnership is an individual or a Canadian partnership, the property must be acquired after December 31, 2021 to qualify (see commentary on the definition of “immediate expensing property” in subsection 1104(3.1)).

  The immediate expensing incentive is available only for the year in which the property becomes available for use. The $1.5 million limit is shared among associated members of a group of eligible persons or partnerships. The limit is prorated for taxation years that are shorter than 365 days. The half-year rule is suspended for property for which the measure is applied. For those eligible persons or partnerships with less than $1.5 million of eligible capital costs, no carry-forward of excess capacity is allowed.

  Immediate expensing

  New subsection 1100(0.1) is introduced to provide an additional first-year CCA deduction on “designated immediate expensing property” (DIEP) of an “eligible person or partnership” (EPOP). The subsection numbering reflects the ordering of the application of this measure, which applies before regular CCA, as explained below. New subsection 1100(0.1), together with definitions provided in new subsection 1104(3.1), are the main provisions that implement the temporary enhanced CCA rules announced as part of Budget 2021, the immediate expensing incentive.

  The immediate expensing incentive is available for DIEP acquired by an EPOP on or after one of two dates in 2021 (depending on the nature of the EPOP) and that becomes available for use before January 1, 2024 (or January 1, 2025 in the case of individuals and Canadian partnerships all the members of which are individuals). If the EPOP is a Canadian-controlled private corporation, property can qualify as DIEP if, among other conditions, it is acquired after April 18, 2021. If the EPOP is an individual or a Canadian partnership, the property must be acquired after December 31, 2021 to qualify (see commentary on the definition of “immediate expensing property” in subsection 1104(3.1)).

  DIEP generally consists of depreciable property other than property included in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51 (additional conditions and restrictions apply, for example regarding non-arm’s length transfers and used property).

  The immediate expensing incentive is only available for the year in which the property becomes available for use (see commentary on the definition of “designated immediate expensing property” in subsection 1104(3.1)) and is limited to the lesser of:

  • the undepreciated capital cost (UCC) of the DIEP to the EPOP (before making any CCA deductions for the year);
  • the EPOP’s “immediate expensing limit” (IEL) for the year (generally $1.5 million, subject to requirements to allocate among group members); and
  • if the EPOP is not a CCPC, the income (computed before making any CCA deductions for the year), if any, earned from the business or property (the source) in which the relevant DIEP is used.

  In other words, the immediate expensing incentive allows an EPOP to deduct, in computing income for a taxation year, up to 100% of the UCC of DIEP for the year, not exceeding the lesser of their IEL for the year and, where the EPOP is not a CCPC, their income for the year from the source in which the property is used (calculated before deducting CCA). As a result, the new immediate expensing incentive cannot be used to create or to increase a loss of an individual or a partnership.

  New subsections 1104(3.1) to (3.6) contain various rules that are relevant in computing an EPOP’s IEL for a particular taxation year.

  EPOPs with a capital cost of “immediate expensing property” in a taxation year that exceeds $1.5 million and immediate expensing property ordinarily included in more than one CCA class can decide to which CCA class the immediate expensing incentive is attributed. Any remaining UCC may be subject to additional capital cost allowance deductions under the existing CCA rules. The availability of other enhanced deductions under existing rules – such as the full expensing for manufacturing and processing machinery and equipment and for clean energy equipment, introduced in the 2018 Fall Economic Statement – does not reduce the maximum amount available under this new measure. In other words, an EPOP (or group) may generally expense up to $1.5 million in addition to all other CCA claims under existing provisions of the Act and Regulations, provided the total CCA deduction does not exceed the capital cost of the property.

  The immediate expensing incentive under this new rule does not change the total amount that can be deducted over the life of a property. Since any deduction taken under the new immediate expensing incentive with respect to property of a prescribed class reduces the UCC of the class for all other purposes, the larger deduction taken in the first year in respect of a property would eventually be offset by smaller deductions, if any, in respect of the property in future years. This also ensures that the total CCA deductions taken in relation to property of a class do not exceed their capital cost and that recapture applies appropriately to the extent that property is sold.

  Example of immediate expensing incentive

  An EPOP (CCPC) invests $3,000,000 in equal amounts to acquire three properties, one falling under CCA Class 7 (15%), one under CCA Class 10 (30%) and the other under CCA Class 50 (55%). All properties become available for use in the year in which they are acquired. The CCPC is not associated with any other EPOP such that its immediate expensing limit is $1.5M for the year (it is assumed that the income derived from the source in which the properties are used exceeds $1.5M for the year and that the CCPC holds no other Class 7, 10 or 50 properties).

  Although the CCPC could designate any of the three properties as DIEP, it is expected that it would generally designate, for purposes of the immediate expensing incentive, property that falls under CCA classes that would otherwise offer the lowest CCA deduction.

  Under this scenario, the CCPC would be allowed a total first-year deduction of up to $2,550,000 versus $1, 500,000 under the existing rules, as illustrated in the table below. This would represent an additional deduction of $1,050,000 in the year due to the immediate expensing incentive.

  CCA Class (rate)	Cost of Acquisitions	Immediate Expensing	1st year Allowance on Remainder of Class *	Total 1st Year Allowance	Current 1st Year Allowance *
  Class 7 (15%)	$1,000,000	$1,000,000	$0	$1,000,000	$225,000
  Class 10 (30%)	$1,000,000	$500,000	$225,000	$725,000	$450,000
  Class 50 (55%)	$1,000,000	$0	$825,000	$825,000	$825,000
  Total	$3,000,000	$1,500,000	$1,050,000	$2,550,000	$1,500,000
  .

  Assuming eligible for the triple first-year allowance under the Accelerated Investment Incentive.

  As illustrated in the table above, the amount of the deduction made pursuant to the immediate expensing incentive immediately affects the UCC of property of the Class in relation to which the deduction is made for all other purposes. In this example:

  • the UCC of Class 7 property is reduced by $1,000,000 (to nil) such that no additional CCA deduction is available on the Class and any future sale of Class 7 property by the CCPC is likely to give rise to recapture;
  • the UCC of Class 10 property is reduced by $500,000 (to $500,000). The reduced UCC (of $500,000) then becomes the basis on which all other CCA claims are calculated; and
  • the UCC of Class 50 property is unaffected (it was not designated as DIEP by the CCPC, but even if it had erroneously been designated by the CCPC, no deduction has been made under the present subsection in relation to Class 50 property such that its UCC would remain unaffected).

  Note that the Act and the Regulations include a series of rules designed to protect the integrity of the CCA regime and the tax system more broadly. These include rules related to limited partners, specified leasing properties, leasing properties, specified energy properties and rental properties. In certain circumstances, these rules can restrict a CCA deduction, or a loss in respect of such a deduction, that would otherwise be available. These integrity rules will also apply to immediate expensing claims.

  Undepreciated capital cost - immediate expensing

  New subsection 1100(0.2) is introduced, for greater certainty, to clarify that the amount of any deduction made by an “eligible person or partnership” under subsection (0.1) in respect of a “designated immediate expensing property” of a prescribed class shall be deducted from the “undepreciated capital cost”of the particular class to which the property belongs for purposes of the Act and Regulations.

  Expenditures excluded from paragraph (0.1)(b)

  New subsection 1100(0.3) excludes certain property from access to the immediate expensing incentive unless the conditions in new paragraphs 1100(0.3)(a) to (c) are satisfied. If those conditions are not met, then new subsection 1100(0.3) reclassifies expenditures incurred before April 19, 2021 (if the eligible person or partnership is a Canadian-controlled private corporation) or before 2022 (if the eligible person or partnership is an individual or Canadian partnership) that would otherwise be treated as being in respect of “immediate expensing property” solely as a result of the application of subparagraph (c)(i) of the definition. In general terms, that subparagraph allows certain unused property acquired from a non-arm’s length person to qualify as “immediate expensing property”.

  New subsection 1100(0.3) ensures that any such transfers cannot give rise to an inappropriate amount of enhanced CCA and aligns the CCA treatment of expenditures made before the effective date of the immediate expensing incentive amendments to the rules that existed when the expenditures were incurred. It does so by removing expenditures incurred by Canadian-controlled private corporations before April 19, 2021 or by other (non-Canadian-controlled private corporations) eligible persons or partnerships before 2022, as the case may be, from the UCC of the property to the “eligible person or partnership” under paragraph 1100(0.1)(b) (thus excluding such expenditures from the immediate expensing incentive).

  The exception to this reclassification rule, for certain inventory purchases from arm’s length persons or partnerships, applies where the conditions in new paragraphs 1100(0.3)(a) to (c) are met.

  Specified leasing property - limitation

  Subsection 1100(1.1) is part of a set of rules that apply to limit the amount of CCA that may be claimed by a taxpayer for a taxation year with respect to certain “specified leasing property”.

  Subsection 1100(1.1) is amended by adding a reference to new subsection (0.1) to ensure that the “specified leasing property” rules apply with respect to the new temporary accelerated CCA incentive announced in Budget 2021, the immediate expensing incentive.

  Specified leasing property – new property

  Subsection 1100(1.12) is part of a set of rules that apply to limit the amount of CCA that may be claimed by a taxpayer for a taxation year with respect to certain “specified leasing property”.

  Subsection 1100(1.12) is amended by adding references to new subsection (0.1) to ensure that the “specified leasing property” rules apply with respect to the new temporary accelerated CCA incentive announced in Budget 2021, the immediate expensing incentive.

  Rental properties

  Subsection 1100(11) limits the amount of CCA that a taxpayer may deduct because of subsection 1100(1) . This limit is intended to prevent taxpayers from sheltering other sources of income with losses created by CCA related to a “rental property”.

  Subsection 1100(11) is amended by adding references to new subsection (0.1) to ensure that the “rental property” rules apply with respect to the new temporary accelerated CCA incentive announced in Budget 2021, the immediate expensing incentive.

  Leasing properties

  Subsection 1100 (15) limits the amount of CCA that a taxpayer may deduct because of subsection 1100(1) . This limit is intended to prevent taxpayers from sheltering other sources of income with losses created by CCA related to “leasing property”.

  Subsection 1100(15) is amended by adding references to new subsection (0.1) to ensure that the leasing property rules apply with respect to the new temporary accelerated CCA incentive announced in Budget 2021, the immediate expensing incentive.

  Computer tax shelter property

  Subsection 1100(20.1) precludes the deduction of capital cost allowance in respect of computer software tax shelter property to the extent the deductions otherwise would result in a loss.

  Subsection 1100(20.1) is amended by adding a reference to new subsection (0.1) to ensure that the rule applies with respect to the new temporary accelerated CCA incentive announced in Budget 2021, the immediate expensing incentive.

  Film or videotape – deemed cost reduction

  Subsection 1100(21.1) requires that the depreciable cost of a taxpayer's interest in certain motion picture film or video tape, or motion picture film or video tape that is a television commercial message, be reduced by the portion of any debt obligation of the taxpayer outstanding at the end of a particular year that is convertible into an interest in the film or tape of the taxpayer.

  Subsection 1100(21.1) is amended by adding references to new subsection (0.1) to ensure that the rule applies with respect to the new temporary accelerated CCA incentive announced in Budget 2021, the immediate expensing incentive.

  Specified energy property

  Subsection 1100 (24) limits the amount of CCA that a taxpayer may deduct because of subsection 1100(1) . This limit is intended to prevent taxpayers from sheltering other sources of income with losses created by CCA related to “specified energy property”.

  Subsection 1100(24) is amended by adding references to new subsection (0.1) to ensure that the specified energy property rules apply with respect to the new temporary accelerated CCA incentive announced in the Budget 2021, the immediate expensing incentive.

  Clause 12

  Anti-avoidance

  Subsection 1102(20.1) deems a taxpayer not to be dealing at arm's length with another person or partnership in certain circumstances and is intended to prevent taxpayers from contriving arm’s length relationships in order to obtain the more favourable treatment that is available for “accelerated investment incentive property” per subsection 1104(4) in respect of arm’s length transfers.

  Subsection 1102(20.1) is amended by adding references to new subsections 1100(0.3) and 1104(3.1) to ensure that the anti-avoidance rule also applies with respect to the new temporary accelerated CCA incentive announced in Budget 2021, the immediate expensing incentive.

  Clause 13

  Interpretation

  Section 1104 sets out various definitions and interpretation rules that apply for the purpose of determining the capital cost allowance (CCA) for a taxation year in respect of a depreciable property of a taxpayer.

  Section 1104 is amended to introduce a number of rules and definitions that apply for the purposes of the new accelerated CCA incentive announced in Budget 2021, the immediate expensing incentive.

  Definitions

  New subsection 1104(3.1) defines “designated immediate expensing property”, “eligible person or partnership”, “immediate expensing property”, and “taxpayer” for the purposes of Part XI and Schedules II to VI of the Regulations. These definitions and new subsection 1100(0.1) are the main provisions that implement the temporary enhanced CCA rules announced as part of Budget 2021, the immediate expensing incentive.

  “designated immediate expensing property”

  In order to be eligible to the immediate expensing incentive, property must qualify as “designated immediate expensing property” (DIEP). The definition contains three conditions.

  First, a property must qualify as “immediate expensing property” of an “eligible person or partnership” (both also defined in new subsection 1104(3.1) and described below).

  Second, a property can only qualify as DIEP in the year in which it becomes available for use. This requirement is intended to ensure that a particular property cannot be eligible for the immediate expensing incentive in more than one taxation year. (Pursuant to paragraph 249(1)(a) of the Act, references to a “taxation year” include a fiscal period of a Canadian resident partnership).

  Finally, the definition requires the property to be designated in prescribed form by the eligible person or partnership filed by the person‘s filing-due date for the taxation year to which the designation relates or, in the case of a partnership, by the day on or before which any member of the partnership is required to file an information return pursuant to section 229 of the Regulations for the fiscal period to which the designation relates.

  The designation is intended to allow “eligible persons or partnerships” to elect for which “immediate expensing property” they wish to claim a deduction under subsection (0.1) in a particular year or period, and to facilitate reporting and administration of the immediate expensing incentive.

  “eligible person or partnership”

  The immediate expensing incentive is available with respect to certain property of an “eligible person or partnership” (EPOP). The definition is restrictive and only includes three specific types of persons or partnerships:

  • (a) Canadian-controlled private corporations,
  • (b) individuals (other than trusts) resident in Canada, or
  • (c) Canadian partnerships all of the members of which were, throughout the period, Canadian-controlled private corporations, individuals (other than trusts) resident in Canada or a combination thereof.

  Furthermore, in order to qualify as an EPOP and benefit from the immediate expensing incentive, a person or partnership must meet the qualifications and maintain their status throughout the relevant taxation year.

  Multi-tiered partnerships, i.e. partnerships with other partnerships as members, are excluded from the definition.

  “immediate expensing property”

  To qualify as “immediate expensing property” (IEP) (which excludes property included in class 1 to 6, 14.1, 17, 47, 49 and 51, which are generally long-lived asset classes), a property must be acquired by an “eligible person or partnership” after one of two dates (depending on the nature of the EPOP). If the EPOP is a Canadian-controlled private corporation, the property must be acquired after April 18, 2021. If the EPOP is an individual or a Canadian partnership, the property must be acquired after December 31, 2021, The property must also become available for use before 2024 (if the EPOP is a Canadian-controlled private corporation or a partnership with members who are not individuals) or 2025 (if the EPOP is an individual or a partnership all the members of which are individuals throughout the tax year) and satisfy one of the two conditions set out in paragraph (c) of the definition.

  Subparagraph (c)(i), in general terms, describes new property and allows property to be IEP if it has never been used and no person or partnership has ever claimed CCA (or a terminal loss) in respect of the property. This rule makes no distinction between the arm’s length or non-arm’s length status of the vendor of the property. However, if the property is IEP solely because of this subparagraph (i.e., it does not also qualify under subparagraph (c)(ii)), certain amounts in respect of the property could be disqualified from the enhanced CCA rules as a result of the application of new subsection 1100(0.3).

  Subparagraph (c)(ii), in general terms, describes certain used property and allows property to be IEP if the property was not subject to a “rollover” and it was not previously owned or acquired by the “eligible person or partnership” or a non-arm’s length person or partnership.

  In general terms, the exclusion for property acquired on a rollover applies to property acquired in circumstances where the “eligible person or partnership” was deemed to have claimed CCA when computing income for previous taxation years (e.g., where the property is acquired in a transaction to which section 85 of the Act applies). It also includes property acquired in circumstances where the undepreciated capital cost of depreciable property of the “eligible person or partnership” was reduced by an amount determined by reference to the amount by which the capital cost of the property to the “eligible person or partnership” exceeds its cost amount (e.g., where the property is acquired in a transaction to which section 87 applies).

  In respect of the arm’s length condition, the “or acquired” criterion is intended to be relevant in circumstances where there is an acquisition of property in circumstances where the property is not yet owned, such as in paragraph 16.1(1)(b) of the Act.

  New subsection 1104(3.1) defines “taxpayer” for purposes of Part XI and Schedules II to VI of the Regulations as including, unless the context requires otherwise, eligible persons or partnerships. This clarification is included, for greater certainty, to ensure that both existing and new rules contained in Part XI and Schedules II to VI apply appropriately to an eligible person or partnership that is a partnership.

  Immediate expensing limit

  An eligible person or partnership’s (EPOP) “immediate expensing limit” (IEL) for a taxation year or fiscal period is, under subsection 1100(0.1), one of the limits of the deduction available under the new temporary enhanced CCA rules announced as part of Budget 2021 (the immediate expensing incentive).

  New subsection 1104(3.2) defines an EPOP’s IEL for a taxation year or fiscal period to be $1,500,000 unless the EPOP is associated with another EPOP under the Act. Where this is the case, the EPOP’s IEL is nil except as otherwise provided in this section. Subsections (3.3) to (3.6) provide rules to address the allocation of the $1.5 million limit among associated EPOPs. In general terms, these new provisions operate similarly to the rules in section 125 of the Act that provide for the allocation of the business limit for the purposes of the small business deduction.

  Associated corporations

  New subsection 1104(3.3) requires that associated “eligible persons or partnerships” (EPOPs) file with the Minister of National Revenue an election, in prescribed form, in which the group apportions to one or more of its members the maximum “immediate expensing limit” for the year ($1,500,000). Under this new provision, associated EPOPs will determine their immediate expensing limits for a year in a two-stage process. First, the associated EPOPs will assign to one or more members of the associated group a percentage such that the total of the percentages assigned does not exceed 100%. If the total does exceed 100%, then the associated group has an immediate expensing limit of nil. The EPOPs must file an agreement in prescribed form in order for the agreed upon percentage allocation to have effect. Second, each associated EPOP to which a percentage has been assigned will multiply that percentage by $1,500,000.

  Failure to file agreement

  New subsection 1104(3.4) allows the Minister of National Revenue to allocate the “immediate expensing limit” of $1,500,000 among a group of associated “eligible persons or partnerships” if the group fails to file an agreement allocating the immediate expensing limit among its members within 30 days after the Minister requests such information in writing.

  Special rules for immediate expensing limit

  New subsection 1104(3.5) introduces two additional rules regarding the calculation of the “immediate expensing limit” of an “eligible person or partnership” (EPOP) for a taxation year.

  First, paragraph 1104(3.5)(a) determines the “immediate expensing limit” of an EPOP (the “first person”) that has two or more taxation years (under subsection (3.6)) ending in a calendar year in which it is associated with another EPOP that has a taxation year (under subsection (3.6)) ending in that calendar year. This rule provides that, subject to the pro-rating rule for short taxation years in paragraph (b) , the “immediate expensing limit” for the first person for a particular taxation year ending in the calendar year, after the first taxation year ending in that calendar year, is deemed to be the lesser of

  • the amount allocated to that person for its first such taxation year under subsection 1104(3.3) or (3.4), and
  • the amount allocated to the person for that particular taxation year under subsection 1104(3.3) or (3.4).

  This rule ensures that the total of the amounts determined as the “immediate expensing limit” for the year for a group of EPOPs that are associated with each other in any second or subsequent taxation years ending in a calendar year does not exceed $1,500,000 for such years.

  Second, a new rule concerning the calculation of an EPOP’s “immediate expensing limit” for a short taxation year is introduced in paragraph (b). This provision applies to all EPOPs, whether or not associated, and requires a proration of the limit for any taxation year of less than 51 weeks in duration. It provides that an EPOP’s “immediate expensing limit” for such a taxation year is its limit otherwise determined multiplied by the number of days in the taxation year and divided by 365.

  Associated - interpretation

  New subsection 1104(3.6) contains interpretive rules that apply in determining whether two or more eligible persons or partnerships are associated with each other for purposes of the “immediate expensing limit”.

  The rules are generally intended to extend the concept of “association” to individuals and partnerships that qualify as EPOPs for purposes of the new enhanced CCA measure announced in Budget 2021, the immediate expensing incentive. Determining whether two EPOPs are associated is necessary to establish their “immediate expensing limit” for a taxation year and thus, to determine the amount of deduction they are entitled to claim under new subsection 1100(0.1). As described below, the new rules take the approach of deeming individuals and partnerships to be corporations. Note that this deeming applies only for the purposes of the association concept for determining the allocation of the “immediate expensing limit” among a group.

  Paragraph (a) provides that, for the purposes described above, a partnership is deemed to be a corporation (the “deemed corporation”) with a capital stock of a single class of shares and with a total of 100 issued and outstanding shares. Each member of the partnership is deemed to be a shareholder of the deemed corporation and to own a number of shares based on the partner’s proportionate interest in the partnership. More specifically, the number of shares deemed to be owned by each partner at any time is determined by reference to its “specified proportion” (as defined in subsection 248(1) of the Act) in respect of the partnership for the last fiscal period of the partnership ending before that time. Where this is not determinable (e.g., because no fiscal period of the partnership has ended since the partner became a member of the partnership), the number of shares deemed to be held by the partner is determined by reference to the relative fair market value of its interest in the partnership.

  In the case of businesses carried on, or immediate expensing property acquired, directly by an individual, paragraph (b) provides that the individual, in respect of that business or immediate expensing property, is deemed to be a corporation that is itself deemed to be controlled by the individual. Thus, for example, if an individual carries on a business as a sole proprietor and also holds all of the shares of a Canadian-controlled private corporation (CCPC) that carries on a second, distinct business, the CCPC and the individual, with respect to the sole proprietorship, would need to share the $1,500,000 “immediate expensing limit”. Indeed, the individual would be deemed, with regard to the sole proprietorship, to be a corporation (the “deemed corporation”) controlled by the individual. Consequently, the CCPC and the deemed corporation would be deemed to be associated under paragraph 256(1)(b) of the Act since both the CCPC and the deemed corporation would be (or be deemed to be) controlled by the individual. In order to facilitate the administration of the deemed association rules, this deeming rule applies only to the extent that an individual carries on a business or has acquired immediate expensing property at any given time.

  The deeming rules contained in subsection (3.6) do not replace, but rather apply in addition to, all other rules of the Act that are relevant in determining whether two corporations are associated with each other.

  Reporting Requirements for Trusts

  Clause 14

  Subsection 104(1) provides a rule under which a reference to a trust or estate is read in the Act as a reference to the trustee or the executor, administrator, heir or other legal representative having ownership or control over trust property.

  Subsection 104(1) provides that, except for the purposes of certain specified provisions, references in the Act to trusts are considered not to include an arrangement where a trust can reasonably be considered to act as agent for its beneficiaries with respect to all dealings in all of the trust's property. These arrangements are generally known as “bare trusts”. Trusts described in paragraphs (a) to (e.1) of the definition “trust” in subsection 108(1) are expressly not affected by this exclusion.

  Consequential on the introduction of new subsection 150(1.3), subsection 104(1) is amended to provide that the exclusion of bare trusts from references in the Act to trusts does not apply for the purposes of section 150.

  This amendment applies to taxation years that end after December 30, 2022.

  Clause 15

  Section 150 provides rules for the filing of returns of income under the Act.

  Section 150 is amended, as described in more detail below, as part of the introduction of new trust reporting requirements. In general terms, the effect of these amendments will be to require trusts to file returns of income each year, unless the trust is subject to one of the exceptions listed in new subsection 150(1.2). The annual return of income for the trust will include certain prescribed information in respect of any person who

  • is a trustee, beneficiary or settlor of the trust, or
  • has the ability to exert influence over trustee decisions regarding the appointment of income or capital of the trust in the year.

  Subsection 150(1) stipulates the tax return requirements and the filing dates for different categories of taxpayers. Subsection 150(1.1) sets out exceptions to subsection 150(1), when the filing of a tax return is not required.

  Subsection 150(1.1) is amended to make it subject to new subsection 150(1.2). Specifically, amended subsection 150(1.1) in effect now provides that the exceptions from filing a return outlined in that subsection do not apply to an express trust, or for civil law purposes a trust other than a trust that is established by law or by judgement, that is resident in Canada, unless the trust meets one of the exceptions outlined in new paragraphs 150(1.2)(a) to (o).

  The amendment applies to taxation years that end after December 30, 2022.

  Exception – trusts

  New subsection 150(1.2) provides for a limitation to the exceptions in subsection 150(1.1). In particular, by stipulating that subsection (1.1) does not apply, it causes subsection 150(1) to require tax return filing for a trust that is both

  • resident in Canada (including trusts that are deemed resident in Canada under section 94) and
  • an express trust (or for civil law purposes a trust other than a trust that is established by law or by judgement).

  New subsection 150(1.2), however, also includes a number of exceptions to the requirement to file a return, which are listed in paragraphs (a) to (o). In addition, a trust that meets one of the exceptions listed in paragraphs 150(1.2)(a) to (o) will not be required to provide the additional information set out in new section 204.2 of the Regulations. Trusts that are required to file a return, whether because of current filing requirements under subsection 150(1) or because of new subsection 150(1.2), will be required to provide the additional information outlined in new section 204.2 of the Regulations. For more information, please see the commentary on new section 204.2 of the Regulations.

  The exceptions to the reporting requirements established through new subsection 150(1.2) are as follows:

  • trusts that have been in existence for less than three months;
  • trusts that hold assets with a total fair market value that does not exceed $50,000 throughout the year, where the only assets held by the trust throughout the year are one or more of
    • cash,
    • certain government debt obligations,
    • a share, debt obligation or right listed on a designated stock exchange,
    • a share of the capital stock of a mutual fund corporation,
    • a unit of a mutual fund trust,
    • an interest in a related segregated fund (within the meaning assigned by paragraph 138.1(1)(a)), and
    • an interest, as a beneficiary under a trust, that is listed on a designated stock exchange;

    Subsection 150(1.2) applies to taxation years that end after December 30, 2022.

    New subsection 150(1.3) provides that, for the purposes of section 150, trusts include an arrangement where a trust can reasonably be considered to act as agent for its beneficiaries with respect to all dealings in all of the trust's property. These arrangements are generally known as “bare trusts”.

    This amendment, along with the consequential amendment in subsection 104(1) mean that bare trusts will be subject to the reporting requirements in this section and section 204.2 of the Regulations.
    New subsection 150(1.3) applies to taxation years that end after December 30, 2022.

    Subsection 150(1.2) provides an exception to the trust reporting requirements for a lawyer's general trust account, but not for specific client accounts.

    New subsection 150(1.4) provides that, for greater certainty, the trust reporting requirements do not require the disclosure of information that is subject to solicitor-client privilege.

    New subsection 150(1.4) applies to taxation years that end after December 30, 2022.

    Clause 16

    False statement or omission – trust return

    Subsection 150(1.2) provides an exception to the trust reporting requirements for a lawyer's general trust account, but not for specific client accounts.

    New subsection 150(1.4) provides that, for greater certainty, the trust reporting requirements do not require the disclosure of information that is subject to solicitor-client privilege.

    Subsection 150(1.4) applies to taxation years that end after December 30, 2022.
    New subsection 150(1.2) and section 204.2 of the Regulations introduce reporting requirements for certain trusts to file a return of income and to provide additional information. New subsection 163(5) introduces a penalty for a failure to comply with these new reporting requirements, including the additional information requested in section 204.2 of the Regulations.

    New subsection 163(5) imposes a penalty on any person or partnership that is subject to the reporting requirements in section 204.2 and who fails to file a return for a trust or who knowingly or under circumstances amounting to gross negligence either makes—or participates in, assents to or acquiesces in, the making of—a false statement or omission in the return.

    In addition, the penalty will apply if the person or partnership fails to comply with a demand by the Canada Revenue Agency under subsection 150(2) or 231.2(1) to file the return.

    New subsection (6) sets out the amount of the penalty in respect of a trust for the purposes of subsection (5) as the greater of
    

    • $2,500; and
    • 5% of the highest total fair market value of all the property held by the trust in the year.
      

    Subsections 163(5) and (6) apply to taxation years that end after December 30, 2022.

    Clause 17

    New section 204.2 is introduced in order to provide for additional information reporting requirements for certain trusts.

    New subsection 204.2(1) introduces a requirement for all trusts that are required to file a return of income to provide additional information (in the T3 form), except for those trusts specifically listed in paragraphs 150(1)(a) to (o) of the Act. This additional information includes the name, address, date of birth (in the case of an individual other than a trust), jurisdiction of residence and taxpayer identification number (or TIN, as defined in subsection 270(1) of the Act) for each person who, in the year,

    • is a trustee, beneficiary or settlor (as defined in subsection 17(15) of the Act) of the trust; or
    • has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the appointment of income or capital of the trust. This would include, for example, a protector of the trust.
    • the required information is provided in respect of each beneficiary of the trust whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing the return; and
    • for beneficiaries whose identity is not known or ascertainable with reasonable effort by the person making the return, the person making the return provides sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust.

    For example, the beneficiary of a trust may not be known where the trust provides for a class of beneficiaries that includes the settlor's current children and grandchildren and any children or grandchildren that the settlor may have in the future. In these circumstances the reporting requirement will be met if the relevant information in respect of all of the settlor's current children and grandchildren are included as well as the details of the terms of the trust that extend the class of beneficiaries to any of the settlor's future children or grandchildren.

    Section 204.2 applies to taxation years that end after December 30, 2022.

    Clause 18

    Master trust

    Subsection 4802(1.1) of the Regulations sets out the conditions to prescribe a trust as a “master trust” for the purposes of paragraph 149 (1)(o.4) of the Act. Among other things, a master trust holds investments exclusively for beneficiaries that are registered pension plans or deferred profit sharing plans.

    Subsection 4802(1.1) is amended so that the conditions for prescribing a trust as a master trust apply for the purposes of new paragraph 150(1.2)(i) of the Act. For more information, see the commentary on subsection 150(1.2).

    The amendment to subsection 4802(1.1) applies to taxation years that end after December 30, 2022.

    Mutual Fund Trusts – Allocations to Redeemers by Exchange Traded Funds

    Clause 19

    Other distributions

    Subsection 107(2.1) sets out rules that apply on a distribution of property by a trust (other than a personal trust or a prescribed trust) in satisfaction of all or part of a beneficiary’s capital interest in the trust, including on a redemption of a beneficiary’s units. Generally, paragraph 107(2.1)(c) reduces a redeeming beneficiary’s proceeds of disposition for the redeemed units by the amount of any capital gain realized by the trust on the transfer of its property to the redeeming beneficiary. This reduction in the redeeming beneficiary’s proceeds of disposition reduces the amount of capital gain realized by the beneficiary on its redeemed units; however, this may also affect the tax position of the trust. If the trust is a mutual fund trust, the reduction in proceeds will affect the benefit that the trust may otherwise realize from the capital gains refund mechanism in section 132 and will also affect calculations made for the purposes of new subsection 132(5.31). Consequently, paragraph 107(2.1)(c) is amended to ensure that it does not apply in the case of a trust that is a mutual fund trust.

    This amendment applies to taxation years that begin after December 15, 2021.

    Clause 20

    Definitions

    Section 132 of the Act contains special rules relating to the taxation of mutual fund trusts.

    Subsection 132(4) provides definitions for the purposes of section 132. The new definition “net asset value” is added in subsection 132(4). The “net asset value” of a mutual fund trust has the same meaning as in National Instrument 81-102 Investment Funds of the Canadian Securities Administrators, as amended from time to time. This new definition is relevant for new subsection 132(5.31).

    This amendment applies to taxation years that begin after December 15, 2021.

    Allocation to redeemers

    Subsection 132(5.3) limits the deduction of certain amounts allocated to beneficiaries that have redeemed units of a mutual fund trust. The opening portion of subsection 132(5.3) sets out the conditions for the application of these rules. In particular, one of these conditions is that the trust has paid or made payable to a beneficiary an amount, on a redemption by that beneficiary of a unit of the trust, that was not included in the beneficiary’s proceeds on the redemption. That amount is referred to in subsection 132(5.3) as the “allocated amount”.

    Subsection 132(5.3) is amended to provide that the reference to “allocated amount” also applies for the purpose of new subsection 132(5.31), which deals with exchange traded funds (“ETFs”) and funds that offer both listed and unlisted units (“combined funds”). For information regarding the application of this methodology to ETFs and combined funds, please refer to the commentary under new subsection 132(5.31).

    This amendment applies to taxation years that begins after December 15, 2021.

    Allocations by ETFs

    New subsection 132(5.31) introduces rules to limit the deduction by a mutual fund trust of certain amounts allocated to its beneficiaries that have redeemed units where the mutual fund trust is an exchange traded fund (in these notes, referred to as an “ETF”) or a fund that offers both listed and unlisted units (in these notes, referred to as a “combined fund”).

    The opening portion of paragraph 132(5.31)(a) provides that the new rule for ETFs applies only when all of the units offered in the taxation year by a trust that is a mutual fund trust are listed on a designated stock exchange in Canada and are in continuous distribution (in these notes, referred as “ETF units”). In such case, paragraph 132(5.3)(b) does not apply. Instead paragraph 132(5.31)(a) applies to the trust. This new provision denies the mutual fund trust a deduction in computing its income for a taxation year to the extent that the total allocated amounts paid out of the mutual fund trust's net taxable capital gains exceed a portion of those gains, as determined by the formula:

    Variable A is the portion of the total allocated amount for the taxation year in respect of redemptions by beneficiaries of the trust that would be, without reference to subsection 104(6), an amount paid out of the mutual fund trust's taxable capital gains.

    Variable B is the lesser of two amounts. The first amount in subparagraph (i) is the total amount paid for redemptions of ETF units in the taxation year. The second amount in subparagraph (ii) is the greater of the amount determined for Variable C and the net asset value of the trust at the end of the immediately preceding taxation year.

    Variable C is the net asset value of the trust at the end of the taxation year, and

    Variable D is the amount that would be, without reference to subsection 104(6), the trust’s net taxable capital gains for the taxation year.
    

    In the case of each of Variable B and C, the term “net asset value” of the trust has the meaning set out in the definition “net asset value” in subsection 132(4).

    Example – Over-Allocation of Taxable Capital Gains by an ETF

    A trust that is an ETF has a net asset value of $800 at the end of its current taxation year. The net asset value of the trust was $700 at the end of the immediately preceding taxation year. The trust disposed of assets during the taxation year resulting in net taxable capital gains for the year of $100. In the same taxation year, some beneficiaries of the trust redeemed their units and the trust paid a total of $500 to these beneficiaries on such redemptions. Using allocations to redeemers, the trust treats $200 of the $500 paid on redemptions as the total allocated amount, so that $100 is the portion of the total allocated amount that is paid out of the taxable capital gains of the trust.

    Using the formula referred to above, Variable B would be the lesser of the total amount paid for redemptions in the taxation year, which would be $500, and the greater of the net asset value of the trust at the end of the year and at the end of the immediately preceding taxation year, which would be $800 (the greater of $800 and $700). Accordingly, Variable B would be $500. Variable C would be the net asset value of the trust at the end of the current taxation year, which is $800. Variable D would be the trust’s net taxable capital gains for the year, which is $100. If Variable A is $100, the formula would provide as follows:

    $100 – ($500 / ($800 + $500) x $100) = $61.54

    In sum, new paragraph 132(5.31) would apply so that the trust would be able to claim a deduction of $38.46 in respect of the $100 of taxable capital gains included in the total allocated amount.

    Allocations by combined funds

    New paragraph 132(5.31)(b) provides for a situation in which a mutual fund trust has a class or series of units that are ETF units and also has another class or series of units that is not both listed and in continuous distribution (in these notes, referred to as “non-ETF units”). In such a case, there are separate rules that apply to the mutual fund trust for redemptions of ETF units and for redemptions of non-ETF units.

    For redemptions of ETF units, the rule in existing paragraph 132(5.3)(b) would not apply. Instead, under new subparagraph 132(5.31)(b)(i), the portion of the allocated amounts for which a deduction by the trust is denied is determined by reference to a modified version of the formula in paragraph 132(5.31)(a). For this purpose, the variables in that formula are modified in order to take into account only the portion of each of the net asset value of the trust, and the net taxable capital gains of the trust, that is referable to the ETF units. The portion of the trust’s net taxable capital gains referable to the ETF units is determined by dividing the portion of the net asset value of the trust that is referable to the ETF units by the total net asset value of the trust, in each case, at the end of the taxation year. This is set out in the formula E / F × G.

    Variable E is the portion of the net asset value of the trust at the end of the taxation year that is referable to the ETF units,

    Variable F is the net asset value of the trust at the end of the taxation year; and

    Variable G is the amount that would be, without reference to subsection 104(6), the trust’s net taxable capital gains for the taxation year.

    For redemptions of non-ETF units, existing paragraph 132(5.3)(b) applies in respect of each such redemption. In effect, this provision limits the allocated amount that may be deducted by the trust with respect to each redemption to one-half of the gain that would otherwise be realized by the redeeming beneficiary, but for the allocated amount. For information regarding the application of this rule to non-ETF units, please refer to the commentary on subsection 132(5.3).

    However, in addition to this existing limitation on the deductibility of an allocated amount on each redemption of a non-ETF unit, new subparagraph 132(5.31)(b)(ii) provides that the total of the allocated amounts for which the trust is allowed to claim a deduction in respect of non-ETF units for the taxation year cannot exceed a portion of the net taxable capital gains of the trust for that taxation year. This portion is determined by dividing the net asset value of the trust that is referable to the non-ETF units by the total net asset value of the trust, in each case, at the end of the taxation year, and multiplying the result by the amount of the net taxable capital gains of the trust for the taxation year.

    This is set out in the formula H / I × J.

    Variable H is the portion of the net asset value of the trust at the end of the taxation year that is referable to the non-ETF units,

    Variable I is the net asset value of the trust at the end of the taxation year, and

    Variable J is the amount that would be, without reference to subsection 104(6), the trust’s net taxable capital gains for the taxation year.

    Example – Mutual Fund Trust with ETF Units and Non-ETF Units (Combined Fund)

    Mutual Fund Trust has ETF units having a net asset value of $400 and non-ETF units having a net asset value of $600, for a total net asset value of $1,000, at the end of its current taxation year. At the end of the immediately preceding taxation year, the net asset value referable to the ETF units was $300 and the net asset value referable to the non-ETF units was $500 for a total net asset value of $800. Mutual Fund Trust realizes net capital gains of $600, giving rise to net taxable capital gains of $300, in the current taxation year. During the taxation year, Mutual Fund Trust pays $100 to beneficiaries on the redemption of their ETF units, and $400 to beneficiaries on the redemption of their non-ETF units. Mutual Fund Trust proposes to allocate to redeemers of ETF units a total allocated amount of $100, of which $50 would be paid out of the taxable capital gains of the trust. Mutual Fund Trust has determined that, with respect to redemptions of non-ETF units, out of a total of $400 of allocated amounts for the year, Mutual Fund Trust would be permitted to deduct $200 under paragraph 132(5.3)(b).

    With respect to the redemptions of ETF units, the following would result:

    The formula in new paragraph 132(5.31)(a), when adapted in accordance with new subparagraph 132(5.31)(b)(i) for application to the redemption of ETF units by Mutual Fund Trust, will deny a deduction of any excess allocated amount in respect of these redemptions determined as follows:

    A – (B / (C + B) × D)

    Variable A would be the amount that Mutual Fund Trust proposes to allocate to the redeeming ETF beneficiaries out of its taxable capital gains, in this example $50. If A exceeds the amount determined by the remainder of the formula, such excess amount would not be deductible by Mutual Fund Trust.

    Variable B is the lesser of

    • (i) the total amount paid by Mutual Fund Trust for redemptions of ETF units, which is $100, and
    • (ii) the greater of
      • (A) the net asset value of the trust assets referable to the ETF units at the end of the taxation year, which is $400, and
      • (B) the net asset value of the trust assets referable to the ETF units at the end of the immediately preceding taxation year, which is $300;

      Accordingly, variable B is $100;

      Variable C is the net asset value of the Mutual Fund Trust that is referable to the ETF units, at the end of the taxation year, which is $400; and

      Variable D is a portion of Mutual Fund Trust’s net taxable capital gains for the taxation year determined by dividing the net asset value of the trust’s assets referable to the ETF units, which is $400, by the total net asset value of the trust’s assets, which is $1,000, at the end of the taxation year, resulting in a portion of 0.40. Thus the portion of Mutual Fund Trust’s net taxable capital gains would be 0.40 x $300, so that variable D would be $120.

      In the result, the formula would apply as follows:

      A – (B / (C + B) × D), which is $50 – ($100 / ($400 + $100) x $120) = $26.

      Accordingly, Mutual Fund Trust would be denied a deduction for $26 of the portion of the allocated amount paid out of its net taxable capital gains.

      With respect to redemptions of the non-ETF units of Mutual Fund Trust, there are two potential limitations on the deductibility of allocated amounts. For each redemption, the formula in existing paragraph 132(5.3)(b) will limit the deduction by Mutual Fund Trust of an allocated amount. Mutual Fund Trust has determined that, with respect to redemptions of non-ETF units, for which it has in total paid redemption amounts of $400 in the year, it may allocate a total of $400 out of the Mutual Fund Trust’s capital gains and would be permitted to deduct a total of $200 as being paid out of its taxable capital gains.

      In addition to this limitation, new subparagraph 132(5.31)(b)(ii) provides that, for a taxation year, Mutual Fund Trust will not be permitted to deduct allocated amounts paid out of its net taxable capital gains to the extent that the total of such allocated amounts is greater than the amount that could be regarded as the portion of the total net taxable capital gains referable to the non-ETF units.

      This is determined by the formula H / I × J.

      Variable H is the portion of the net asset value of Mutual Fund Trust at the end of the taxation year that is referable to the non-ETF units, which is $600,

      Variable I is the net asset value of Mutual Fund Trust at the end of the taxation year, which is $1,000, and

      Variable J is the amount of Mutual Fund Trust’s net taxable capital gains for the taxation year, which is $300.

      Under this formula, the deduction claimed by Mutual Fund Trust in respect of allocated amounts for the redemptions of non-ETF units may not exceed $600 / $1,000 × $300, or $180. Accordingly, notwithstanding that, under subparagraph 132(5.3)(b) Mutual Fund Trust would have been allowed to deduct a total of $200 in respect of allocated amounts in respect of redemptions of non-ETF units, new subparagraph 132(5.31)(b)(ii) limits this deduction to $180.

      In sum, Mutual Fund Trust would be able to use allocations to redeemers to deduct $204 of its $300 of net taxable capital gains for the year.

      These amendments apply to taxation years that begin after December 15, 2021.

      Clause 21

      Subsection 132.2(3) sets out rules that apply to each mutual fund trust or each mutual fund corporation undergoing a qualifying exchange.

      Consequential on the introduction of subsection 132(5.31) that provides for rules to limit certain deductions by a mutual fund trust, new paragraph 132.2(3)(o) applies to a mutual fund trust undergoing a qualifying exchange. The paragraph requires that, for the taxation year of the fund that includes the transfer time, certain amounts be calculated as if the taxation year ended immediately before the transfer time.

      Where all the units offered by a mutual fund trust are listed on a designated stock exchange in Canada, subparagraph 132.2(3)(o)(i) applies to amounts determined for Variables B, C and D in paragraph 132(5.31)(a).

      Where the mutual fund trust offers both listed and unlisted units, subparagraph 132.2(3)(o)(ii) addresses the portion of the fund that is referable to each type of units. For the portion of the fund referable to the listed units, clause 132.2(3)(o)(ii)(A) applies to amounts determined for Variables B and C for the purposes of subparagraph 132(5.31)(b)(i) and clause 132.2(3)(o)(ii)(B) applies to the amounts determined for Variable D, E, F and G in clause 132(5.31)(b)(i)(C).

      For the portion of the fund referable to the unlisted units, clause 132.2(3)(o)(ii)(C) applies to the amounts determined for Variables H, I and J in subparagraph 132(5.31)(b)(ii).

      This amendment applies to taxation years that begin after December 15, 2021.

      Disability Tax Credit

      Clause 22

      Subsection 118.3(1) provides the disability tax credit, which is a 15% non-refundable tax credit that recognizes the impact of non-itemizable disability-related costs on an individual's ability to pay tax.

      To be eligible for the disability tax credit, an individual must have a severe and prolonged impairment in physical or mental functions. The effects of the impairment must be such that, even with appropriate therapy, the individual is:

      • markedly restricted in the their ability to perform a basic activity of daily living, due to the effects of one or more severe and prolonged impairments in mental or physical functions
      • significantly restricted in their ability to perform more than one basic activity of daily living if the cumulative effect of the restrictions is equivalent to having a single marked restriction in the ability to perform a basic activity of daily living; or
      • would be markedly restricted were it not for extensive life sustaining therapy occurring at least three times a week for an average of at least 14 hours per week in total.

      The basic activities of daily living are defined as walking; feeding or dressing oneself; mental functions necessary for everyday life; speaking; hearing; and eliminating bodily waste.

      Paragraph 118.3(1)(a.1) provides certain conditions related to disability tax credit eligibility. Paragraph (a.1) includes the extension of eligibility for the disability tax credit to individuals who would be markedly restricted in their ability to perform a basic activity of daily living, but for certain therapy. In particular, the therapy must be administered to them at least three times each week, for a total duration averaging not less than 14 hours per week, in order to sustain one of their vital functions.

      Paragraph 118.3(1)(a.1) is amended to provide that the requirement that therapy be administered at least three times each week is reduced to at least two times each week. The requirement that therapy be of a duration averaging not less than 14 hours a week remains.

      This amendment applies to the 2021 and subsequent taxation years in respect of certificates described in paragraphs 118.3(1)(a.2) or (a.3) of the Act that are filed with the Minister of National Revenue after royal assent to this amendment.

      Time spent on therapy

      Subsection 118.3(1.1) is relevant for the purpose of paragraph 118.3(1)(a.1), which, as noted above, extends eligibility for the disability tax credit to individuals who would be markedly restricted in their ability to perform a basic activity of daily living, but for certain therapy.

      Subsection 118.3(1.1) defines the activities that will be included in determining time spent by an individual receiving therapy for the purpose of paragraph 118.3(1)(a.1).

      Consequential on the amendment to paragraph 118.3(1)(a.1), the reference to the required frequency of therapy is reduced from at least three times each week to at least two times each week. The requirement that therapy be of a duration averaging not less than 14 hours a week remains.

      This amendment applies to the 2021 and subsequent taxation years in respect of certificates described in paragraphs 118.3(1)(a.2) or (a.3) of the Act that are filed with the Minister of National Revenue after royal assent to this amendment.

      ITA
      118.3(1.1)(b), (c) and (d)

      Subsection 118.3(1.1) defines the activities that are included in determining time spent receiving therapy for the purpose of paragraph 118.3(1)(a.1). Subsection 118.3(1.1) currently specifies that the time spent on administering therapy

      • includes only time dedicated to the therapy — that is, the individual has to take time away from normal, everyday activities in order to receive the therapy,
      • includes, in the case of therapy that requires a regular dosage of medication that needs to be adjusted on a daily basis, the activities directly involved in determining the appropriate dosage, but does not include time spent on activities related to a dietary or exercise restrictions or regime (even if these restrictions or regimes are a factor in determining the daily dosage of medication), and
      • includes, in the case of a child who is unable to perform the activities related to the therapy as a result of the child's age, the time spent by the child's primary caregivers (usually the parents) in performing or supervising these activities for the child but
      • does not include travel time, medical appointments, shopping for medication or recuperation after therapy.

      Paragraph 118.3(1.1)(b) is amended to include two new subparagraphs related to the time spent determining certain dosages. Consistent with the language in existing paragraph (b), new subparagraph (b)(i) provides that time spent on administering therapy includes, in the case of therapy that requires a regular dosage of medication that needs to be adjusted on a daily basis, the activities directly involved in determining the appropriate dosage. New subparagraph 118.3(1.1)(b)(ii) relates to therapy that requires the daily consumption of a medical food or medical formula to limit intake of a particular compound to levels required for the proper development or functioning of the body. It is added to provide that time spent on administering such therapy includes the time spent on activities that are directly related to the determination of the amount of the compound that can be safely consumed.
      In conjunction with the amendments to paragraph 118.3(1.1)(d) (described below), the existing rule that time spent administering therapy does not include time spent on activities related to a dietary or exercise restrictions or regime (even if these restrictions or regimes are a factor in determining the daily dosage of medication) will no longer be applicable in relation to therapy described in subparagraph (b)(ii).

      Paragraph 118.3(1.1)(c) is amended to include two new subparagraphs.

      New subparagraph 118.3(1.1)(c)(i) provides that, in the case of a child who is unable to perform the activities related to the administration of the therapy as a result of the child’s age, the time spent on administering therapy includes the time spent by the child’s primary caregivers performing or supervising those activities for the child.

      New subparagraph 118.3(1.1)(c)(ii) is added to provide that time spent on administering therapy, in the case of an individual who is unable to perform the activities related to the administration of the therapy because of the effects of an impairment or impairments in physical or mental functions, includes the time required to be spent by another person to assist the individual in performing those activities.

      Paragraph 118.2(1.1)(d) provides a list of exclusions for time spent on certain activities that are not counted as time spent on administering therapy. Paragraph 118.3(1.1)(d) is amended to include five new subparagraphs.

      New subparagraph 118.3(1.1)(d)(i) provides that time spent on administering therapy does not generally include time spent on activities related to dietary or exercise restrictions or regimes. This proscription does not extend to time spent on activities related to dietary or exercise restrictions or regimes that are directly related to the determination of the dosage of medication under new subparagraph 118.3(1.1)(b)(i), or the determination of the amount of the compound that can be safely consumed under new subparagraph 118.3(1.1)(b)(ii).

      Consistent with the proscription in existing paragraph (d), new subparagraph 118.3(1.1)(d)(ii) provides that time spent on administering therapy does not include travel time.

      New subparagraph 118.3(1.1)(d)(iii) provides that time spent on administering therapy does not generally include medical appointments. This proscription does not apply to time spent on medical appointments to receive therapy or to determine the daily dosage of medication, medical food or medical formula.
      Consistent with the proscription in existing paragraph (d), new subparagraph 118.3(1.1)(d)(iv) provides that time spent on administering therapy does not include time spent on shopping for medication.

      New subparagraph 118.3(1.1)(d)(v) provides that time spent on administering therapy does not generally include recuperation after therapy. This proscription does not apply to medically required recuperation.

      The amendments to subsection 118.3(1.1) apply to the 2021 and subsequent taxation years in respect of certificates described in paragraphs 118.3(1)(a.2) or (a.3) of the Act that are filed with the Minister of National Revenue after royal assent to these amendments.

      Clause 23

      Section 118.4 sets out circumstances in which an individual is considered to have a severe and prolonged impairment for the purposes of the disability tax credit under 118.3(1).

      To be eligible for the disability tax credit, an individual must have a severe and prolonged impairment in physical or mental functions. For more detail, please see the commentary on subsection 118.3(1) above.

      For the purpose of determining an individual’s eligibility for the disability tax credit, paragraph 118.4(1)(c) provides the meaning of the concept of a “basic activity of daily living” in relation to an individual, including “mental functions necessary for everyday life” at subparagraph (i).

      • Paragraph 118.4(1)(c.1) currently provides a list of mental functions necessary for everyday life: memory — which refers to the ability to remember the following: simple instructions; basic personal information such as name and address; or material of importance or interest,
      • problem solving, goal-setting and judgement (taken together) — which refers to the ability to solve problems, set and keep goals, and make appropriate decisions and judgements, and
      • adaptive functioning — which refers to refers to abilities related to self-care, health and safety, social skills and common, simple transactions.

      Paragraph 118.4(1)(c.1) is amended to expand the list of mental functions necessary for everyday life to include

      • attention,
      • concentration,
      • memory,
      • judgement,
      • perception of reality,
      • problem solving,
      • goal setting,
      • regulation of behaviour and emotions,
      • verbal and non-verbal comprehension, and
      • adaptive functioning.

      This amendment (including the separate consideration of problem solving, goal setting and judgement, which were previously required to be considered together) is intended to ensure that the eligibility criteria for the disability tax credit better articulate the range of functions necessary for everyday life. Consistent with the concept of a basic activity of daily living, the reference to goal setting is intended to capture short-term, daily goals rather than longer term life planning.

      This amendment applies to the 2021 and subsequent taxation years in respect of certificates described in paragraphs 118.3(1)(a.2) or (a.3) of the Act that are filed with the Minister of National Revenue after royal assent to this amendment.

      April 2020 One-time Additional GST/HST Credit Payment

      Clause 24

      COVID-19 – additional deemed payment

      Subsection 122.5(3.001) provides assistance in relation to the COVID-19 pandemic for certain individuals and families through a special top-up payment under the Goods and Services Tax (GST) credit. This subsection is amended to address a technical issue in the provision.

      This amendment is deemed to have come into effect on March 25, 2020.

      Rate Reduction for Zero-Emission Technology Manufacturers

      Clause 25

      New section 125.2 introduces the zero-emission technology manufacturing deduction, which provides a corporate tax rate reduction applicable to zero-emission technology manufacturing profits (as defined in new subsection 125.2(2)) for taxation years that begin after 2021 and before 2032. The low rate is provided in the form of a deduction from tax otherwise payable by the corporation.

      Zero-emission technology manufacturing

      New subsection (1) provides the formula for determining the amount of a corporation’s zero-emission technology manufacturing deduction from tax otherwise payable for a taxation year.

      The formula has two main parts. The first, represented by element A multiplied by element B, provides a rate reduction of 7.5 percentage points for zero-emission technology manufacturing profits that would otherwise be taxed at the 15% general corporate rate, reducing the rate by one half. This rate reduction (element A) applies in full for taxation years beginning after 2021 and before 2029. The amount of the rate reduction is gradually phased-out for taxation years after 2028.

      Element B determines the amount of income that would otherwise be subject to the general corporate rate eligible for the rate reduction under this section. This is the lesser of the amount determined in paragraphs (a) and (b).

      • Paragraph (a) of element B computes the amount of general rate income eligible for the rate reduction. This is the amount by which the corporation’s zero-emission technology manufacturing profits for the year (as defined in subsection (2)) exceed the amount of income of the corporation for that year that is subject to the small business rate. (Income subject to the small business rate is included in element D, described below.)
      • Paragraph (b) ensures that general rate income eligible for this rate reduction does not exceed that corporation’s taxable income (incorporating certain carve-outs) for the year. Specifically, taxable income for the year for the purposes of this restriction excludes income for the year that is active business income if a foreign tax credit is available in relation to foreign taxes on that income. In addition, where the corporation is a CCPC during the taxation year, aggregate investment income for the year and income for the year subject to the small business deduction rate are excluded.

      The second part of the formula, represented by C multiplied by D, provides for a rate reduction of 4.5 percentage points for zero-emission technology manufacturing profits which would otherwise be taxed at the 9% small business deduction rate, reducing the rate by one-half.

      Element C provides the amount of the rate reduction for income of a corporation for a taxation year that is subject to the small business deduction rate. For taxation years beginning after 2021 and before 2029, income subject to the small business rate of 9% eligible for the zero-emission technology manufacturing deduction will be permitted a small business income rate reduction of 4.5 percentage points. The amount of this rate reduction is also phased-out for taxation years after 2028.

      Element D determines the amount of income of a corporation for a taxation year subject to the small business deduction rate that is eligible for the rate reduction under this section, which is the lesser of the amount determined in paragraphs (a) and (b).

      • Paragraph (a) ensures that the amount of zero-emission technology manufacturing profits eligible for the small business income rate reduction of 4.5% does not exceed the amount of income for the year subject to the small business deduction rate.
      • Paragraph (b) provides that the amount of income subject to the small business income rate reduction of 4.5% is equal to the corporation’s zero-emission technology manufacturing profits for the year to the extent those profits have not already been included in element B for purposes of the computing the rate reduction for income otherwise subject to the general rate.

      Element E implements the condition that the deduction is only available to a corporation if at least 10 per cent of its gross revenue from all active businesses carried on in Canada is derived from qualified zero-emission technology manufacturing activities (as defined in subsection 5202(1) and section 5204 of the Regulations).

      Definitions

      New subsection (2) provides definitions. It creates cross-reference style definitions for a list of terms that, for the purposes of this section, have the meaning assigned by Part LII of the Regulations. The definitions are relevant for computing the zero-emission technology manufacturing profits of a corporation for a taxation year, also defined under this subsection. (The definition “qualified zero-emission technology manufacturing activities” is also relevant for the purposes of element E in the formula in subsection (1)).

      “zero-emission technology manufacturing profits”

      Subsection (2) defines “zero-emission technology manufacturing profits” of a corporation for a taxation year as the amount determined by the formula:

      Element A is the corporation’s adjusted business income for the taxation year (which is defined in sections 5202 and 5203 of Part LII of the Regulations as, in general terms, a corporation’s active business from a business carried out in Canada reduced to the extent of its “resource profits”).

      In order to arrive at a corporation’s zero-emission technology manufacturing profits for a year, its adjusted business income (element A) is multiplied by element B, which is the proportion of the corporation’s total labour and capital costs for the taxation year that is incurred in qualified zero-emission technology manufacturing activities. This proportion is obtained by dividing element D (which is the aggregate of its ZETM cost of capital and ZETM cost of labour (as defined in Part LII of the Regulations)) by element E (which is the total of its cost of capital and cost of labour (as defined in that Part of the Regulations)).

      Element C in effect reverses the proration in the formula if 90% or more of the corporation’s total labour and capital costs for a taxation year is used in qualified zero-emission technology manufacturing activities. In this case, the corporation’s zero-emission technology manufacturing profits for the year is, in effect, deemed to equal its adjusted business income for the year.

      Determination of gross revenue

      New subsection 125.2(3) of the Act provides special rules for computing gross revenue of a corporation (for the purposes of paragraph (a) of element E in (1)) where that corporation is a member of a partnership.

      Paragraph (a) in effect includes, as part of a corporation’s gross revenue for a year from an active business, its proportionate share of the gross revenue of a partnership from the active business of which that corporation is a member for a fiscal period ending in the taxation year. The proportionate share is based on the corporation’s proportionate share of income from the partnership for that fiscal period.

      Paragraph (b) provides that the same proportion, based on the corporate partner’s share of income from the partnership for a fiscal period ending in the corporation’s taxation year, applies in computing a corporation’s gross revenue for a year from qualified zero-emission technology manufacturing activities (that are carried on through a partnership of which the corporation is a member).

      These amendments come into force on January 1, 2022.

      Clause 26

      Interpretation

      Section 5202 of the Regulations defines a number of terms that apply for the purposes of Part LII of the Regulations(except as otherwise provided in sections 5203 or 5204 of the Regulations) and are therefore relevant in determining a corporation’s manufacturing and processing profits for a taxation year for the purposes of the manufacturing and processing credit in section 125.1 of the Act.

      Section 5202 is amended to add the definitions “qualified zero-emission technology manufacturing activities”, “ZETM cost of capital” and “ZETM cost of labour” required in determining a corporation’s zero-emission technology manufacturing profits for a year for the purposes of the zero-emission technology manufacturing deduction (in new section 125.2).

      Definitions

      “qualified zero-emission technology manufacturing activities”

      The definition “qualified zero-emission technology manufacturing activities” provides the activities that qualify for the zero-emission technology manufacturing deduction. First, a qualified zero-emission technology manufacturing activity must be qualified activity, which is defined in this subsection for purposes of determining eligibility for the manufacturing and processing deduction under section 125.1 of the Act. In general, a qualified activity is an activity performed in Canada in connection with the manufacturing or processing of goods for sale or lease, subject to the inclusions under subparagraphs (a)(i) to (ix) of that definition and to the exclusions under paragraphs (d) to (i) of that definition and of paragraphs (a) to (k) in the definition “manufacturing or processing” in subsection 125.1(3) of the Act.

      Second, a qualified zero-emission technology manufacturing activity must be an activity performed in connection with the manufacturing or processing of certain property described in subparagraphs (a)(i) to (a)(xi) or the production of certain gases or fuels described in subparagraphs (b)(i) to (iv). The following is a list of eligible property the manufacturing or processing of which may constitute a qualified zero-emission technology manufacturing activity under paragraph (a):

      • solar energy conversion equipment, including solar thermal collectors, photovoltaic solar arrays and custom supporting structures or frames (but does not include passive solar heating equipment) (subparagraph (i)),
      • wind energy conversion equipment, including wind turbine towers, nacelles and rotor blades, (subparagraph (ii)),
      • water energy conversion equipment, including hydroelectric, water current, tidal and wave energy conversion equipment (subparagraph (iii),
      • geothermal energy equipment (subparagraph (iv)),
      • equipment for a ground source heat pump system (subparagraph (v)).
      • electrical energy storage equipment used for storage of renewable energy or for providing grid-scale storage or other ancillary services, including battery, compressed air and flywheel storage systems (subparagraph (vi)),
      • equipment used to charge, or to dispense hydrogen to, a zero-emission vehicle as described below in subparagraph (x) (subparagraph (vii)), and
      • equipment used for the production of hydrogen by electrolysis of water (subparagraph (viii)).

      Subparagraph (a)(ix) provides an additional inclusion so that manufacturing (or processing) of equipment that is a component of property included in subparagraphs (a)‍(i) to (viii) above may be a qualified zero-emission technology manufacturing activity, but only if such equipment is purpose-built or designed exclusively to form an integral part of that property.

      Additional property the manufacturing or processing of which may be included as a qualified zero-emission technology manufacturing activity includes

      • a motor vehicle that is a plug-in hybrid that meets the conditions prescribed by subsection 1102(26) of the Regulations or
      • is automotive equipment that is fully electric, fully powered by hydrogen or fully powered by a combination of electricity and hydrogen.

      This subparagraph is intended to incorporate the assembly of the zero-emission vehicles not the manufacturing or processing of components that go into that final assembly (subparagraph (x)).

      Subparagraph (xi) provides that the manufacturing of integral components of a zero-emission vehicle may be qualified zero-emission technology manufacturing activities only to the extent that those components are integral to the powertrain of a zero-emission vehicle described in subparagraph (x), including batteries or fuel cells. For instance, the manufacturing of windshield wipers solely for zero-emission vehicles would not fall under this definition, but the manufacturing of components of the electric engine would. For more information, please see the commentary on new subsection 5202(2) implementing restrictions on general-purpose parts.

      Paragraph (b) provides that certain production activities may be qualified zero-emission technology manufacturing activities if performed in connection with the production of certain gases and fuels. The list of eligible gases and fuels is as follows:

      • hydrogen produced by electrolysis of water (subparagraph (i)),
      • gaseous biofuel as defined in subsection 1104(13) of the Regulations (subparagraph (ii)),
      • liquid biofuel as defined in subsection 1104(13) of the Regulations (subparagraph (iii)), and
      • solid biofuel as defined in subsection 1104(13) of the Regulations (subparagraph (iv)).

      For more information, please see the commentary on the new definition gaseous biofuel, liquid biofuel and solid biofuel in subsection 1104(13).

      Paragraph (c) provides that converting a vehicle (that is not a zero-emission vehicle) into a zero-emission vehicle is a qualified zero-emission technology manufacturing activity, whether or not such an activity is technically a manufacturing or processing activity.

      “ZETM cost of capital”

      The definition “ZETM cost of capital” of a corporation for a taxation year is the portion of the cost of capital (also defined in section 5202) of that corporation that reflects the extent to which each property used in the computation of that corporation’s cost of capital was used in qualified zero-emission technology manufacturing activities during the year. For purposes of computing the ZETM cost of capital of a corporation, the portion of time during a taxation year that a property was used in qualified zero-emission technology manufacturing activities must be determined. For instance, if a property were used 50% of the time during the year in qualified zero-emission technology manufacturing activities, the ZETM cost of capital would equal 50% of that property’s cost of capital for the year.

      “ZETM cost of labour”

      The definition “ZETM cost of labour” of a corporation for a taxation year is the cost of labour (also defined in section 5202) to the extent those costs were for qualified zero-emission technology manufacturing activities.

      Specifically, paragraph (a) provides that ZETM cost of labour includes the amount of salaries and wages paid or payable to persons engaged in qualified zero-emission technology manufacturing activities for the portion of the time those persons were so engaged.

      Paragraph (b) includes in ZETM cost of labour other amounts paid or payable to non-employees for the performance of functions (that would normally be performed by an employee of the corporation) directly related to qualified zero-emission technology manufacturing activities.

      Interpretation

      New subsection 5202(2) clarifies that qualified zero-emission technology manufacturing activities do not include the manufacturing or processing of general purpose parts or equipment where such parts or equipment are suitable for integration into property other than property described in paragraph (a) of the definition of “qualified zero-emission technology manufacturing activities” in subsection (1). For instance, manufacturing standard bolts used in turbines described in paragraph (a) of that definition, and in other equipment, would be excluded under this subsection.

      These amendments come into force on January 1, 2022.

      Clause 27

      Partnerships

      Section 5204 provides a number of definitions that apply for the purpose of calculating Canadian manufacturing and processing profits in circumstances under which a corporation is a member of a partnership. The introductory portion of section 5204 is amended to clarify that this is a definition section that defines certain terms for purposes of Part LII of the Regulations.

      Section 5204 is also amended to add the definitions “ZETM cost of capital” and “ZETM cost of labour” that apply for purposes of calculating a corporate partner’s zero-emission technology manufacturing profits for the year for purposes of the zero-emission technology manufacturing deduction (in new section 125.2).

      “ZETM cost of capital” - partnership

      The definition “ZETM cost of capital” in this section describes the computation of ZETM cost of capital for a taxation year of a corporate member of a partnership. The definition “cost of capital” in this section requires a corporate partner to include in its cost of capital a proportion of the partnership’s cost of capital based on the corporation’s income share of that partnership. This definition provides that a portion of the amount added to the corporate partner’s cost of capital for the taxation year is included in the corporation’s ZETM cost of capital to the extent that each such property of the partnership is used in qualified zero-emission technology manufacturing activities during the year.

      For further information, please see the commentary on the definition “ZETM cost of capital” in section 5202.

      “ZETM cost of labour”- partnership

      The definition “ZETM cost of labour” in this section describes the computation of ZETM cost of labour of a corporate member of a partnership.

      Paragraph (a) of the definition “ZETM cost of labour” provides that a portion of the amount added to the corporate partner’s cost of labour for the taxation year under this section is included in the corporation’s ZETM cost of labour to the extent the salaries and wages paid or payable to employees by the partnership are for time spent engaged in qualified zero-emission technology manufacturing activities.

      Paragraph (b) provides a similar rule for amounts paid or payable to non-employees for the performance of functions directly related to qualified zero-emission technology manufacturing activities.

      For further information, please see the commentary on the definition “ZETM cost of labour” in section 5202.

      These amendments come into force on January 1, 2022.

      Film or Video Production Tax Credits

      Clause 28

      COVID-19 — production commencement time

      Section 125.4 sets out the rules that apply for the purpose of computing the Canadian film or video production tax credit (“CPTC”). Generally, this tax credit is available at a rate of 25% of qualified labour expenditures incurred by a qualified corporation for a production certified by the Minister of Canadian Heritage to be a Canadian film or video production.

      For the purpose of the definition “labour expenditure” in subsection 125.4(1), in order to be eligible for the CPTC, expenditures in respect of a film or video production must be incurred by a qualified corporation after the production commencement time. The definition “production commencement time” describes the time that is the latest of the following:

      • The time at which a qualified corporation or its parent company first incurs development labour costs for the development of property of the corporation that is script material on which a Canadian film or video production is based.
      • The first time at which the qualified corporation or its parent company acquires a right in respect of the story that is the basis of the final script. Such rights might include a published literary work, play or screenplay.
      • Two years before the date on which principal photography of the production begins.

      In response to the COVID-19 pandemic, new subsection 125.4(1.1) extends the two-year period that precedes the date on which principal photography of the production begins, in the definition of “production commencement time”, to a three-year period.

      This extension applies to corporations in respect of film or video productions that incurred labour expenditure in taxation years ending in 2020 or 2021.

      Clause 29

      Certificates Issued by the Minister of Canadian Heritage

      Section 1106 of the Regulations addresses criteria to be applied by the Minister of Canadian Heritage in determining whether a production may be certified as a “Canadian film or video production” that is eligible for the Canadian film or video production tax credit under section 125.4 of the Act.

      COVID-19 — application for a certificate of completion

      Pursuant to the definition “application for a certificate of completion” in subsection 1106(1) of the Regulations, an application for a certificate of completion must be filed within 24 months of the end of the production company’s first taxation year following the start of principal photography. The production’s application deadline can be extended by 18 months (to 42 months) if valid waivers are filed with the Canada Revenue Agency in respect of the first and second taxation years ending after the production’s principal photography began.

      In response to the COVID-19 pandemic, new subsection 1106(1.1) provides a further extension to the production application deadline by an additional 12 months (to 54 months). To be eligible for the additional extension, valid waivers in respect of the first, second and third taxation years ending after the production’s principal photography began would need to be filed with the Canada Revenue Agency within the normal reassessment period for each of those years.

      The additional 12-month extension is available to corporations that incurred labour expenditure in respect of film or video productions in taxation years ending in 2020 or 2021.

      COVID-19 — excluded production

      Subsection 1106(1) of the Regulations provides the definition of an “excluded production” for purposes of the Canadian film or video production tax credit under section 125.4 of the Act. For these purposes, an excluded production is not a “Canadian film or video production” and is not eligible for the Canadian film or video production tax credit.

      Under the existing definition in subsection 1106(1), an excluded production includes a production where there is no written agreement with a Canadian distributor or with a broadcaster licensed by the Canadian Radio-television and Telecommunications Commission (CRTC) to show the production in Canada within a two-year period that begins at the earliest time after the production was completed that it is commercially exploitable.

      In response to the COVID-19 pandemic, new subsection 1106(1.2) extends, in certain circumstances, the two-year period to a three-year period for a production to be shown in Canada under a written agreement with a Canadian distributor or with a CRTC-licensed broadcaster.

      This extension applies only to corporations in respect of film or video productions that incurred labour expenditure in taxation years ending in 2020 or 2021.

      Clause 30

      COVID-19 — accredited production

      Subsection 9300(1) of the Regulations provides the definition of an “accredited production” for purposes of the film or video production services tax credit under section 125.5 of the Act. To qualify as an accredited production, existing subsection 9300(1) provides that a film or video production must incur expenditures that exceed certain thresholds within a 24-month period after the time that the principal filming or taping of the production began.

      In response to the COVID-19 pandemic, new subsection 9300(1.1) extends the 24-month period to a 36-month period in certain circumstances. Under subsection (1.1), a film or video production is an accredited production if the related expenditure thresholds are exceeded within a 36-month period after the time that the principal filming or taping of the production began.

      This extension applies only to corporations that incurred Canadian labour expenditure in respect of film or video productions in taxation years ending in 2020 or 2021.

      Postdoctoral Fellowship Income

      Clause 31

      Earned Income

      Section 146 provides rules relating to registered retirement savings plans (RRSPs) and subsection 146(1) defines a number of terms that apply for the purposes of these rules. The definition “earned income” is relevant in determining the maximum tax-deductible contributions that an individual may make to their RRSP for a year (i.e., the individual’s contribution limit).

      New paragraph (b.01) is added to the definition “earned income” to allow income received in connection with a program that consists primarily of research and does not lead to a college diploma or university degree (and thus does not qualify for the scholarship exemption) to be treated as earned income. As a result, postdoctoral fellowship income will qualify as earned income for the purpose of determining the amount that an individual may contribute to their RRSP.

      This amendment applies to 2021 and subsequent taxation years. For example, postdoctoral fellowship income received in 2021 will be included in earned income for the individual’s 2021 taxation year, which will be relevant in the determination of the individual’s RRSP contribution limit for 2022.

      The amendment also applies to postdoctoral fellowship income received in the 2011 to 2020 taxation years if, before 2026, the individual files an election with the Minister of National Revenue for an adjustment to their “earned income”. The additional earned income will increase the individual’s RRSP contribution limit after the date that the election is filed.

      Fixing Contribution Errors in Defined Contribution Pension Plans

      Clause 32

      Definitions

      Subsection 146(1) provides definitions for terms that are relevant for the purposes of the provisions of section 146 of the Act relating to registered retirement savings plans. Subsection 146(1) contains a definition of a taxpayer's net past service pension adjustment (net PSPA) for the purpose of computing the taxpayer's RRSP deduction limit and the taxpayer's unused RRSP deduction room.

      A taxpayer's net PSPA for a year is defined to be the amount determined by the formula P + Q – G. Variable Q refers to an amount prescribed for the taxpayer under a government-sponsored retirement arrangement. Currently, such an amount is not prescribed under the Income Tax Regulations.

      Consequential on the introduction of permitted corrective contributions under new subsection 147.1(20) of the Act, variable Q is amended to refer instead to contributions made under subsection 147.1(20) in respect of the taxpayer in the year immediately preceding the taxation year. Accordingly, the permitted corrective contribution will be added to a taxpayer’s net PSPA that is used to reduce the taxpayer’s “RRSP deduction limit” and “unused RRSP deduction room” (each as defined in subsection 146(1)) for the taxation year.

      For more information on the rules to determine a permitted corrective contribution, please see the commentary on the definitions added to subsection 147.1(1) of the Act and the commentary on new subsection 147.1(20) of the Act.

      This amendment comes into force on January 1, 2021.

      Clause 33

      Registered Pension Plans

      Section 147.1 sets out rules relating to the registration, amendment, administration and revocation of registration of a registered pension plan (RPP). The section also contains the pension adjustment limits and the restriction on the payment of past service benefits.

      Under the current rules, defined benefit pension plans may provide additional benefits to an employee in respect of past years of service. In contrast to defined benefit provisions, the registration rules do not permit contributions to a money purchase provision of an RPP in respect of an employee’s earnings in prior years. For example, where a plan administrator discovers an under-contribution error in prior years under a money purchase provision, the tax rules do not provide the legislative authority to enable the administrator to correct the contribution error.

      Budget 2021 proposes to provide flexibility to plan administrators of money purchase pension plans to correct for under-contribution errors. Additional contributions (defined as “permitted corrective contributions”) to an employee's money purchase account will be permitted to compensate for an under-contribution error made in any of the five years preceding the year of the additional contribution, subject to a dollar limit.

      The permitted corrective contributions will reduce the employee's registered retirement savings plan (RRSP) contribution room for the taxation year following the year in which the contribution is made. If the result is negative RRSP room, the individual is prohibited from making new deductible RRSP contributions (and may be subject to Part X.1 tax on undeducted RRSP contributions) until the individual earns future RRSP room and eliminates the negative balance.

      The amendments to section 147.1 of the Act come into force on January 1, 2021.

      Definitions

      Subsection 147.1(1) defines those terms that are relevant for the purposes of the provisions of section 147.1 of the Act relating to registered pension plans.

      The definitions “designated money purchase provision” and “permitted corrective contributions” are being added consequential on the introduction of new subsection 147.1(20) of the Act.

      “designated money purchase provision”

      A money purchase provision is a designated money purchase provision in a calendar year if the provision meets one of the following conditions:

      • the pension plan has ten or more members throughout the year; or
      • not more than 50% of the contributions made to the provision in the year are with respect to individuals described in paragraph 8515(4)(a) or (b) (i.e. connected persons and employees whose remuneration for the year exceeds 2.5 times the year’s maximum pensionable earnings (for Canada Pension Plan purposes).

      “permitted corrective contribution”

      A “permitted corrective contribution” in a calendar year is a contribution, with respect to an individual, that would have been made to a money purchase provision of an RPP in any of the five immediately preceding years (each referred to as a “retroactive year”) in accordance with the plan terms, but for a failure to enroll the individual in the plan or a failure to make a contribution required by the terms of the plan as registered.

      A permitted corrective contribution cannot exceed the lesser of the two amounts determined in paragraphs (a) and (b).

      Paragraph (a) is the total catch-up contributions that may be made in respect of the retroactive years. It is the total of formula A + B – C that applies for each of the five retroactive years.

      • Variable A is the amount by which the required contributions with respect to the individual under the money purchase provision for the retroactive year exceeds the amounts actually contributed with respect to the individual in the retroactive year.
      • Variable B is the amount of interest, if any, that may be added to the amounts determined for variable A at a rate that is either:
        • (i) an amount required by the Pension Benefits Standards Act, or a similar law of a province; or
        • (ii) if the relevant law does not impose a requirement, a rate that does not exceed a reasonable rate.

        Paragraph (b) is the dollar limit determined by the formula E – F. Variable E is 125% of the money purchase limit for the year in which the permitted corrective contributions are made.

        Variable F is the total permitted corrective contributions previously made with respect to the individual under subsection 147.1(20) of the Act.

        Illustration of a permitted corrective contribution

        Andreya was hired on January 1, 2018 and earned a salary of $90,000 plus an annual bonus. Her employer participates in a money purchase pension plan that requires each employee to contribute 6% of earnings and requires the employer to match the employee contribution. She also makes contributions to her personal Registered Retirement Savings Plan (RRSP).

        In April 2021, the plan administrator discovered that Andreya had not been enrolled in the plan. On May 31, 2021, she and the employer each make a lump sum catch-up contribution to make up for the contributions not made in years 2018 to 2020. The employer also adds credited interest (for both employer and employee portions) at the fund rate of return of 5% per annum.

        The total (employer plus employee) catch-up contribution in 2021 in respect of Andreya cannot exceed the lesser of the amounts determined in the formulas under paragraphs (a) and (b) of the definition “permitted corrective contribution”.

        The amount in paragraph (a) is the total contributions (plus credited interest) that may be made in respect of the three retroactive years, each year determined by the formula A + B – C.

        For 2018:
        A = $90,000 x 12% = $10,800
        B = compound interest for 3 years at 5% per annum = $540 + $567 + $595 = $1,702
        C = $0
        A + B – C = $10,800 + $1,702 – 0 = $12,502

        For 2019:
        A = $90,000 x 12% = $10,800
        B = compound interest for 2 years at 5% per annum = $540 + $567 = $1,107
        C = $0
        A + B – C = $10,800 + $1,107 – 0 = $11,907

        For 2020:
        A = $90,000 x 12% = $10,800
        B = 10,800 x .05 = $540
        C = $0
        A + B – C = $10,800 + $540 – 0 = $11,340

        The total amount for paragraph (a) is $12,502 + $11,097 + $11,340 = $35,749

        The amount in paragraph (b) is the dollar limit determined by the formula E – F, where
        E = 125% of the money purchase limit for 2021
        F = $0
        E – F = $36,512 – $0 = $36,512

        The lesser of the amounts in paragraphs (a) and (b) is $35,749.

        On May 31 2021, a permitted corrective contribution was deposited to Andreya’s account under the plan equal to $35,749. The plan administrator must file a prescribed information return with the Canada Revenue Agency to report the amount within 120 days after the contribution is made (i.e. on or before September 28, 2021). The administrator does not need to amend T4 slips for any of the 2018, 2019 or 2020 year.

        The contribution will reduce Andreya’s RRSP contribution room for 2022 (i.e. the year following the year of the catch-up contribution). If Andreya otherwise would have had less than $35,749 of RRSP contribution room for 2022, she will not be able to make deductible RRSP contributions in 2022 (and in any future years in which RRSP room remains negative). If she chooses to make non-deductible RRSP contributions, she would be subject to a Part X.1 tax on overcontributions. However, the negative RRSP room does not impede current or future required contributions to the registered pension plan by Andreya and her employer.

        Second error discovered in 2022:

        In June 2022, the plan administrator discovered that Andreya’s annual bonus of $10,000 for each of 2020 and 2021 was not included in determining the pension contribution amount for those two years. Therefore, in 2022, the plan administrator will facilitate another permitted corrective contribution to the plan for Andreya.

        Her permitted corrective contribution amount in 2022 cannot exceed the lesser of the amounts determined in the formulas under paragraphs (a) and (b) of the definition “permitted corrective contribution”.

        The amount in paragraph (a) is the total catch-up contributions that may be made in respect of the retroactive years, each year determined by the formula A + B – C that applies for each of the retroactive years (in this case for 2020 and 2021).

        For 2020:
        A = (($90,000 salary + $10,000 bonus) x 12%) minus nil contributions made in 2020
        A = $12,000
        B = compound interest for 2 years at 5% per annum = $600 + $630 = $1230
        C = $11,907 (catch-up contributed under subsection 147.1(20) in 2021)
        A + B – C = $12,000 + $1,230 – $11,907 = $1,323

        For 2021:
        A = required contributions for 2021 minus contributions already made in 2021
        = ($100,000 * 12%) – ($90,000 * 12%) = $1,200
        B = $1,200 x .05 = $60
        C = 0
        A + B – C = $1,200 + $60 – 0 = $1,260

        The amount for paragraph (a) is $1,323 + $1,260 = $2,583.

        The amount for paragraph (b) is the dollar limit determined by the formula E – F, where
        E = 125% of the money purchase limit for 2022 (assume $30,590) = $38,237
        F = $35,749
        E – F = $2,488

        The lessor of the amounts in paragraphs (a) and (b) is $2,488.

        On June 20, 2022, a permitted corrective contribution is deposited to Andreya’s account under the plan equal to $2,488. The plan administrator must file a prescribed information return with the Canada Revenue Agency to report the amount within 120 days after the contribution is made (i.e. on or before October 28, 2022). The administrator does not need to amend T4 slips for 2020 or 2021.

        Permitted corrective contribution

        New subsection 147.1(20) of the Act permits an individual or an employer to make a catch-up contribution in a calendar year under to money purchase provision of a registered pension plan in respect of the individual under certain conditions. Those conditions are that the contribution is a permitted corrective contribution and the provision was a designated money purchase provision in each of the five years immediately preceding the year.

        Permissible contributions to a registered pension plan are listed under paragraph 8502(b) of the Regulations and are part of the registration conditions applicable to pension plans. Notwithstanding the registration conditions, plan administrators will not be required to amend the plan terms to explicitly provide for permitted corrective contributions.

        For information on the definitions permitted corrective contribution and designated money purchase provision, see the commentary on the amendments made to subsection 147.1(1) of the Act.

        For more information on reporting requirements for a permitted corrective contribution for an individual, see the commentary on new subsection 8402(4) of the Regulations.

        Clause 34

        Pension contributions deductible — employer contributions

        Paragraph 147.2(1)(a) of the Act permits an employer to deduct from income for a taxation year the amount of contributions it makes under a money purchase provision of a registered pension plan, if the contributions are in respect of periods before the end of the taxation year and made in accordance with the plan as registered.

        Paragraph 147.2(1)(a) is amended to allow an employer to deduct “permitted corrective contributions” under new subsection 147.1(20) in respect of periods before the end of the taxation year. The paragraph is split into two subparagraphs. Subparagraph (i) preserves the traditional rule permitting a deduction for contributions made in accordance with the plan as registered. Subparagraph (ii) refers to permitted corrective contributions made under subsection 147.1(20).

        For more information, please see the commentary on subsection new 147.1(20) of the Act.

        Service after 1989

        Subsection 147.2(4) of the Act provides rules that govern the deductibility of employee contributions to registered pension plans. Paragraph 147.2(4)(a) allows an individual to deduct contributions in respect of years after 1989, or a prescribed eligible contribution, to the extent that the contributions are made in accordance with the terms of the plan as registered.

        Consequential on the introduction of permitted corrective contributions under new subsection 147.1(20) of the Act, paragraph 147.2(4)(a) is amended to allow an individual to deduct, in addition to the contributions described above, a permitted corrective contribution. The paragraph is split into two subparagraphs. Subparagraph (i) preserves the traditional rule permitting the deduction of contributions made in accordance with the plan as registered. Subparagraph (ii) refers to permitted corrective contributions made under new subsection 147.1(20).

        For more information on the rules to determine a permitted corrective contribution, see the commentary on subsection 147.1(20) of the Act.

        These amendments comes into force on January 1, 2021.

        Clause 35

        Paragraph 8301(4)(a) of the Regulations describes the contributions made in a year with respect to an individual under a money purchase provision of a registered pension plan that are included and excluded in determining the individual's pension credit for the year.

        Consequential on the introduction under section 147.1 of the Act of new rules related to permitted corrective contributions, paragraph 8301(4)(a) is amended to exclude a contribution made under subsection 147.1(20) from the determination of an individual’s pension credit.

        For more information on the rules to determine and report a permitted corrective contribution, see the commentary on subsections 147.1(1) and (20) of the Act and on new subsection 8402(4) of the Regulations.

        This amendment comes into force on January 1, 2021.

        Clause 36

        Total Pension Adjustment Reversal

        Subsection 8304.1(1) of the Regulations defines, for the purposes of the Act, an individual's “total pension adjustment reversal” for a year as the sum of the individual's pension adjustment reversal determined in connection with the individual's termination in the year from a deferred profit sharing plan or a registered pension plan.

        An individual's total pension adjustment reversal for a year is taken into account in determining the individual's “RRSP deduction limit” and “unused RRSP deduction room” (each as defined in subsection 146(1) of the Act). It is also taken into account in determining if an individual has undeducted RRSP contributions that are subject to an overcontribution tax under Part X.1 of the Act.

        Consequential on the introduction of new subsection 8304.1(16), subsection 8304.1(1) is amended to define an individual’s “total pension adjustment reversal” for a year to mean the sum of the pension adjustment reversal and a pension adjustment correction in respect of the individual for the year.

        The subsection is split into paragraphs. Paragraph (a) preserves the traditional pension adjustment reversal that is determined in connection with an individual's termination in the year from a deferred profit sharing plan or a benefit provision of a registered pension plan. Paragraph (b) adds the new pension adjustment correction determined in respect of the individual for the year under new subsection 8304.1(16).

        For more information on the rules to determine a pension adjustment correction, please see the commentary on new subsection 8304.1(16) of the Regulations.

        This amendment comes into force on January 1, 2021.

        Pension Adjustment Correction

        A registered pension plan becomes a revocable plan if it is not administered in accordance with the terms of the plan as registered. For example, if a contribution to the plan exceeds what is permitted by the plan terms, the plan becomes a revocable plan. Subparagraph 8502(d)(iii) of the Regulations permits a registered pension plan to return contributions made by an individual or employer in order to avoid revocation of the registration of the plan.

        New subsection 8304.1(16) requires that a pension adjustment correction be determined for an individual when a distribution described in subparagraph 8502(d)(iii) is made from a money purchase provision.

        In general terms, a pension adjustment correction restores an individual’s RRSP contribution room in the calendar year of the contribution refund. The amount will be added to an individual’s total pension adjustment reversal that is used to determine the individual's “RRSP deduction limit” and the individual's “unused RRSP deduction room” for a calendar year.

        An individual’s pension adjustment correction is generally the portion of a refund of contributions made in the five previous years that reduced the individual’s RRSP room (i.e. the portion that did not exceed pension adjustment limits). The pension adjustment correction is the total of formula A – B – C that applies for each of the five retroactive years.

        Variable A is the pension adjustment reported for the individual under the money purchase provision of the plan for the retroactive year.

        Variable B is the amount that should have been contributed to the provision in accordance with the terms of the plan with respect to the individual for the retroactive year.

        Variable C is the amount by which an individual’s total pension adjustment (i.e. the total pension credits determined under money purchase provisions, defined benefit provisions and deferred profit sharing plans) for the retroactive year exceeds the lesser of the money purchase limit for the retroactive year and 18% of the individual’s earned income (as defined in subsection 146(1) of the Act) for the year.

        Variable C reduces an individual’s pension adjustment correction by the amount by which the pension adjustment reported for the individual for the year exceeds the individual’s pension adjustment limit (the lesser 18% of earnings or the money purchase limit).

        To simplify reporting requirements, the plan administrator is required to report the pension adjustment correction with respect to the individual to the Canada Revenue Agency using a prescribed information return, rather than to amend T4 slips for prior years. For more information on the reporting requirements of a pension adjustment correction, please see the commentary on new subsection 8402.01(4.1) of the Regulations.

        For more information on an individual’s total pension adjustment reversal for a calendar year, please see the commentary on amendments made to subsection 8304.1(1) of the Regulations.

        Illustration of a pension adjustment correction:

        Aly earned an annual salary of $115,000 in 2019 and 2020. His employer participates in a money purchase pension plan that requires each employee to contribute 7.5% of earnings and requires the employer to match the employee contribution of 7.5%.

        In May 2021, the plan administrator discovered that, in both 2019 and 2020, Aly contributed 10% of his earnings to the plan and the employer contributed an additional 10% of earnings.
        A pension adjustment of $23,000 was reported on his T4 slips in 2019 and 2020.

        As a result of the over-contributions in 2019 and 2020, the plan was not administered in accordance with the terms of the plan and therefore becomes a revocable plan. In order to avoid the revocation, the plan administrator refunded $11,500 from Aly’s account ($5,750 paid to Aly and paid $5,750 to the employer).

        As a result of the refunds of over-contributions, a pension adjustment correction is required to be determined for Aly, equal to the sum of A – B – C for 2019 plus A – B – C for 2020.

        For 2019:
        A = $23,000
        B = $17,250
        C = $23,000 – (lesser of $27,230 and $20,700) = $2,300
        A – B – C
        = $23,000 – $17,250 – $2,300
        = $3,450

        For 2020, the result of A – B – C will be also be $3,450 (based on the same calculations as for year 2019).

        Aly’s pension adjustment correction is $6,900. Therefore, the plan administrator must file the prescribed information return with the Canada Revenue Agency to report the $6,900 amount. The filing deadline for the form is 60 days after the end of the second calendar quarter (or August 29, 2021). As a result of pension adjustment correction and the required form being filed with the CRA, Aly’s RRSP room will be increased by $6,900 for taxation year 2021.

        For 2021, the total over-contribution amount, for 2019 and 2020, equals $11,500. Aly will receive a tax T4A slip for $5,750 to report in his income the portion for the over-contribution amount contributed by him. Similarly, Aly’s employer will also receive a tax slip for $5,750 to report in its income the portion of the over-contribution amount contributed by the employer.

        Although the total contribution refund is $11,500, the pension adjustment correction to restore Aly’s RRSP contribution room is limited to $6,900. Aly’s pension adjustment limit for each of 2019 and 2020 was $20,700 (18% x $155,000). The pension adjustment reported on his T4 slips in each of those 2 years was $2,300 more than the pension adjustment limits (23,000 – 20,700 = 2,300). The $4,600 of contributions ($2,300 + $2,300) did not reduce his RRSP contribution room and accordingly should not be part of his pension adjustment correction. The $11,500 refund minus the excluded $4,600 portion equals Aly’s $6,900 pension adjustment correction (and RRSP room increase).

        This amendment comes into force on January 1, 2021.

        Clause 37

        Section 8402 of the Regulations sets out the reporting requirements when certain past service benefit improvements occur under registered pension plans.

        New subsection 8402(4) requires that if a permitted corrective contribution is made under new subsection 147.1(20) of the Act with respect to an individual, the administrator of the plan must file with the Canada Revenue Agency an information return in prescribed form within 120 days after the contribution is made to the plan.

        For more information on the rules to determine a permitted corrective contribution, see the commentary on subsections 147.1(1) and 147.1(20) of the Act.

        This amendment comes into force on January 1, 2021.

        Clause 38

        Pension adjustment correction – employer reporting

        New subsection 8402.01(4.1) requires that if a pension adjustment correction is determined for an individual in connection with a distribution from a money purchase provision of a registered pension plan, the administrator of the plan must file with the Canada Revenue Agency an information return in prescribed form to report the amount.

        Paragraph (a) requires that if the distribution occurs in the first, second or third quarter of a calendar year, the prescribed information return must be filed no later than 60 days after the end of the quarter. Paragraph (b) requires that if the distribution occurs in the fourth quarter of a calendar year, the prescribed information return must be filed before February of the following calendar year.

        Note that subsection 8402.01(5) defines the first quarter, second quarter, third quarter and fourth quarter of a calendar year.

        For more information regarding the determination of a pension adjustment correction, please see the commentary on new subsection 8304.1(16) of the Regulations.

        This amendment comes into force on January 1, 2021.

        Clause 39

        Permissible distributions

        Subparagraph 8502(d)(v) permits a reasonable rate of interest to be added to a return of contributions described in subparagraph 8502(d)(iv). Contributions described in that subparagraph are contributions refunded to an employee from a defined benefit provision of a registered pension plan, where such refund is pursuant to an amendment to a pension plan under which future employee contributions to the provision are reduced.

        Subparagraph 8502(d)(v) is amended to add a reference to subparagraph 8502(d)(iii), thereby permitting a reasonable rate of interest to be added to a return of contributions to avoid the revocation of plan registration.

        This amendment comes into force on January 1, 2021.

        Mandatory Disclosure Rules

        Clause 40

        Assessment and reassessment

        Subsection 152(4) of the Act generally provides that the Minister of National Revenue may, at any time, assess tax and other amounts payable by a taxpayer for a taxation year, but may not assess after the normal reassessment period for the year. Exceptions to this general rule are described in paragraphs 152(4)(a) to (d). Paragraph (b.1) currently provides an exception where an information return described in subsection 237.1(7) or 237.3(2) is not filed as and when required

        Consequential on the amendments to section 237.3, paragraph 152(4)(b.1) is amended so that it applies only in respect of information returns described in subsection 237.1(7). New paragraph 152(4)(b.5) is being added to address situations where an information return is required to be filed under subsection 237.3(2).
        

        This amendment applies to taxation years that begin after 2021.

        Assessment and reassessment

        Subsection 152(4) of the Act generally provides that the Minister of National Revenue may, at any time, assess tax and other amounts payable by a taxpayer for a taxation year, but may not assess after the normal reassessment period for the year. Exceptions to this general rule are described in paragraphs 152(4)(a) to (d).

        Paragraph 152(4) of the Act is amended to add new paragraphs (b.5) to (b.7), consequential on the amendments to section 237.3 and the additions of sections 237.4 and 237.5.

        New paragraph (b.5) provides an exclusion from the normal reassessment period rules where an information return that is required to be filed under subsection 237.3(2) (relating to reportable transactions) is not filed as and when required.

        New paragraph (b.6) provides an exclusion from the normal reassessment period rules where an information return that is required to be filed under subsection 237.4(4) (relating to notifiable transactions) is not filed as and when required.

        New paragraph (b.7) provides an exclusion from the normal reassessment period rules where an information return that is required to be filed under subsection 237.5(2) (relating to uncertain tax treatments) is not filed as and when required.

        These new paragraphs apply to taxation years that begin after 2021.

        Extended period of assessment

        Subsection 152(4.01) of the Act limits the matters in respect of which the Minister of National Revenue can assess when an assessment to which paragraph 152(4)(a), (b), (b.1), (b.3), (b.4) or (c) applies is made beyond the normal reassessment period for a taxpayer in respect of a taxation year. In general terms, such a reassessment can be made only to the extent that it can reasonably be regarded as relating to a matter specified in any of those paragraphs.

        Consequential on the addition of paragraphs 152(4)(b.5) to (b.7), the portion of subsection 152(4.01) before paragraph (a) is amended to include references to these new paragraphs. In addition, paragraph 152(4.01)(b) is amended to include:

        • references to new paragraphs 152(4)(b.5) to (b.7) in its opening words;
        • a revised reference to paragraph 152(4)(b.1) (which has been modified to confine its scope to subsection 237.1(7)) in paragraph 152(4.01)(b)(vii); and
        • references to new paragraphs 152(4)(b.5) to (b.7) in new paragraphs 152(4.01)(b)(viii) to (x).

        For more information, see the commentary on new paragraphs 152(4)(b.5) to (b.7) and on sections 237.3 to 237.5.

        This amendment applies to taxation years that begin after 2021.

        Clause 41

        Interest on penalties

        Subsection 161(11) of the Act requires the payment of interest on penalties imposed under the Act.

        Consequential on the addition of sections 237.4 and 237.5 to the Act, paragraph 161(11)(b.1) is amended to include references to penalty provisions set out in those new sections.

        This amendment comes into force on royal assent.

        Clause 42

        Partnership liable to penalty

        Subsection 163(2.9) of the Act allows a penalty imposed under subsection 163(2.4) or section 163.3, 237.1 or 237.3 to be assessed against a partnership and applies the provisions of the Act relating to assessments, interest, refunds, objections and appeals with respect to the penalty as if the partnership were a corporation.

        Consequential on the addition of section 237.4 to the Act, subsection 163(2.9) is amended to include a reference to that new section.

        This amendment comes into force on royal assent.

        Clause 43

        Subsection 227(10) of the Act empowers the Minister of National Revenue to assess a person for various amounts, including penalties and other amounts payable by the person in respect of the failure to comply with the various provisions of the Act.

        Consequential on the addition of sections 237.4 and 237.5 to the Act, paragraph 227(10)(b)
        is amended to include references to the penalty provisions set out in those new sections.

        This amendment comes into force on royal assent.

        Clause 44

        Definitions

        Subsection 237.3(1) of the Act contains definitions that are relevant for the purposes of the “reportable transaction” rules in section 237.3(1).

        “avoidance transaction”

        The term “avoidance transaction” in subsection 237.3(1) of the Act currently has the same meaning as it does under the General Anti-Avoidance Rule (GAAR) in section 245.

        The definition is amended to mean a transaction if it may reasonably be considered that one of the main purposes of the transaction, or of a series of transactions of which the transaction is a part, is to obtain a tax benefit. This provides a lower threshold for there to be an avoidance transaction under the reportable transaction rules than under the GAAR, which uses a primary purpose test.

        “reportable transaction”

        The definition “reportable transaction” in subsection 237.3(1) of the Act is amended to provide that only one of the conditions described in paragraphs (a) to (c) of this definition need be present in order for a transaction to be a reportable transaction.

        Paragraph (c) of the definition “reportable transaction” is also amended to provide an exclusion from reporting requirements regarding contractual protection offered in the context of normal commercial transactions to a wide market. This amendment is intended to be similar to the exclusion that applies in subparagraph (a)(v) of the definition “advantage” in subsection 207.01(1), in the context of the anti-avoidance rules, set out in Part XI.01 of the Act, which help to ensure that registered plans are not used to provide excessive tax advantages unrelated to their respective basic objectives.

        “tax treatment”

        The new definition “tax treatment” is relevant to paragraph 237.3(2)(a) of the Act, which provides the reporting obligation in respect of reportable transactions.

        The term generally refers to a tax filing position taken by a person, and is largely modeled upon the definitions “tax treatment” and “uncertain tax treatment” in IFRIC Interpretation 23, as developed by the International Financial Reporting Standards (IFRS) Interpretations Committee.

        These amendments and the new definition apply to reportable transactions entered into after 2021.

        Application

        Subsection 237.3(2) of the Act imposes an obligation on certain persons to file an information return in respect of reportable transactions. Currently, this obligation will apply if, in general terms, any of paragraphs (a) to (c) of the definition “reportable transaction” are applicable in respect of an avoidance transaction or series of transactions that includes the avoidance transaction.

        Paragraph 237.3(2)(a) of the Act is replaced to provide that an information return in prescribed form and containing prescribed information in respect of a reportable transaction must be filed with the Minister by every person for whom a tax benefit results from any of the sources set out in subparagraphs (i) to (iii). It also requires reporting by a person for whom a tax benefit is expected to result based on the person’s tax treatment of the reportable transaction. This is intended to ensure that reporting is required in circumstances where a person’s filing position is successfully challenged. The three sources are:

        • the reportable transaction;
        • any other reportable transaction that is part of a series of transactions that includes the reportable transaction; and
        • a series of transactions that includes the reportable transaction.

        This amendment applies to reportable transactions entered into after 2021.

        Application

        Subsection 237.3(4) of the Act currently provides that if more than one person is required to file an information return under subsection (2) in respect of a reportable transaction, the filing of an information return with full and accurate disclosure in prescribed form by one person satisfies the requirement to file for any other person who is also subject to a reporting obligation for the same transaction.

        Subsection 237.3(4) is effectively repealed so that all persons described in any of paragraphs 237.3(2)(a) to (d) of the Act must file an information return for a reportable transaction.

        This amendment applies to reportable transactions entered into after 2021.

        Time for filing return

        Subsection 237.3(5) of the Act sets out the time period within which a person who is required to file an information return under subsection 237.3(2) in respect of a reportable transaction must file the return with the Minister of National Revenue.

        Subsection 237.3(5) of the Act is amended to provide that an information return for a reportable transaction under subsection 237.3(2) is required to be filed with the Minister

        • by a particular person described in paragraph 237.3(2)(a), within 45 days of the earlier of:
          • the day the particular person becomes contractually obligated to enter into the transaction (or a person described in paragraph 237.3(2)(b) becomes contractually obligated to enter into the transaction for the benefit of the particular person); and
          • the day the particular person enters into the transaction (or a person described in paragraph 237.3(2)(b) enters into the transaction for the benefit of the particular person). This is intended to reflect situations where there is no contractual obligation to enter into the transaction before the date the transaction is entered into (for example, if the reportable transaction is an “event”);
          • the day the particular person becomes contractually obligated to enter into the transaction for the benefit of a person described in paragraph 237.3(2)(a); and
          • the day the particular person enters into the transaction for the benefit of a person described in paragraph 237.3(2)(a); and

          This amendment applies to reportable transactions entered into after 2021.

          Tax benefits disallowed

          Subsection 237.3(6) of the Act applies when an information return in respect of a reportable transaction is not filed in accordance with subsection 237.3(2) and when any resulting penalty under subsection 237.3(8) and any interest on that penalty are unpaid. Where subsection (6) currently applies, the General Anti-Avoidance Rule (the GAAR) in subsection 245(2) is deemed to apply, regardless of whether the misuse or abuse test in subsection 245(4) is met.

          Consequential on amendments to the definition “avoidance transaction” in subsection 237.3(1), which delink that definition from the “avoidance transaction” definition used under the GAAR, subsection 237.3(6) is amended so that when it applies, section 245 is to be read without reference to the misuse or abuse test in subsection 245(4). As a result, a transaction would need to be an avoidance transaction as defined in subsection 245(3) for the deeming rule in subsection 237.3(6) to cause the GAAR to apply.

          This amendment applies to reportable transactions entered into after 2021.

          When an information return in respect of a reportable transaction or, in the case of a series of transactions, each reportable transaction that is part of the series, is not filed in accordance with subsection 237.3(2) and subsection 237.3(5) of the Act, every person who has failed to file an information return in respect of the reportable transaction or of each reportable transaction that is part of the series is liable to pay a penalty.

          Subsection 237.3(8) of the Act is amended to provide different penalties for different circumstances. In particular, when a person fails to file an information return in respect of a reportable transaction as required under subsection 237.3(2) on or before the day required under subsection 237.3(5), they are liable to a late-filing penalty equal to

          • in the case of a person for whom a tax benefit results, or – based on the person’s tax treatment of the transaction – is expected to result, from the reportable transaction, as well as another who enters into the reportable transaction for the benefit of that person
            • $500 per week for each failure to report a reportable transaction, up to the greater of $25,000 and 25% of the tax benefit, or
            • for corporations with assets having a total carrying value of $50 million or more for its last taxation year that ends prior to the day on which the information return is required to be filed, a penalty of $2,000 per week for each failure to report a reportable transaction, up to the greater of $100,000 and 25% of the tax benefit; and
            • the amount of the fees charged by that person in respect of the reportable transaction,
            • $10,000, and
            • $1,000 per day that the person fails to report the reportable transaction, up to a maximum of $100,000.

            For greater certainty, where a person enters into a reportable transaction for the benefit of a particular person, the amount of the tax benefit is the amount of the tax benefit for the particular person.
            This amendment applies to reportable transactions entered into after 2021, excluding transactions entered into before the date on which the enacting legislation receives Royal Assent.

            Penalty – greater of amounts

            It is possible for a person to be described in both paragraphs 237.3(2)(b) and (d) in respect of a reportable transaction. Subsection (8) provides different penalty computations for people described in those two paragraphs.

            New subsection (8.1) provides that if a person described in both paragraphs 237.3(2)(b) and (d) fails to file an information return in respect of a reportable transaction as required by subsection 237.3(2) on or before the day required under subsection 237.3(5), that person is liable to a penalty equal to the greater of the amounts determined under paragraphs 237.3(8)(a) and (b).

            New subsection 237.3(8.1) applies to reportable transactions entered into after 2021, excluding transactions entered into before the date on which the enacting legislation receives Royal Assent.

            Determining carrying value

            The penalty under subsection 237.3(8) of the Act is determined in part for certain corporations by reference to the carrying value of the corporation’s assets.

            New subsection (8.2) provides that, for the purpose of subparagraph 237.3(8)(a)(i), the carrying value of the assets of a corporation is to be determined in accordance with paragraphs 181(3)(a) and (b). In effect, the carrying value of the assets of a corporation is based on the corporation’s balance sheet.

            New subsection 237.3(8.2) applies to reportable transactions entered into after 2021, excluding transactions entered into before the date on which the enacting legislation receives Royal Assent.

            Joint and several liability – special cases

            Under subsection 237.3(9), every person who is subject to a penalty under subsection 237.3(8) is jointly and severally, or solidarily, liable to pay the penalty, subject to the limitation provided under subsection 237.3(10) for advisors and promoters.

            Consequential on the imposition of separate reporting requirements and penalties for people in respect of reportable transactions, subsection 237.3(10) is repealed.

            This amendment applies to reportable transactions entered into after 2021, excluding transactions entered into before the date on which the enacting legislation receives Royal Assent.

            Application of ss. 231 to 231.3

            Subsection 237.3(13) of the Act ensures that the provisions of sections 231 to 231.3 dealing with audits, inspections and powers of enforcement apply to any person who is required to file an information return in respect of a reportable transaction under subsection (2) notwithstanding that, at the time of such audit or inspection, a return of income may not have been filed for the taxation year in which a tax benefit results from the repeortable transaction or series of transactions that includes the reportable transaction.

            Consquential on the amendments to section 237.3, subsection (13) is amended to update its language and ensure that the provision applies to the year in which a transaction that is relevant to a tax benefit occurs, even if the tax benefit results in a subsequent year. This may be the case where, for example, a transaction creates a tax attribute that is to be used in a later year.

            This amendment applies to reportable transactions entered into after 2021.

            Clause 45

            Notifiable Transactions

            New section 237.4 of the Act requires certain persons to report to the Minister of National Revenue prescribed information in respect of a notifiable transaction (as defined in subsection 237.4(1)).

            New section 237.4 applies to notifiable transactions entered into after 2021, except that the penalty rules in 237.4(8) to (10) do not apply to notifiable transactions entered into before the date on which the enacting legislation receives Royal Assent.

            Definitions

            New subsection 237.4(1) of the Act provides a number of definitions that apply for the purposes of section 237.4.

            The definition “advisor” is relevant in determining whether a person is required to file an information return in respect of a notifiable transaction, and the amount of the penalty to which that person may be liable under new subsection 237.4(8).

            An “advisor” in respect of a notifiable transaction means each person who provides any assistance or advice with respect to creating, developing, planning, organizing or implementing the notifiable transaction to another person. This includes any person who enters into the notifiable transaction for the benefit of another person.

            A person can also be an advisor in respect of a notifiable transaction if that person provides assistance or advice to any promoter or any other advisor in respect of the transaction, even though the person does not provide contractual protection, assistance or advice directly to the person who entered into the transaction or series. Therefore, although an advisor would generally be a person whose business is to provide professional services or contractual protection to a person entering into a notifiable transaction, other persons can also be considered to be an “advisor” in respect of the transaction or series. More than one person may be an advisor in respect of a particular notifiable transaction or series of transactions.

            A person or partnership that provides advice or representation to a person only in respect of an audit or tax dispute in relation to a particular notifiable transaction would not be an advisor in respect of that notifiable transaction, if they were neither involved in the creation, development, planning, organizing or implementation of the transaction, nor in the providing of contractual protection.

            A “fee”, in respect of a notifiable transaction, has the same meaning as in subsection 237.3(1) of the Act.

            “notifiable transaction”

            New subsection 237.4(3) of the Act gives the Minister of National Revenue the authority to designate transactions or series of transactions for the purposes of section 237.4. This designation is to be made with the concurrence of the Minister of Finance. Subsection 237.4(4) provides a requirement to report notifiable transactions.

            The definition “notifiable transaction” incorporates the transactions and series of transactions designated by the Minister of National Revenue into the reporting requirement rules in section 237.4. In particular, a notifiable transaction is a transaction that is the same as, or substantially similar to, a designated transaction, or a transaction in a series of transactions that is the same as, or substantially similar to, a designated series of transactions.

            Subsection 237.4(2) sets out an interpretative rule that applies with respect to the term “substantially similar” for the purposes of notifiable transactions.

            “Person” includes a partnership. This ensures that partnerships are subject to the notifiable transaction rules.

            “Promoter”, in respect of a notifiable transaction, has the same meaning as in subsection 237.3(1) of the Act.

            “tax benefit”

            “Tax benefit” has the same meaning as in subsection 245(1) of the Act, which contains the General Anti-Avoidance Rule.

            “tax treatment”

            “Tax treatment”, has the same meaning as in subsection 237.3(1) of the Act. For more information, see the commentary on that definition.

            “transaction”

            “Transaction” has the same meaning as in subsection 245(1) of the Act and, as a result, includes an arrangement or event.

            Interpretation – substantially similar

            New subsection 237.4(2) of the Act sets out an interpretation rule regarding the application of the phrase “substantially similar”, which is used in the definition “notifiable transaction” in subsection 237.4(1). Two transactions (or series of transactions) are substantially similar if they are expected to obtain the same or similar types of “tax consequences” (as defined in subsection 245(1)) to one or more persons and the transactions (or series of transactions) are either factually similar or based on the same or similar tax strategy.

            The phrase “substantially similar” is to be interpreted broadly in favour of disclosure, such that the purpose of the obligation to report is not frustrated by slight variations in facts, tax consequences, or tax strategy. To this end, any background information provided in the Minister of National Revenue’s publications setting out the notifiable transactions could be relevant.

            Example Notifiable Transaction

            Assume that the Minister designates the following series of transactions to require reporting in situations where taxpayers attempt to “break” Canadian-controlled private corporation (CCPC) status in order to avoid the application of certain anti-deferral rules in the Act that otherwise apply to CCPCs earning or realizing investment income.

            Foreign Continuance

            A taxpayer’s corporation that holds investment assets, or assets that subsequently become investment assets, and that is initially incorporated in Canada is later continued under the laws of a foreign jurisdiction. As a result, it ceases to be a CCPC by virtue of it no longer being a “Canadian corporation”. However, by ensuring that the central management and control of the corporation are exercised in Canada and that subsection 250(5) does not apply, the corporation remains resident in Canada and, as a result, it is not considered to have emigrated and it is not subject to the foreign accrual property income (FAPI) regime.

            Examples of Substantially Similar Transactions

            The following three examples (Foreign Incorporation, “Skinny” Voting Shares, and Option to Acquire Control) illustrate other series of transactions that are “substantially similar” to the example notifiable transaction provided above describing a foreign continuance to break CCPC status in order to avoid the application of certain anti-deferral rules in the Act. This is because each example:

            • obtains the same tax consequences, with the corporation avoiding the anti-deferral rules that apply to CCPCs and not being subject to the FAPI regime; and
            • is factually similar, in that each takes the same or a slightly different path, through manipulation of either “Canadian corporation” status or “Canadian-controlled” status, to rely on technical provisions of the Act to break the CCPC status while remaining, in substance, a Canadian-controlled private corporation that is ultimately controlled (in law or in fact) by Canadian resident individuals.

            Foreign Incorporation

            A taxpayer initially incorporates a corporation in a foreign jurisdiction and capitalizes it with investment assets, or assets that subsequently become investment assets. Such a corporation would not be a CCPC by virtue of it not being a “Canadian corporation”. However, by ensuring that the central management and control of the corporation are exercised in Canada, the corporation is taxed as a resident of Canada with the result that it is not subject to the foreign accrual property income regime.

            “Skinny” Voting Shares

            On or after incorporation, a corporation that holds or is capitalized with investment assets, or assets that subsequently become investment assets, issues a majority of special voting shares, redeemable for a nominal amount (also known as “skinny” voting shares), to a non-resident person in order to cause the corporation to not be “Canadian-controlled” and, as such, to not be a CCPC. The non-resident person who owns the voting shares is often (but not necessarily) an entity owned and controlled by Canadian residents.

            Alternatively, the skinny voting shares could be issued to a public corporation instead of a non-resident person.

            Option to Acquire Control

            A corporation that holds investment assets, or assets that subsequently become investment assets, issues an option to a non-resident person for the acquisition of a majority of the voting shares of a corporation in order to cause the corporation to not be “Canadian-controlled” and, as such, to not be a CCPC. This right to acquire control through the majority of the voting shares is often (but not necessarily) held by a non-resident entity that is owned by Canadian residents or accommodating non-resident persons.

            Alternatively, the option to acquire control could be issued to a public corporation instead of a non-resident person.

            Designation of notifiable transactions

            New subsection 237.4(3) of the Act authorizes the Minister of National Revenue to designate transactions, or series of transactions, for the purposes of section 237.4. Due to the definition “notifiable transaction” in subsection (1), transactions that have been designated or that are included in a series of transactions that have been designated (including substantially similar transactions or series, as the case may be) are required to be reported under subsection (4).

            Transactions can be designated in the manner that the Minister of National Revenue considers appropriate, such as on the Canada Revenue Agency webpages. The designations are to be made with the concurrence of the Minister of Finance.

            Requirement to file return

            New subsection 237.4(4) of the Act imposes an obligation on certain persons to file an information return in respect of a notifiable transaction. More specifically, the persons required to file information returns are as follows:

            • every person for whom a tax benefit results, or for whom a tax benefit is expected to result based on the person’s tax treatment of the notifiable transaction, from
              • the notifiable transaction,
              • any other notifiable transaction that is part of a series of transactions that includes the notifiable transaction, or
              • a series of transactions that includes the notifiable transaction;

              The reporting requirements apply on a transaction-by-transaction basis. In other words, reporting is required in respect of each transaction that is part of a series of transactions that includes the notifiable transaction. However, subsection 237.4(6) provides that if the reporting of a notifiable transaction describes each transaction in the series, the requirement to report each transaction in the series will be met. More than one person may have a reporting requirement in respect of the same notifiable transaction. As well, every person described in paragraphs 237.4(4)(a) to (d) is required to file an information return for each notifiable transaction in respect of each person for whom a tax benefit could result from the notifiable transaction, or from the series of transactions that includes the notifiable transaction.

              Unless information returns in respect of a notifiable transaction are filed with the Minister of National Revenue, the Minister can deny any tax benefit that could result from the notifiable transaction, and impose a penalty on each person who failed to report any notifiable transaction, to which they would be jointly and severally, or solidarily, liable. Moreover, unless and until an information return in respect of a notifiable transaction is filed as and when required, the Minister of National Revenue may reassess a participant in a notifiable transaction outside of the normal reassessment period for a taxation year in respect of the transaction.

              The information return must contain prescribed information as determined by the Minister of National Revenue. Every person who is subject to a reporting requirement would be expected to make reasonable and good faith efforts to identify the information to be reported and ensure that such information is provided to the Minister of National Revenue in order to satisfy that person’s reporting obligation in respect of a notifiable transaction. New subsection 237.4(11) provides an exclusion from the imposition of failure-to-report penalties if due diligence has been exercised by the person required to report the notifiable transaction.

              Time for filing return

              New subsection 237.4(5) of the Act provides two deadlines for the information return required by subsection 237.4(4) to be filed with the Minister for a notifiable transaction, depending on the person required to file the return.

              A person for whom a tax benefit results from the notifiable transaction (or is expected to result based on the person’s tax treatment of the notifiable transaction), as well as a particular person who enters into the notifiable transaction for the benefit of that person, must file on or before the particular day that is 45 days after the earliest of

              • the day on which the person becomes contractually obligated to enter into the notifiable transaction,
              • the day on which the person enters into the notifiable transaction, and
              • if the person is a person for whom a tax benefit results (or is expected to result based on the person’s tax treatment of the notifiable transaction) and another person enters into the notifiable transaction for the benefit of that person, the day on which the notifiable transaction is entered into.

              An advisor or promoter in respect of the notifiable transaction (as well as by a person who does not deal at arm’s length with the advisor or promoter and is or was entitled to a fee) must file no later than the earliest deadline for a person described above in respect of the notifiable transaction.

              Clarification of reporting transactions in series

              New subsection 237.4(6) of the Act provides that the filing of a full and accurate information return under subsection 237.4(4) by a person in respect of a notifiable transaction that is part of a series that includes the notifiable transaction, and which accurately describes each transaction that is part of the series, will satisfy the person’s reporting obligation in respect of each transaction that is part of the series.

              Assessments

              New subsection 237.4(7) of the Act provides the Minister of National Revenue with the authority to make such assessments, determinations and redeterminations that are necessary to give effect to the new rules in subsection 237.4(8), which impose penalties for late-filing in respect of the notifiable transaction reporting obligation imposed under new subsection 237.4(4).

              New subsection 237.4(8) of the Act provides penalties for the failure to file an information return in respect of a notifiable transaction as required under subsection 237.4(5). If it applies, a person is liable to a late-filing penalty equal to

              • in the case of a person for whom a tax benefit results, or – based on the person’s tax treatment of the transaction – is expected to result, from the notifiable transaction, as well as another who enters into the notifiable transaction for the benefit of that person
                • $500 per week for each failure to report a notifiable transaction up to the greater of $25,000 and 25% of the tax benefit, or
                • for corporations that have assets that have a total carrying value of $50 million or more for its last taxation year that ends prior to the day on which the information return is required to be filed, a penalty of $2,000 per week for each failure to report a notifiable transaction, up to the greater of $100,000 and 25% of the tax benefit; and
                • the amount of the fees charged by that person in respect of the notifiable transaction,
                • $10,000, and
                • $1,000 per day that the person fails to report the reportable transaction, up to a maximum of $100,000.

                Penalty – deeming rule

                Under new subsection 237.4(9) of the Act, if a person is liable to a penalty under paragraph 237.4(8)(b) on account of having entered into a notfiable transaction for the benefit of a person for whom a tax benefit results (or, based on the person’s tax treatment of the transaction, is expected to result) as well as under paragraph 237.4(8)(d) on account of their entitlement to a fee from their dealings with an advisor or promoter in respect of the notifiable transaction, the amount of that person’s penalty is deemed to be equal to the greater of the amounts determined under paragraphs 237.4(8)(a) and (b).

                Determining carrying value

                The penalty under subsection 237.4(8) of the Act is determined in part for certain corporations by reference to the carrying value of the corporation’s assets.

                New subsection 237.4(10) provides that, for the purpose of new subparagraph 237.4(8)(a)(i), the carrying value of the assets of a corporation is to be determined in accordance with paragraphs 181(3)(a) and (b). In effect, the carrying value of the assets of a corporation is based on the corporation’s balance sheet.

                Joint and several liability

                New subsection 237.4(11) of the Act provides that every person who is subject to a penalty under subsection 237.4(8) in respect of a notifiable transaction is jointly and severally, or solidarily, liable to pay the penalty.

                Due diligence

                New subsection 237.4(12) of the Act provides that a person will not be liable to a penalty under subsection 237.4(8) if the person has exercised the degree of care, diligence and skill to prevent the failure to file that a reasonably prudent person would have exercised in comparable circumstances. Whether a person has exercised the degree of care, diligence and skill required will be based on the facts and circumstances of each case.

                Reporting not an admission

                New subsection 237.4(13) of the Act provides that the filing of an information return under new subsection 237.4(4) in respect of a notifiable transaction is not an admission by the person that any transaction is part of a series of transactions. This is similar to paragraph 237.3(12)(b), which applies to reportable transactions.

                Application of ss. 231 to 231.3

                New subsection 237.4(14) of the Act ensures that the provisions of sections 231 to 231.3 dealing with audits, inspections and powers of enforcement apply to any person who is required to file an information return in respect of a notifiable transaction, and regardless of whether a return of income has been filed for the taxation year in which the tax benefit results (or is expected to result) from the notifiable transaction.

                The language in subsection 237.4(14) also ensures that the provision applies to the year in which a transaction that is relevant to a tax benefit occurs, even if the tax benefit results in a subsequent year. This may be the case where, for example, a transaction creates a tax attribute that is to be used in a later year.

                Solicitor-client privilege

                For the purpose of new section 237.4 of the Act, a lawyer (including an advocate or notary in the province of Quebec) who is an advisor in respect of a notifiable transaction is not required to disclose in an information return in respect of the transaction, any information in respect of which the lawyer, on reasonable grounds, believes that a client of the lawyer has solicitor-client privilege. Such a person would nevertheless be expected to provide information for which solicitor-client privilege does not exist.

                Clause 46

                Reportable Uncertain Tax Treatments

                New section 237.5 of the Act requires certain corporations to report to the Minister of National Revenue in respect of reportable uncertain tax treatments.

                New section 237.5 applies to taxation years that begin after 2021, except that the penalty under subsection 237.5(5) does not apply to taxation years that begin before the date on which the enacting legislation receives Royal Assent.

                Definitions

                New subsection 237.5(1) of the Act provides a number of definitions that apply for the purposes of section 237.5.

                “consolidated financial statements”

                “Consolidated financial statements”has the meaning assigned by subsection 233.8(1) of the Act. It means financial statements in which the assets, liabilities, income, expenses and cash flows of the members of a group are presented as those of a single economic entity.

                “Person” includes a partnership. This makes possible the consideration of partnerships within consolidated groups, for purposes of the definition “relevant financial statements”.

                “relevant financial statements”

                “Relevant financial statements” of a corporation for a taxation year means audited financial statements that are

                • in respect of the corporation, or a consolidated group of which the corporation is a member (for this purpose, a consolidated group is a group of two or more persons required to prepare consolidated financial statements for financial reporting purposes under applicable accounting principles);
                • prepared in accordance with International Financial Reporting Standards, or other country-specific generally accepted accounting principles (GAAP) relevant for corporations that are listed on a stock exchange outside Canada; and
                • prepared for a period of time that ends in the year.

                “reportable uncertain tax treatment”

                A “reportable uncertain tax treatment” of a corporation for a taxation year is a tax treatment of the corporation in respect of which uncertainty is reflected in relevant financial statements of the corporation for the year.

                Relevant financial statements of a corporation are generally audited financial statements of the corporation, or audited consolidated financial statements of a group of which the corporation is a member, that are prepared in accordance with International Financial Reporting Standards or other country-specific generally accepted accounting principles (GAAP) relevant for domestic public companies (e.g., U.S. GAAP). For more information, see the commentary on the definition “relevant financial statements.”

                As noted in the commentary on the definition “tax treatment,” the meaning of tax treatment is largely modeled upon the definitions “tax treatment” and “uncertain tax treatment” in IFRIC Interpretation 23, as developed by the IFRS Interpretations Committee.

                Uncertainty is considered to be reflected in financial statements when the tax attributes used in the financial statements (e.g., taxable profit, tax loss, tax bases, unused tax losses, unused tax credits, tax rates) are not consistent with the tax treatment. For example, regarding financial statements prepared in accordance with IFRS, pursuant to IFRIC Interpretation 23:

                • an uncertain tax treatment is a tax treatment for which there is uncertainty over whether the relevant taxation authority (in the Canadian context, this ultimately refers to the courts) will accept the tax treatment under tax law;
                • if an entity concludes it is not probable that the taxation authority will accept an uncertain tax treatment, the entity shall reflect the effect of uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates; and
                • an entity shall reflect the effect of uncertainty for each uncertain tax treatment that it concludes is not probable that the taxation authority will accept by using the most likely amount or the expected value amount, rather than the tax treatment.

                As another example, uncertainty would be considered to be reported in financial statements prepared in accordance with U.S. GAAP when a reserve with respect to a tax position taken in a tax return (which is similar in meaning to a tax treatment) has been recorded in the financial statements. For example, pursuant to Accounting Standards Codification (ASC) 740, if it is not more likely than not that a tax position taken in a tax return will be sustained upon examination, an unrecognized tax benefit is established in the financial statements for the entire tax benefit.

                “reporting corporation”

                A “reporting corporation” for a taxation year is a corporation that has prepared relevant financial statements for the year, has assets that have a total carrying value of $50 million or more at the end of the year and is required to file a return of income for the year under section 150 of the Act.

                A corporation that is a resident of Canada, or a non-resident with a taxable presence in Canada, is required to file a return of income under section 150, and as such would be a reporting corporation if the other criteria described above are met.

                Pursuant to subsection 237.5(9), the determination of whether the carrying value of a corporation’s assets is greater than or equal to $50 million at the end of a taxation year (the “asset threshold”) is to be made in accordance with paragraphs 181(3)(a) and (b).

                For this purpose, relevant financial statements are generally audited financial statements of a corporation, or audited consolidated financial statements of a group of which the corporation is a member (referred to as the corporation’s “group”), that are prepared in accordance with International Financial Reporting Standards or other country-specific generally accepted accounting principles (GAAP) relevant for domestic public companies (e.g., U.S. GAAP).

                Canadian GAAP require that the audited financial statements of public corporations be prepared in accordance with IFRS. As a result, Canadian public corporations would generally be reporting corporations, subject to the asset threshold. Since IFRS require that a public corporation’s financial statements be prepared on a consolidated basis with those corporations that it controls, each corporation that is controlled by a Canadian public corporation would also be a reporting corporation (each subject to the asset threshold).

                A reporting corporation also includes a private corporation that meets the asset threshold if it, or its group, has audited financial statements prepared in accordance with IFRS. While normally a private corporation would not have audited financial statements prepared in accordance with IFRS, where it does, those statements would be presented on a consolidated basis with those corporations it controls and would, when appropriate, reflect uncertainty pertaining to uncertain tax treatments relating to those corporations.

                A reporting corporation also includes a corporation that meets the asset threshold if it, or its group, has audited financial statements prepared in accordance with another country-specific GAAP relevant for domestic public corporations (e.g., U.S. GAAP). For example, a U.S.-resident corporation with audited financial statements prepared in accordance with U.S. GAAP would be a reporting corporation if the carrying value of its assets is greater than or equal to $50 million at the end of the year. This is meant to ensure that the requirement to disclose reportable uncertain tax treatments will apply appropriately where a corporation is a Canadian corporation controlled by a non-resident corporation, or is a non-resident corporation carrying on business in Canada through a permanent establishment.

                “tax treatment”

                “Tax treatment” of a corporation means a treatment in respect of a transaction, or series of transactions, that the corporation uses, or plans to use, in a return of income or an information return (or would use in a return of income or an information return if a return of income or an information return were filed), and includes the corporation’s decision not to include a particular amount in a return of income or an information return. This definition is largely modeled upon the definitions “tax treatment” and “uncertain tax treatment” in IFRIC Interpretation 23, as developed by the IFRS Interpretations Committee.

                “transaction”

                “Transaction”has the same meaning as in subsection 245(1) of the Act and, as a result, includes an arrangement or event.

                Requirement to file return

                New subsection 237.5(2) of the Act provides that a reporting corporation that has one or more reportable uncertain tax treatments for a taxation year shall file with the Minister of National Revenue an information return in prescribed form and containing prescribed information in respect of each reportable uncertain tax treatment. This information is expected to be readily available given the need to analyze uncertain tax treatments as part of the preparation of relevant financial statements.

                Time for filing return

                New subsection 237.5(3) of the Act provides that a corporation required to file an information return under new subsection 237.5(2), in respect of a reportable uncertain tax treatment of the corporation for a taxation year, must file the return with the Minister of National Revenue on or before the corporation’s filing-due date for the year.

                Assessments

                New subsection 237.5(4) of the Act provides the Minister of National Revenue with the authority to make such assessments, determinations and redeterminations as are necessary to give effect to new subsection 237.5(5), which provides a penalty for late-filing in respect of the reportable uncertain tax treatment reporting obligation imposed under new subsection 237.5(2).

                New subsection 237.5(5) of the Act provides that when a corporation fails to file, on or before the day required under new subsection 237.5(3), an information return in respect of a reportable uncertain tax treatment, the corporation is liable to a penalty equal to $2,000 for each week during which the failure continues, up to a maximum of $100,000.

                Due diligence

                Under new subsection 237.5(6) of the Act, a corporation will not be liable for a penalty under new subsection 237.5(5) if the corporation has exercised the degree of care, diligence and skill to prevent the failure to file that a reasonably prudent person would have exercised in comparable circumstances. Whether a corporation has exercised the degree of care, diligence and skill required will be based on the facts and circumstances of each case.

                Reporting not an admission

                New subsection 237.5(7) of the Act provides that the filing of an information return under new subsection 237.5(2) in respect of a reportable uncertain tax treatment is not an admission by the corporation that the tax treatment is not in accordance with the Act and the Income Tax Regulations, or that any transaction is part of a series of transactions. This is similar to paragraph 237.3(12), which applies to reportable transactions.

                Application of ss. 231 to 231.3

                New subsection 237.5(8) of the Act ensures that the provisions of sections 231 to 231.3 dealing with audits, inspections and powers of enforcement apply to a corporation that is required to file, under new subsection 237.5(2), an information return in respect of a reportable uncertain tax treatment for a taxation year, notwithstanding that, at the time of such audit or inspection, a return of income might not have been filed for the year.

                Determining carrying value

                New subsection 237.5(9) of the Act provides that, for the purposes of the definition “reporting corporation” in new subsection 237.5(1), the carrying value of the assets of a corporation is to be determined in accordance with paragraphs 181(3)(a) and (b). As such, the carrying value of a corporation’s assets is to be based on the corporation’s balance sheet.

                Avoidance of Tax Debts

                Clause 47

                Section 160 contains rules regarding the joint and several, or solidary liability of a taxpayer for the income tax liability of another person who, when not dealing at arm's length with the taxpayer, transferred property to the taxpayer for consideration less than its fair market value.

                Consequential on the introduction of the section 160 anti-avoidance rules in new subsection 160(5) and the section 160 avoidance planning penalty in new section 160.01, section 160 is amended by adding new subsection 160(0.1). Subsection 160(0.1) provides that in sections 160 and 160.01, a transaction includes an arrangement or event. Please see the commentary in new subsection 160(5) and new section 160.01 for more information.

                The amendments come into force on April 19, 2021.

                The amount that a taxpayer is liable to pay in respect of the transfer of property from a non-arm's length tax debtor is determined under subsection 160(1). The Minister may assess the taxpayer for such a liability under subsection 160(2).

                Subsection 160(1) applies in situations where

                • there has been a non-arm's length transfer of property, and
                • the transferor had a pre-existing tax liability or a tax liability that arose in the year of the transfer.

                If these conditions are met, the transferee is jointly and severally, or solidarily liable in respect of amounts payable by the transferor under the Act, to the extent that the fair market value of the property transferred exceeded the value of the consideration given for the property at the time of the transfer.

                New subsection 160(5) introduces new anti-avoidance rules to address abusive planning which seeks to circumvent the application of section 160.

                New paragraph 160(5)(a) addresses planning that attempts to circumvent the application of section 160 by avoiding the requirement that property be transferred between persons that do not deal at arm’s length. This paragraph deems, for the purposes of subsections 160(1) to (4), a transferor and transferee of property to not be dealing at arm’s length at all times in a transaction or series of transactions involving the transfer if

                • at any time during the period beginning immediately prior to the transaction or series of transactions and ending immediately after the transaction or series of transactions, the transferor and transferee do not deal at arm’s length, and
                • it is reasonable to conclude that one of the purposes of undertaking or arranging the transaction or series of transactions is to avoid joint and several, or solidary liability of the transferee and transferor for an amount payable under this Act.

                New paragraph 160(5)(b) addresses planning that attempts to circumvent the application of section 160 by avoiding the requirement that the transferor have an existing tax debt owing in or in respect of the taxation year in which the property is transferred, or any preceding taxation year. This new paragraph provides that an amount that the transferor is liable to pay under this Act (including, for greater certainty, an amount that the transferor is liable to pay under section 160, regardless of whether the Minister has made an assessment under subsection 160(2) for that amount) is deemed to have become payable in the taxation year in which the property was transferred, if it is reasonable to conclude that one of the purposes for the transfer of property is to avoid the payment of future tax debt by the transferor or transferee.

                New paragraph 160(5)(c) addresses planning that attempts to effectively avoid section 160 through a transaction or series of transactions that reduce the fair market value of consideration given for the property transferred in order to render all or a portion of a tax debt of the transferor uncollectible. .

                In applying section 160, subparagraph 160(1)(e)(i) is intended to limit the joint and several, or solidary liability in respect of any tax liability of the transferor for the year in which the transfer took place, or any preceding taxation year. Subparagraph (1)(e)(i) limits the joint and several, or solidary nature of the transferor’s tax liability to the extent that, at the time of the transfer, the fair market value of the transferred property exceeds the fair market value of the consideration received.

                New paragraph (5)(c) ensures that the fair market value of consideration given for the transferred property remains relevant in determining the extent to which joint and several, or solidary liability applies under section 160, including

                • at the time that the consideration was given, and
                • throughout the period that begins immediately before and ends immediately after the transaction or series that includes the transfer of property.

                For this purpose, paragraph (5)(c) deems the amount determined under subparagraph (1)(e)(i) to be the greater of

                • the amount otherwise determined under subparagraph 160(1)(e)(i) without reference to this new anti-avoidance rule, and
                • the amount by which the fair market value of the property at the time of the transfer exceeds either
                  • the lowest fair market value of the consideration (that is held by the transferor) given for the property at any time during the period beginning immediately prior to the transaction or series of transactions and ending immediately after the transaction or series of transactions, or
                  • nil if the consideration is in a form that is cancelled or extinguished during the period.

                  For greater certainty, the reference to nil in clause (b) in the description of B in the formula in (5)(c)(ii) is intended to ensure an appropriate extension of the joint and several, or solidary liability in situations where property given as consideration (for example, a promissory note) is subsequently cancelled or extinguished for proceeds below the fair market value at the time it is given.

                  The amendments come into force on April 19, 2021.

                  Clause 48

                  New section 160.01 introduces a penalty for section 160 avoidance planning.

                  New subsection 160.01(1) provides definitions that apply for the purpose of new section 160.01. The terms defined for this purpose are “culpable conduct”, “gross entitlements”, “person”, “planning activity”, “section 160 avoidance planning” “tax attribute”, “tax attribute transaction”, “tax benefit”, “transferee” and “transferor”. For more detail, see the commentary below on some of these definitions.

                  “Culpable conduct” has the same meaning as in subsection 163.2(1) and means conduct, whether an act or a failure to act, that

                  • is tantamount to intentional conduct,
                  • shows an indifference as to whether the Act is complied with, or
                  • shows a wilful, a reckless or a wanton disregard of the law.

                  “Gross entitlements” has the same meaning as in subsection 163.2(1) and means all amounts to which the person (or another person not dealing at arm’s length with the person) is entitled, either before or after that time and either absolutely or contingently, to receive or obtain in respect of section 160 avoidance planning. The definition “gross entitlements” is relevant for the purpose of computing a penalty under new subsection 160.01(2) for engaging in section 160 avoidance planning.

                  “Planning activity” has the same meaning as in subsection 163.2(1) and generally includes organizing or creating an arrangement, entity, plan or scheme. It also includes participating (directly or indirectly) in the selling of an interest in, or the promotion of, an arrangement, entity, plan or scheme.

                  “Section 160 avoidance planning” is the planning activity in respect of which the penalty in new subsection 160.01(2) applies. This is planning activity that involves the removal of property of a taxpayer with the intention of rendering all or a portion of a current or future tax liability debt of the taxpayer uncollectible, while attempting to circumvent the application section 160 and the joint and several, and solidary liability in respect of that tax debt. Such planning means planning activity in respect of a transaction or series of transactions that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, has as one of its main purposes the reduction of a transferee’s joint and several, or solidary, liability for tax payable under this Act by a transferor (or that would be payable by the transferor if not for a tax attribute transaction).

                  “Tax attribute” is relevant for the definition “tax attribute transaction”. The definition is intended to capture anything that is commonly understood to be a tax attribute. A tax attribute means a balance, pool or other amount determined under the Act that is or may be relevant in computing income or in determining a taxpayer's liability for tax under the Act in any taxation year. The definition specifically includes,

                  • a capital loss, non-capital loss, restricted farm loss, farm loss and limited partnership loss;
                  • an amount that is deductible in computing the person’s income;
                  • any balance of undeducted outlays, expenses or other amounts;
                  • paid-up capital in respect of a share of any class of the capital stock of a corporation;
                  • cost or capital cost of a property;
                  • an amount deductible from an amount otherwise payable under the Act; and
                  • an amount that is deemed to have been remitted as an amount payable under the Act.

                  Note that this list of inclusions does not in any way restrict or limit the definition. The list essentially provides examples of tax attributes.

                  “Tax attribute transaction” is a transaction commonly utilized in planning activity that attempts to circumvent the application of section 160, and render all or part of a person’s tax liability uncollectible . Such a transaction means a transaction or series of transactions in which a tax attribute – of a person that dealt at arm’s length with a transferor or transferee of property immediately before the transaction or series of transactions – is used, directly or indirectly, to provide a tax benefit for the transferor (or, if the transferor is amalgamated with another corporation, the “new corporation” as defined in subsection 87(1)).

                  “tax benefit” has the same meaning as in subsection 163.2(1) and means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act.

                  “transferee” refers to “transferee” as used in subsections 160(1) and (5).

                  “transferor” refers to “transferor” as used in subsections 160(1) and (5).

                  The amendments come into force on April 19, 2021.

                  New subsection 160.01(2) provides for a penalty for a person who engages in, participates in, assents to or acquiesces in section 160 avoidance planning. The penalty is equal to the lesser of

                  • 50% of the amount payable under this Act (determined without reference to subsection 160.01(2)), the joint and several, or solidary, liability for which was sought to be avoided through the planning; and
                  • the total of $100,000 and the person’s gross entitlements at the time at which the notice of assessment of the penalty is sent to the person in respect of the planning.

                  The amendments come into force on April 19, 2021.

                  New subsection 160.01(3) is similar to subsection 163.2(9). Subsection 160.01(3) provides that the penalty in subsection 160.01(2) does not apply to a person solely because the person provided clerical services or secretarial services with respect to the section 160 avoidance planning.

                  The amendments come into force on April 19, 2021.

                  Registration and Revocation Rules Applicable to Charities

                  Clause 49

                  Winding-up period

                  Subsection 168(3.1) provides for the automatic revocation of the registration of a qualified donee (which includes registered charities) upon it becoming a “listed terrorist entity” (as defined in subsection 149.1(1)).

                  Subsection 188(1.1) imposes a tax payable in respect of the revocation of the charity's registration.

                  Subsection 188(1.2) applies for the purpose of calculating the revocation tax under subsection 188(1.1), in respect of certificates issued under the Charities Registration (Security Information) Act and notices of intention to revoke the registration of a charity that are issued by the Minister of National Revenue.

                  Subsection 188(1.2) is amended to also apply in respect of an entity that becomes a “listed terrorist entity”. It is also restructured to improve readability.

                  This amendment comes into force on June 29, 2021.

                  Taxes Applicable to Registered Investments

                  Clause 50

                  Tax payable

                  A registered investment is a qualified investment for registered disability savings plans, registered education savings plans, registered retirement savings plans, registered retirement income funds, deferred profit sharing plans and tax-free savings accounts (collectively, “registered plans”), as well as for other registered investments. Section 204.6 of the Act provides the manner of calculating the tax payable by a registered investment that holds property, at the end of any month, which is not a qualified investment for the type of registered plan in respect of which the registered investment is registered. (A qualified investment is referred to in subsection 204.6(1) as a “prescribed investment”.) Subsection 204.6(1) imposes a monthly tax equal to 1% of the property’s fair market value at the time of acquisition.

                  Subsection 204.6(1) is amended to modify the formula for calculating the amount of tax payable by a registered investment. In general terms, the amended formula prorates the tax to the extent that the shares or units of the registered investment are held by investors that are registered plans or by other registered investments described in paragraphs 204.4(2)(b), (d) or (f). Shares or units held by widely-held registered investments (pooled funds, mutual fund trusts and mutual fund corporations) described in paragraphs 204.4(2)(a), (c) and (e) will not be taken into account in determining the amount of tax payable. Those widely-held registered investments are not themselves subject to qualified investment restrictions.

                  More specifically, the amount of tax payable is determined by the formula 0.01(A x B/C).

                  • Variable A is the fair market value of the property that is not a qualified investment at the time it was acquired by the taxpayer.
                  • Variable B is the total number of shares or units of the registered investment held by registered plans or by other registered investments (described in paragraphs 204.4(2)(b), (d) or (f)) at the end of the month.
                  • Variable C is the total number of issued and outstanding shares or units of the registered investment held by all investors at the end of the month.

                  The effect of the fraction B/C is that the 1% per month tax will be reduced based on the proportion of shares (or units, as the case may be) that are held by investors who are not themselves subject to qualified investment rules.

                  For example, assume that a registered investment acquires a non-qualified investment valued at $1,000,000 at acquisition and that 100 units of the registered investment are held by a trust described in 204.4(2)(d) and 400 units of the registered investment are held by a mutual fund trust as defined in 132(6). At the end of each month for which it holds the non-qualified investment, the registered investment would be liable to pay a tax equal to $2000 (i.e. 0.01 x $1,000,000 x 100/500).

                  This amendment applies to taxes calculated in respect of months after 2020. It also applies to a month before 2021 if

                  • no notice of assessment in respect of an amount payable for the month had been sent to the taxpayer before April 20, 2021, or
                  • if a notice of assessment was sent to the taxpayer before April 20, 2021 in respect of a month, the taxpayer had outstanding rights of objection or appeal in respect of the assessment on April 20, 2021.

                  Audit Authorities

                  Clause 51

                  Information gathering

                  Section 231.1 grants authorized persons, for any purpose related to the administration or enforcement of the Act, powers of audit, examination and entry. It also enables them to require a taxpayer, or any other person, to give them all reasonable assistance and to answer all proper questions relating to the administration or enforcement of the Act.

                  Paragraph 231.1(1)(a) grants authorized persons the power to inspect, audit or examine any document, including books and records. This paragraph is amended to modernize its language and to render it consistent with the language employed in subsection 288(1) of the Excise Tax Act.

                  Paragraph 231.1(1)(b) grants authorized persons the power to examine any property or process of, or matter relating to a taxpayer or any other person. This paragraph is amended to modernize its language and to render it consistent with the language employed in subsection 288(1) of the Excise Tax Act. The existing reference to “property in an inventory of a taxpayer” is removed as it is considered to be contemplated in existing references to any property or process of, or matter relating to a taxpayer or any other person.

                  Paragraph 231.1(1)(c) grants authorized persons the power to enter into any premises or place where any business is carried on, any property is kept, anything is done in connection with any business or any books or records are or should be kept. This paragraph is amended to include restrictions upon the entry by authorized persons into a dwelling house, consistent with those contained in existing subsection 231.1(2) of the Act (which is being consequentially repealed).

                  Paragraph 231.1(1)(d) requires that authorized persons be given all reasonable assistance and that all their proper questions be answered.
                  

                  This paragraph is amended to make clear that a taxpayer, or any other person, will be required to provide this assistance, as well as to answer these questions with respect to the administration or enforcement of the Act.
                  

                  Paragraph 231.1(1)(d) is further amended to require a taxpayer or any other person to attend with the authorized person at a place designated by the authorized person, or by video-conference or another form of electronic communication, and confirms the requirement to answer questions orally. This amendment is made to take into account the evolution of the means of communication available for information gathering purposes. The reference to video-conference or another form of electronic communication is consistent with communications options available for hearings under section 32 of the Federal Court Rules.
                  

                  Revised paragraph 231.1(1)(d) also confirms that authorized persons may require that questions be answered in writing, in any form that they specify. For example, authorized persons may require answers to be provided in electronic form, such as by way of an electronic spreadsheet or table. They may also require that questions be answered by means of an organizational chart, or by another similar form of presentation.

                  New paragraph 231.1(1)(e) is added to make clear that authorized persons may require a taxpayer or any other person to give the authorized person all reasonable assistance with anything the authorized person is authorized to do under this Act.

                  These amendments come into force on royal assent.

                  Prior authorization

                  Consequential on amendments to paragraph 231.1(1)(c), which has been revised to include restrictions upon the entry by authorized persons into a dwelling house, subsection 231.1(2) of the Act is repealed.

                  This amendment come into force on royal assent.

                  Capital Cost Allowance for Clean Energy Equipment

                  Clause 52

                  Subsection 1104(13) of the Regulations sets out various definitions that apply for purposes of capital cost allowance (CCA) Classes 43.1 and 43.2 in Schedule II to the Regulations. Consequential on the amendments to expand eligibility for Classes 43.1 and 43.2 to equipment used to convert specified waste materials into liquid and solid biofuels, subsection 1104(13) is amended by repealing the conditions in paragraphs (a) and (b) of the definition “plant residue” as those conditions are no longer necessary. Furthermore, the definition “separated organics” is amended by removing the reference to a system that converts biomass into biogas.
                  

                  Subsection 1104(13) is also amended by adding the definitions “specified waste material”, “liquid biofuel” and “solid biofuel” as part of the expansion of eligibility for Classes 43.1 and 43.2 to waste conversion equipment, as noted above. These definitions, and the added definition “gaseous biofuel”, are also relevant for the purposes of paragraph (b) of the definition “qualified zero-emission technology manufacturing activities” in subsection 5202(1), which is relevant for computing the zero-emission technology manufacturing deduction under new section 125.2 of the Act.

                  Consistent with the expansion in respect of equipment used to produce liquid and solid biofuels, the definitions “biogas” and “producer gas” are amended to expand the types of feedstock from which these gases may be produced or generated. This in turn expands eligibility for certain property in Classes 43.1 and 43.2 (for instance subparagraph (d)(ix) of Class 43.1).

                  Finally, the definition “producer gas” is also amended, in respect of property of a taxpayer that becomes available for use by the taxpayer after 2024, to remove from that definition producer gas that is generated from feedstock of which more than 25 percent of the energy content is from fossil fuel. The energy content is to be expressed as the higher heating value of the feedstock.

                  “gaseous biofuel”

                  The definition “gaseous biofuel” applies for the purpose of determining what constitutes a qualified zero-emission technology manufacturing activity under subparagraph (b)(ii) of that definition in subsection 5202(1).
                  Gaseous biofuel means a fuel produced all or substantially all from specified waste material (also a defined term added to this subsection), that is a gas at a temperature of 15.6 degrees Celsius and a pressure of 101 kPa.

                  “liquid biofuel”

                  The definition “liquid biofuel” is added as part of the amendments to expand property eligible for Classes 43.1 and 43.2 under subparagraph (d)(xi) to equipment used to produce liquid biofuel. This new definition also applies for the purpose of determining what constitutes a qualified zero-emission technology manufacturing activity under subparagraph (b)(iii) of that definition in subsection 5202(1).

                  Liquid biofuel means fuel all or substantially all of which is produced from a specified waste material (also a defined term added to this subsection) or carbon dioxide. In order to be liquid biofuel, the fuel must be in a liquid state at a temperature of 15.6 degrees Celsius and at a pressure of 101 kPa.

                  “solid biofuel”

                  The definition “solid biofuel” is added as part of the amendments to expand property eligible for Classes 43.1 and 43.2 under new subparagraph (d)(xx) to equipment used to produce solid biofuels. This new definition also applies for the purpose of determining what constitutes a qualified zero-emission technology manufacturing activity under subparagraph (b)(iv) of that definition in subsection 5202(1).

                  Solid biofuel means a fuel produced all or substantially from specified waste material (also a defined term added to this subsection). In order to be considered a solid biofuel, the fuel must be solid at a temperature of 15.6 degrees Celsius and a pressure of 101 kPa and have been produced either through 1) a thermo-chemical conversion process to increase its carbon fraction and densification or 2) densification into pellets or briquettes.

                  Solid biofuel does not include charcoal that is used for cooking or fuels with fossil fuel-derived ignition accelerants.

                  “specified waste material”

                  The definition “specified waste material” is introduced consequential on the amendments to expand eligibility for Classes 43.1 and 43.2 to equipment converting any of a list of organic materials into liquid biofuel or solid biofuel. Conversion equipment that converts specified waste material into these fuels is eligible for one of those two Classes. Specifically, “specified waste material” means wood waste, plant residue, municipal waste, sludge from an eligible sewage treatment facility, spent pulping liquor, food and animal waste, manure, pulp and paper by-product and separated organics.

                  The definition “biogas” is amended in order to expand the types of feedstocks from which the gas can be produced. Specifically, this amendment provides that biogas may be produced from any specified waste material (for more information, see the commentary on new definition “specified waste material” in this subsection) as long as it is produced by the process of anaerobic digestion. This amendment expands Class 43.1 eligibility for certain property, for instance, property that meets the criteria under subparagraph (d)(xiii) of that Class.

                  “producer gas”

                  Producer gas means fuel the composition of which, excluding its water content, is all or substantially all non-condensable gases, that is generated primarily from eligible waste fuel (as defined in subsection 1104(13)) using a thermo-chemical conversion process and that is not generated using any fuels other than eligible waste fuel or fossil fuel. This definition is relevant for the purposes of determining whether equipment is eligible for inclusion in Classes 43.1 and 43.2 because it is described in clause (c)(i)(A), subparagraph (d)(ix) or subparagraph (d)(xvi) of Class 43.1 of Schedule II to the Regulations.

                  The definition “producer gas” is amended in two ways. First, new paragraph (a) of this definition expands the list of eligible feedstock such that producer gas may be primarily generated from any feedstock that is a specified waste material even if that feedstock is not considered eligible waste fuel, e.g., spent pulping liquor or separated organics. For more information, see the commentary on new definition “specified waste material” in this subsection.

                  This definition is also amended by adding paragraph (b) to introduce a restriction for property of a taxpayer that becomes available for use by the taxpayer after 2024. Specifically, the restriction that producer gas may in part be generated from fossil fuel as long as it is primarily generated from eligible waste fuel and specified waste material is narrowed such that producer gas may only be generated from feedstock of which no more than 25 percent of the energy content is from fossil fuel. The energy content is to be expressed as the higher heating value of the feedstock.

                  These amendments apply to property acquired after April 18, 2021 that has not been used or acquired for use before April 19, 2021.

                  Clause 53

                  Subsection 1104(17) of the Regulations requires environmental compliance in respect of certain properties before those properties can be included in Class 43.1 or 43.2 in Schedule II in the Regulations. The subsection applies to property that would otherwise be included in subparagraph (c)(i) of Class 43.1 and to property that is described in any of subparagraphs (d)(viii), (ix), (xi), (xiii), (xiv), (xvi) and (xvii) of Class 43.1 or paragraph (a) of Class 43.2. Property is not in compliance unless, at the time the property becomes available for use by the taxpayer, the taxpayer has satisfied the requirements of all environmental laws, by-laws and regulations of Canada, a province or a municipality in Canada, or of a municipal or public body performing a function of government in Canada, applicable in respect of the property.

                  If a property is not included in Class 43.1 or 43.2 because of subsection 1104(17), the property may remain included in the CCA class that would otherwise apply to that property.

                  Paragraph 1104(17)(a) is amended to add references to new subparagraphs (d)(xix), (xx), (xxi) and (xxii) of Class 43.1 to Schedule II to ensure that the requirement for environmental compliance also applies to property described in those subparagraphs. This amendment is consequential on the introduction of

                  • new subparagraph (d)(xix) of Class 43.1 to Schedule II (to include certain pumped hydroelectric energy storage installation property),
                  • new subparagraph (d)(xx) of Class 43.1 to Schedule II (including certain equipment used to produce solid biofuels),
                  • new subparagraph (d)(xxi) of Class 43.1 to Schedule II (including certain hydrogen refuelling equipment), and
                  • new subparagraph (d)(xxii) of Class 43.1 to Schedule II (including certain equipment to produce hydrogen through electrolysis of water).

                  These amendments apply to property acquired after April 18, 2021 that has not been used or acquired for use before April 19, 2021.

                  Clause 54

                  ITR
                  Schedule II

                  Schedule II to the Regulations lists the properties that can be included in each CCA class. A portion of the capital cost of depreciable property is deductible as CCA each year. CCA rates for each type of property, identified by their CCA classes, are set out in section 1100 of the Regulations.

                  Class 43.1 (30% CCA rate)

                  Class 43.1 in Schedule II currently provides an accelerated CCA rate of 30% per year (on a declining-balance basis) for clean energy generation and energy conservation equipment. Class 43.1 (and indirectly Class 43.2) is amended to expand eligibility for inclusion in Classes 43.1 and 43.2 to certain

                  • pumped hydroelectric energy storage installations,
                  • equipment that generates electricity by diverting or impeding the natural flow of water (or by using physical barriers or dam-like structures),
                  • active solar heating equipment, equipment that is part of a ground source heat pump system, and equipment used to produce electrical or heat energy from geothermal energy, that is used to heat water for use in a swimming pool,
                  • equipment used to convert specified waste material into solid biofuel,
                  • equipment used to convert specified waste material or carbon dioxide into liquid biofuel,
                  • equipment used to produce hydrogen by electrolysis of water, and
                  • hydrogen refuelling equipment.

                  Class 43.1 (and indirectly Class 43.2) is also amended to restrict eligibility for inclusion in Classes 43.1 and 43.2 for certain cogeneration systems, specified waste-fuelled heat production equipment and producer gas generating equipment.

                  Paragraphs (a) to (c) of Class 43.1 describe cogeneration property eligible for that Class. Subparagraphs (c)(i) and (ii) describe different kinds of cogeneration systems. Property that is a part of one of those systems is eligible for inclusion in this Class, provided the conditions contained in paragraphs (a) and (b), and the preamble to Class 43.1, are met.

                  Subparagraph (c)(i) describes a system used to generate electrical energy, or both electrical and heat energy (using certain eligible fuels), that meet a designated heat rate threshold. Subparagraph (c)(i) is amended to designate a new heat rate and to add a new restriction on the use of fossil fuels.

                  Specifically, clause (c)(i)(B) is amended to designate a new heat rate threshold applicable to systems rated to generate more than three megawatts of electrical energy. Such systems will be required to meet a heat rate threshold of less than or equal to 11,000 British thermal units (BTUs) per kilowatt-hour on an annual basis. The heat rate is determined using the formula

                  (2 x B + C)/(D + E/3412)

                  • B is the energy content of fossil fuel other than solution gas (expressed as the higher heating value of the fuel) consumed by the system in BTU, C is the energy content of the eligible waste fuel, producer gas and spent pulping liquor (expressed as the higher heating value of the fuel) consumed by the system in BTU,
                  • D is the gross electrical energy produced by the system in kilowatt-hours, and
                  • E is the net useful energy in the form of heat exported from the system to a thermal host in BTU.

                  For greater certainty, in computing the formula, element B is first multiplied by 2 before being added to C in determining the numerator and element E is first divided by 3412 before being added to D in determining the denominator.

                  Subparagraph (c)(i) is also amended by adding clause (C), implementing a new restriction on fossil fuel usage by these systems. Specifically, clause (C) provides that no more than 25 percent of the energy content of the fuel used by the system may be from fossil fuel, as determined on an annual basis. The energy content is to be expressed as the higher heating value of the fuel.
                  

                  Subparagraph (c)(ii) applies to certain equipment that is part of an enhanced combined cycle system. Subparagraph (c)(ii) is repealed in order that such equipment no longer be considered eligible for Class 43.1.

                  Active Solar Heating, Ground Source Heat Pump and Geothermal Energy Systems Used to Heat a Swimming Pool

                  Subparagraph (d)(i) of Class 43.1 in Schedule II applies to certain active solar heating equipment and equipment that is part of a ground source heat pump system. Clause (d)(i)(B) is amended to remove the restriction on active solar heating equipment, and ground-source heat pump system equipment, used to heat swimming pools.

                  Subparagraph (d)(iv) of Class 43.1 in Schedule II applies to certain heat recovery equipment used primarily for the purpose of conserving energy, reducing the requirement to acquire energy or extracting heat for sale, by extracting for reuse thermal waste that is generated directly in an industrial process (other than an industrial process that generates or processes electrical energy). Subparagraph (d)(iv) is amended to remove the restriction on heat recovery equipment used to heat swimming pools.

                  Subparagraph (d)(vii) of Class 43.1 in Schedule II describes equipment that is used primarily for the purpose of generating electrical energy, heat energy, or both electrical and heat energy, solely from geothermal energy (geothermal energy equipment). Subparagraph (d)(vii) is amended to remove the restriction on geothermal energy equipment used to heat swimming pools.

                  Specified Waste-Fuelled Heat Production Equipment

                  Subparagraph (d)(ix) of Class 43.1 to Schedule II describes equipment used for the sole purpose of generating heat energy, primarily from the consumption of eligible waste fuel and not using any fuel other than eligible waste fuel or fossil fuel.

                  Subparagraph (d)(ix) is amended by adding new clause (B) to implement the restriction that equipment is not eligible under this subparagraph unless it uses fuel no more than 25 percent of the energy content of which is from fossil fuel, as determined on an annual basis. The energy content is to be expressed as the higher heating value of the fuel.

                  Clauses (A), (C) and (D) describe the existing conditions for eligibility under this subparagraph. Clause (A) provides that the equipment must be used for the sole purpose of generating heat energy, not using any fuel other than eligible waste fuel, fossil fuel, producer gas and any combination of those fuels (subject to the above limitation on fossil fuel). Clause (C) provides that for greater certainty eligible equipment may include (if the other conditions are met) fuel handling equipment used to upgrade the combustible portion of the fuel, control, feedwater and condensate systems and other ancillary equipment. Clause (D) provides that this subparagraph excludes equipment used for the purpose of producing heat energy to operate electrical generating equipment, buildings or other structures, heat rejection equipment (such as condensers and cooling water systems), fuel storage facilities, other fuel handing equipment and property otherwise included in Class 10 or 17.

                  Equipment Used to Produce Liquid Fuel from Specified Waste Material or Carbon Dioxide

                  Subparagraph (d)(xi) of Class 43.1 in Schedule II applies to certain equipment that is part of a system that is used to convert wood waste or plant residue into bio-oil. Subparagraph (xi) is expanded to apply to equipment that is part of a system to convert any specified waste material (as defined in subsection 1104(13)), or convert carbon dioxide, into liquid biofuel (also defined in subsection 1104(13)). Such equipment includes storage, materials handling and ash-handling equipment and equipment used to remove non-combustibles and contaminants from the fuels produced.

                  However, Clauses (A), (B) and (D) to (F) provide that eligible equipment to produce liquid biofuel excludes equipment used to produce spent pulping liquor, equipment used for the collection or transportation of specified waste material or carbon dioxide, property that would otherwise be included in Class 17, automotive vehicles, and buildings or other structures. Clause (C) excludes equipment used for the transmission or distribution of liquid biofuel external to the liquid biofuel production site.

                  Water Current, Wave or Tidal Energy Technologies Using Physical Barriers

                  Subparagraph (d)(xii) of Class 43.1 in Schedule II includes a fixed location fuel cell that meets certain conditions. In particular, to be included in subparagraph (d)(xii), the fuel cell must use hydrogen, either generated from the fuel cell itself (if the fuel cell is reversible) or from ancillary electrolysis equipment that uses electricity all or substantially all of which is generated using kinetic energy of flowing water or wave or tidal energy, among other sources of energy. Subparagraph (d)(xii) is amended to remove the restriction on electricity generated by using kinetic energy of flowing water or wave or tidal energy by diverting or impeding the natural flow of water, or by using physical barriers or dam-like structures.

                  Subparagraph (d)(xiv) of Class 43.1 in Schedule II to the Regulations currently describes property that generates electricity using kinetic energy of flowing water or wave or tidal energy without diverting or impeding the natural flow of the water or by using physical barriers or other dam-like structures. Subparagraph (d)(xiv) is amended to remove the restriction related to diverting or impeding the natural flow of the water, or using physical barriers or other dam-like structures.

                  Producer Gas Generating Equipment

                  Subparagraph (d)(xvi) of Class 43.1 includes in that Class equipment used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating producer gas. Eligible equipment to generate producer gas does not include equipment used to generate producer gas if the gas is to be converted into liquid biofuels or chemicals. This subparagraph is amended to clarify that this restriction applies to the conversion of producer gas into any liquid fuel, not just liquid biofuel.

                  Subparagraph (d)(xvi) is also amended by adding new Clause (B) to implement the restriction that equipment may only be eligible under this subparagraph if the equipment generates producer gas using feedstock no more than 25 percent of the energy content of which is from fossil fuel, as determined on an annual basis. The energy content is to be expressed as the higher heating value of the feedstock.

                  Clauses (A), (C) and (D) describe the existing conditions. Clause (A) provides that the equipment must be used by the taxpayer, or a lessee of the taxpayer, primarily for the purpose of generating producer gas (subject to the restrictions on conversion to liquid fuels or chemicals). Clause (C) provides that eligible equipment may include (if the other conditions are met) related piping (including fans and compressors), air separation equipment, storage equipment, equipment used for drying or shredding feedstock, ash-handling equipment, equipment used to upgrade producer gas into biomethane and equipment used to remove non-combustibles and contaminants from the producer gas. Clause (D) provides that this subparagraph excludes buildings or other structures, heat rejection equipment (such as condensers and cooling water systems), equipment used to convert producer gas into liquid fuels or chemicals and property otherwise included in Class 10 or 17.

                  Pumped Hydroelectric Energy Storage Installations

                  New subparagraph (d)(xix) of Class 43.1 in Schedule II to the Regulations is introduced to expand Class 43.1 eligibility to pumped hydroelectric energy storage installations all or substantially all of the use of which by the taxpayer, or by a lessee of the taxpayer, is to store electrical energy.

                  In order to be eligible for inclusion in Class 43.1, the pumped hydroelectric energy storage installation must meet one of two additional conditions currently found in subclauses (d)(xvii)(B)(I) and (II). The first condition is that the electrical energy to be stored by the electrical energy storage equipment must be used in connection with Class 43.1 property of the taxpayer or a lessee of the taxpayer, as the case may be. The alternative condition, if the first condition is not met, is that the round trip efficiency of the electrical energy storage system is greater than 50%. In this regard, the round trip efficiency of the electrical energy storage system is to be computed by reference to the quantity of electrical energy supplied to and discharged from the electrical energy storage system.

                  Eligible property will include (assuming either the condition in subclause (I) or (II) is met) reversing turbines, transmission equipment, dams, reservoirs and related structures. However, new clauses (A) and (B) do not include property used solely for back-up electrical energy or buildings. This subparagraph is not intended to apply to large-scale hydroelectric power generating stations, as this subparagraph includes only equipment used for storing and discharging electrical energy by means of pumping water.

                  Equipment Used to Produce Solid Fuel from Specified Waste Material

                  New subparagraph (d)(xx) of Class 43.1 in Schedule II is introduced to expand Class 43.1 eligibility to equipment used to produce solid biofuel. Specifically, subparagraph (d)(xx) includes in Class 43.1 equipment all or substantially all of the use of which by the taxpayer, or by a lessee of the taxpayer, is to produce solid biofuel (as defined in amended subsection 1104(13)) from specified waste material (as defined in amended subsection 1104(13)). Eligible equipment includes storage, materials handling and ash-handling equipment.

                  However, new clauses (A) to (D) provide that eligible equipment used to produce solid biofuel does not include

                  • equipment used to make wood chips, hog fuel or black liquor,
                  • property that would otherwise be included in Class 17,
                  • automotive vehicles, or
                  • buildings and other structures.

                  Hydrogen Refuelling Equipment

                  New subparagraph (d)(xxi) of Class 43.1 in Schedule II is introduced to expand Class 43.1 eligibility to hydrogen refuelling equipment. Specifically, subparagraph (d)(xxi) includes in Class 43.1 equipment used by a taxpayer, or by a lessee of the taxpayer, to dispense hydrogen for use in automotive equipment powered by hydrogen. Such equipment includes vaporization, compression, cooling and storage equipment.

                  However, new clauses (A) to (E) specify exclusions in this regard. Clause (A) excludes equipment used for the production of hydrogen and the transmission of hydrogen from an external location to the hydrogen refuelling equipment. Clause (B) excludes equipment used for the transmission or distribution of electricity from an external location to the hydrogen refuelling equipment. Clauses (C) to (E) provide that eligible equipment does not include automotive vehicles, auxiliary electrical generating equipment or buildings and other structures.

                  Hydrogen Production by Electrolysis of Water

                  New subparagraph (d)(xxii) of Class 43.1 in Schedule II to the Regulations is introduced to expand Class 43.1 eligibility to certain equipment where all or substantially all of its use by the taxpayer, or a lessee of the taxpayer, is to produce hydrogen by electrolysis of water. Such equipment includes electrolysers, rectifiers and other ancillary electrical equipment, water treatment and conditioning equipment and equipment used for hydrogen compression and storage.

                  However, new clauses (A) to (E) provide exclusions similar to those for hydrogen refueling equipment in new subparagraph (d)(xi). Specifically, clause (A) excludes equipment used for the transmission or distribution of hydrogen external to the hydrogen production site. Clause (B) excludes equipment used for the transmission or distribution of electricity external to the hydrogen production site. Clauses (C) to (E) provide that eligible equipment does not include automotive vehicles, auxiliary electrical generating equipment or buildings and other structures.

                  The amendments to expand Class 43.1 eligibility, which incorporates the amendments to subparagraphs (d)(i), (iv), (vii), (xi), (xii) and (xiv) and the addition of new subparagraphs (d)(xix) to (xxii), apply to property acquired after April 18, 2021 that has not been used or acquired for use before April 19, 2021.

                  The amendments to restrict Class 43.1 eligibility, which incorporates amendments to subparagraphs (c)(i), (d)(ix) and (d)(xvi), and the repeal of subparagraph (c)(ii), apply to property of a taxpayer that becomes available for use by the taxpayer after 2024, except for the amendment to (d)(xvi) to replace the reference to “liquid biofuels” with “liquid fuels” which applies to property acquired after April 18, 2021 that has not been used or acquired for use before April 19, 2021.

                  Class 43.2 (50% CCA rate)

                  Class 43.2 in Schedule II provides for a temporary accelerated CCA rate of 50% for certain Class 43.1 properties. Class 43.2 includes some of the properties described in Class 43.1 if acquired after February 22, 2005 and before 2025. However, under paragraph (a) and subparagraph (b)(i) of Class 43.2, certain cogeneration equipment will not be included in Class 43.2 if it does not meet a more stringent heat rate threshold.

                  Consequential to amendments to paragraph (c) of Class 43.1 mandating a higher fuel efficiency standard for cogeneration systems in that Class, Class 43.2 is also amended to remove its more stringent heat rate threshold which is now unnecessary. Specifically, paragraph (a) is amended to remove reference to the more stringent heat rate threshold and subparagraph (b)(i) is repealed.

                  These amendments apply to property of a taxpayer that becomes available for use by the taxpayer after 2024.

                  For more information, please see the commentary on paragraph (c) of Class 43.1.

                  Excessive Interest and Financing Expenses Limitation

                  Overview

                  New sections 18.2 and 18.21 of the Income Tax Act (the “Act”), together with new paragraph 12(1)(l.2), are the core rules of the new excessive interest and financing expenses limitation (“EIFEL”) regime. This regime comprises rules consistent with the recommendations in the report under Action 4 of the Group of 20 and Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting Project (the “BEPS Action 4 report”).The BEPS Action 4 report recommends certain limitations on the deductibility of interest and other financing costs to address BEPS.

                  Consistent with the BEPS Action 4 report, the objective of the EIFEL regime is to address BEPS issues arising from taxpayers deducting for income tax purposes excessive interest and other financing costs, principally in the context of multinational enterprises and cross-border investments. To this end, as recommended in the Action 4 report, the rules adopt an “earnings stripping” approach, which restricts a taxpayer’s (or group’s) deductions for interest expense and other financing costs to an amount that is commensurate with the taxable income generated by its activities in Canada. In general terms, the EIFEL rules limit the amount of net interest and financing expenses (being the taxpayer’s interest and financing expenses net of its interest and financing revenues) that may be deducted in computing a taxpayer’s income to no more than a fixed ratio of earnings before interest, taxes, depreciation and amortisation (“EBITDA”). For this purpose, the main elements are:

                  • Fixed ratio: Pursuant to the definition “ratio of permissible expenses” in new subsection 18.2(1), the applicable fixed ratio is 30%. In order to facilitate transition to the new regime, a fixed ratio of 40% applies only for taxation years beginning on or after January 1, 2023 and before January 1, 2024 (subject to an anti-avoidance rule that denies a taxpayer the benefit of the 40% ratio, generally where the taxpayer undertakes a transaction to extend the period for which that ratio otherwise applies).
                  • Interest and financing expenses and revenues: The interest and other financing expenses of the taxpayer that are within scope of the new rules are set out in the definition “interest and financing expenses” in subsection 18.2(1) (which is the main definitions subsection for the new regime). Notably, they include, among other things, interest and financing expenses that are “capitalized” and deducted as capital cost allowance or as amounts in respect of resource expenditure pools; an imputed amount of interest in respect of certain finance leases; certain amounts that are economically equivalent to interest or that can reasonably be considered part of the cost of funding; and various expenses incurred in obtaining financing. The definition “interest and financing revenues” captures the taxpayer’s interest income, as well as other income from the provision of financing. Anti-avoidance rules are included to ensure amounts are included in interest and financing expenses, or excluded from interest and financing revenues, where a transaction or series of transactions is undertaken to avoid such results.
                  • EBITDA: The taxpayer’s EBITDA is referred to in the rules as “adjusted taxable income” (defined in subsection 18.2(1)), and is determined based on amounts taken into account in computing its tax liability under Part I of the Act, rather than amounts reported in in its financial statements. A taxpayer’s adjusted taxable income is its taxable income (or, in the case of a non-resident taxpayer, taxable income earned in Canada), determined under Part I of the Act, as adjusted for certain items. In general terms, the adjustments add amounts to taxable income to effectively reverse deductions for the taxpayer’s interest and financing expenses, certain tax expenses and capital cost allowance, as well as certain other amounts; and subtract amounts to effectively reverse inclusions in taxable income for interest and financing revenues and untaxed income, as well as certain other amounts.

                  Notably, because it is based on taxable income, the taxpayer’s adjusted taxable income reflects deductions for dividends received under section 112 (for inter-corporate dividends) and 113 (for dividends received from foreign affiliates). Thus, the new rules can limit the deductibility of interest expense incurred to invest in shares that produce such dividends. Adjusted taxable income is also reduced by losses deducted under section 111, except to the extent they are attributable to the taxpayer’s net interest and financing expenses for a prior taxation year.
                  The main operative rule of the EIFEL regime, which denies deductibility of net interest and financing expenses that exceed the permissible level, is in new subsection 18.2(2). That subsection applies to taxpayers that are corporations or trusts (the definition “taxpayer” in subsection 18.2(1) excludes natural persons and partnerships). It also applies in computing a non-resident taxpayer’s taxable income earned in Canada.

                  Similar to the approach under the thin capitalization rules in the Act, the EIFEL rules also apply indirectly in respect of partnerships, as interest and financing expenses and revenues of a partnership are attributed to members that are corporations or trusts, in proportion to their interests in the partnership. Where a taxpayer has excessive interest and financing expenses, as determined under the rules, new paragraph 12(1)(l.2) – which is analogous to paragraph 12(1)(l.1) of the thin capitalization rules – includes an amount in the taxpayer’s income in respect of the taxpayer’s share of partnership interest and financing expenses.

                  The EIFEL rules generally apply mechanically; there is no avoidance or purpose condition for the operative rules to apply. They also apply after existing limitations on the deductibility of interest and financing expenses in the Act, including the thin capitalization rules (subsection 18(4) is amended to clarify this ordering). Any expenses whose deductibility is denied under such existing limitations are excluded from a taxpayer’s interest and financing expenses for purposes of the new rules.

                  To ensure the new rules are appropriately targeted at significant BEPS risks, exceptions from the rules are provided for “excluded entities” (defined in subsection 18.2(1)), which generally comprise:

                  • Canadian-controlled private corporations that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million (i.e., the top end of the phase-out range for the small business deduction);
                  • Groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less; and
                  • Certain standalone Canadian-resident corporations and trusts, and groups consisting exclusively of Canadian-resident corporations and trusts that carry on substantially all of their business in Canada. This exclusion applies only if, in general terms, no non-resident is a foreign affiliate of, or holds a significant interest in, any group member, and no group member has any significant amount of interest and financing expenses payable to a “tax-indifferent investor” (as defined in subsection 248(1)).

                  Excluded interest

                  The EIFEL rules allow two taxable Canadian corporations to jointly elect that one or more interest payments made by one to the other in a taxation year be excluded from the new interest limitation under subsection 18.2(2). This exclusion applies if the conditions in the definition “excluded interest” in subsection 18.2(1) are met. Among other conditions, the two corporations must be “eligible group corporations” in respect of each other, which is defined in subsection 18.2(1) as, essentially, corporations that are related or affiliated (in determining affiliation for these purposes, section 251.1 is to be read without reference to the definition “controlled” in subsection 251.1(3)). This election is principally intended to ensure that the EIFEL rules do not negatively impact transactions that are commonly undertaken within Canadian corporate groups to allow the losses of one group member to be offset against the income of another group member.

                  Group ratio rules

                  The “group ratio” rules are in new section 18.21. Where the conditions in new subsection 18.21(2) are met, the Canadian members of a group of corporations and/or trusts can jointly elect into the group ratio rules for a taxation year (special rules allow certain standalone entities that are not part of any group to also elect into the group ratio rules). In that case, instead of the maximum amount a group member is permitted to deduct in respect of interest and financing expenses for the year being determined by reference to the 30% fixed ratio (or 40%, for the transitional year), it is determined in accordance with the group ratio rule in subsection 18.21(3).

                  In essence, the group ratio rules allow a taxpayer to deduct interest and financing expenses in excess of the fixed ratio, provided the taxpayer is a member of an accounting consolidated group whose ratio of net third-party interest expense to book EBITDA exceeds the fixed ratio and the group is able to demonstrate this based on audited consolidated financial statements. The “consolidated group” is defined in subsection 18.21(1) as an ultimate parent and all the entities that are fully consolidated in the parent’s consolidated financial statements, or that would be if the group were required to prepare such statements under IFRS.

                  The consolidated group’s net third-party interest expense and book EBITDA are referred to in these rules as the “group net interest expense” and “group adjusted net book income”, respectively, and are defined in subsection 18.21(1). They are determined based on amounts in the group’s audited consolidated financial statements, with appropriate adjustments. There is an exclusion from group net interest expense for certain interest payments to persons or partnerships that are outside the consolidated group but that do not deal at arm’s length with one or more consolidated group members; that have a significant equity interest in any Canadian group member; or a significant equity interest in which is held by any Canadian group member.

                  Under the group ratio rule in subsection 18.21(3), the maximum amount of interest and financing expenses the consolidated group members are collectively permitted to deduct is generally determined as the total of each Canadian group member’s adjusted taxable income multiplied by the group ratio. The group allocates this maximum deductible amount among its Canadian group members in its group ratio election. This “flexible” allocation mechanism allows taxpayers to allocate the group ratio deduction capacity where it is most needed.

                  The group ratio rules contain certain limitations that are mainly intended to account for the possibility that some group members may have negative book EBITDA, or the group as a whole may have negative book EBITDA, such that a simple formulaic determination of the group ratio could give unreasonably high or meaningless results. These limitations are found in the definition “group ratio”, in subsection 18.21(1), and the “allocated group ratio amount” rule in subsection 18.21(3).

                  Excess capacity and cumulative unused excess capacity

                  If a taxpayer’s net interest and financing expenses exceed the maximum permitted for a taxation year, there are two mechanisms that could nonetheless enable the taxpayer to deduct all or a portion of this excess.

                  The first applies to the extent the taxpayer has “excess capacity” (as defined in subsection 18.2(1)) for any of its three immediately preceding taxation years that it has not used for another purpose in any of those preceding years (the rules, in effect, provide a three-year carry-forward of excess capacity). In general terms, the taxpayer’s “excess capacity” for a taxation year is the amount, if any, by which the maximum amount it is permitted to deduct in respect of interest and financing expenses for the year (determined as its fixed ratio multiplied by its adjusted taxable income, plus its interest and financing revenues for the year) exceeds its actual interest and financing expenses for the year. A taxpayer is treated as not having excess capacity for any taxation year in which it is subject to the group ratio. A taxpayer’s unused excess capacity is the portion that has not been either used to deduct the taxpayer’s own excess interest and financing expenses for another year, or transferred by the taxpayer to another group member in a previous year.

                  The taxpayer’s unused excess capacity carryforwards from the three taxation years immediately preceding a given taxation year are automatically applied to reduce the amount of interest and financing expenses whose deductibility would otherwise be denied under subsection 18.2(2) in the given year. The amount of excess capacity that is used in this manner is referred to as the taxpayer’s “absorbed capacity” for the given taxation year (defined in subsection 18.2(1)). This mechanism is intended to “smooth” the impact of earnings volatility under the EIFEL rules.

                  The second mechanism applies where the taxpayer does not have sufficient unused excess capacity carryforwards of its own, but has one or more other Canadian group members that have “cumulative unused excess capacity” they can transfer to the taxpayer. A group member’s cumulative unused excess capacity for a taxation year is the amount available to transfer to other group members in the year, and is essentially its excess capacity for the year plus its unused excess capacity carryforwards from the three immediately preceding taxation years. Transfers of cumulative unused excess capacity require a joint election by the transferor and transferee under new subsection 18.2(4), and can only be made between taxable Canadian corporations that are “eligible group corporations” in respect of each other (as defined in subsection 18.2(1)). The transferee’s resulting “received capacity” amount can reduce the amount of interest and financing expenses whose deductibility is otherwise denied to the transferee under subsection 18.2(2). The transferor’s cumulative unused excess capacity is reduced by any amounts transferred to other group members, as well as by the taxpayer’s own absorbed capacity.

                  “Relevant financial institutions” (defined in subsection 18.2(1)) are prohibited from transferring their cumulative unused excess capacity to other group members. Financial institutions would be expected to often have excess capacity because their regular business activities tend to result in interest income exceeding their interest expense. This restriction is intended to ensure such net interest income cannot be used to shelter the interest and financing expenses of other members of the financial institution's group.

                  Carryforwards of denied interest and financing expenses

                  Interest and financing expenses that are denied under subsection 18.2(2), and amounts included in a taxpayer’s income under paragraph 12(1)(l.2) in respect of the taxpayer’s share of a partnership’s interest and financing expenses, are carried forward for up to twenty years. There is no carry-back for such amounts; however, the three-year carry-forward of excess capacity (reflected in a taxpayer’s “cumulative unused excess capacity”) is in substance equivalent to a carry-back of denied interest and financing expenses.

                  The carry-forward of denied interest and financing expenses is provided under new paragraph 111(1)(a.1), which allows a taxpayer to deduct its prior-year “restricted interest and financing expenses” (defined in subsection 111(8)) in computing its taxable income. This deduction is available in two circumstances. First, a taxpayer can deduct its restricted interest and financing expenses to the extent of its excess capacity for a taxation year. Second, a taxpayer can deduct such amounts to the extent it has “received capacity” for a taxation year, as a result of having received a transfer out of the cumulative unused excess capacity of another group member.

                  A taxpayer’s excess capacity or received capacity, as the case may be, is automatically reduced to the extent of its restricted interest and financing expense carryforwards. In effect, this reflects a mandatory “ordering rule”, whereby those amounts must be applied to enable the deduction of prior-year restricted interest and financing expenses, before a taxpayer can transfer its excess capacity to another group member or use its received capacity to deduct its excess interest and financing expenses for the current year. Like the three-year carry-forward of excess capacity, the carry-forward of restricted interest and financing expenses is intended to smooth the impact of earnings volatility under the EIFEL rules.

                  Continuity rules for new tax attributes

                  In connection with the new EIFEL regime, amendments to sections 87 and 88 of the Act ensure that, where a particular corporation undergoes an amalgamation or winding-up, its carryforwards of restricted interest and financing expenses and cumulative unused excess capacity generally are inherited by the new corporation formed on the amalgamation or the parent corporation in respect of the winding-up.

                  Amendments are also made to sections 111 and 256.1, to address the impact of a change of control (or “loss restriction event”) on a taxpayer’s EIFEL tax attributes. Similar to the treatment of non-capital loss carryforwards under existing subsection 111(5), a taxpayer’s carryforwards of restricted interest and financing expenses generally remain deductible following a loss restriction event, to the extent the taxpayer continues to carry on the same business following the loss restriction event. However, a taxpayer’s cumulative unused excess capacity does not survive a loss restriction event.

                  Transitional rules

                  Transitional rules are included in the enacting legislation for the EIFEL regime. Under these rules, a taxpayer can elect, jointly with its other corporate group members, if any, to have special rules apply for the purpose of determining the excess capacity of the taxpayer (and each group member, if any) for each of the three taxation years (referred to as the “pre-regime years”) immediately preceding its first taxation year in respect of which the EIFEL rules apply. Absent these transitional rules, a taxpayer would not have excess capacity for any of the pre-regime years because the EIFEL rules otherwise do not apply in respect of the pre-regime years. The transitional rules, in effect, allow electing taxpayers a three-year carry-forward of their excess capacity (as determined under the special transitional rules) for pre-regime years, as this excess capacity is included in computing a taxpayer’s cumulative unused excess capacity.

                  In determining a taxpayer’s excess capacity for pre-regime years, the transitional rules seek to approximate what would have been the unused portion of the taxpayer’s excess capacity – after being used for transfers to other group members with excess interest and financing expenses over the maximum permitted, and to deduct the taxpayer’s own excess interest and financing expenses for any pre-regimes years – had the EIFEL rules applied in respect of the pre-regime years.

                  Effective date

                  The EIFEL rules generally apply in respect of taxation years that begin on or after January 1, 2023. An anti-avoidance rule applies, to cause the EIFEL rules to apply earlier for a particular taxpayer, if the taxpayer undertakes a transaction or series of transactions to trigger an early taxation year-end for the purpose of deferring the application of the EIFEL rules. The rules apply with respect to existing as well as new borrowings.

                  Clause 56

                  Partnership – interest and financing expenses add back

                  New paragraph 12(1)(l.2) provides an income inclusion for a taxpayer that is a member of a partnership, as part of the new excessive interest and financing expenses limitation (EIFEL) regime. The core rules for this new regime are in new sections 18.2 and 18.21. For more information, see the commentary on those sections.

                  In general terms, new paragraph 12(1)(l.2) includes an amount in a taxpayer’s income for a taxation year – in respect of the taxpayer’s share of the interest and financing expenses for the year of partnerships of which the taxpayer is a member – if the taxpayer’s total interest and financing expenses for the year exceed the amount of such expenses that the taxpayer is permitted to deduct, as determined under subsection 18.2(2). This income inclusion is in lieu of a denial of a deduction under subsection 18.2(2), but with similar effect, and is analogous to paragraph 12(1)(l.1) of the thin capitalization rules.

                  The reason the income inclusion under paragraph 12(1)(l.2) is needed is that income is calculated at the partnership level and allocated to partners on a net basis (i.e., after any deduction of amounts at the partnership level in respect of the interest and financing expenses). Consequently, deductions for the partnership’s interest and financing expenses cannot be denied at the partner level under subsection 18.2(2). The income inclusion effectively adds back to the partner’s income the relevant portion of the interest and financing expenses that are deducted at the partnership level.

                  The amount included under paragraph 12(1)(l.2) in a taxpayer’s income for a taxation year is determined by the formula A x B.

                  Variable A is essentially the total of the taxpayer’s share of the interest and financing expenses for the year of all partnerships of which the taxpayer is a member. All of these amounts are included in computing the taxpayer’s interest and financing expenses under paragraph (g) of the definition “interest and financing expenses” in subsection 18.2(1), with an exclusion for any amounts included in the taxpayer’s income under paragraph 12(1)(l.1) of the thin capitalization rules.

                  Variable B integrates the income inclusion under paragraph 12(1)(l.2) with the excessive interest and financing expenses limitation in subsection 18.2(2).

                  By virtue of subparagraph (i) of variable B, no amount will be included in the taxpayer’s income under paragraph 12(1)(l.2) if the taxpayer is an “excluded entity” for a taxation year (as defined in subsection 18.2(1)), as such entities are similarly not subject to the limitation in subsection 18.2(2).

                  If the taxpayer is not an excluded entity, the amount determined for B is the proportion determined under the formula in subsection 18.2(2) in respect of the taxpayer for the year. This is the proportion of the taxpayer’s interest and financing expenses that exceeds the maximum permitted under subsection 18.2(2). While this proportion is generally used to determine the proportion of the taxpayer’s deductions in respect of interest and financing expenses that is denied under subsection 18.2(2), the proportion can nonetheless be computed and applied for purposes of paragraph 12(1)(l.2), even in a year when the taxpayer’s only interest and financing expenses are derived from its share of partnership expenses.

                  Thus, paragraph 12(1)(l.2), in effect, includes in a taxpayer’s income an amount representing the proportion, of the taxpayer’s share of the interest and financing expenses of partnerships of which it is a member, that is determined to be “excessive” based on the limitation under subsection 18.2(2).

                  New paragraph 12(1)(l.2) applies in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                  Source of income

                  Subsection 12(2.02) mainly ensures that any income inclusion under paragraph 12(1)(l.1) for a non-resident partner will be taxable in Canada to the same extent as income earned through the partnership.

                  This subsection is amended to provide for similar treatment in respect of any income inclusion under new paragraph 12(l)(l.2). For further information, see the commentary on paragraph 12(1)(l.2) and section 18.2.

                  This amendment applies in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                  Clause 57

                  Limitation on deduction of interest

                  Subsection 18(4) provides thin capitalization rules to limit deductions, by corporations and trusts, in respect of interest on debt owing to certain specified non-residents. If the amount of debt owing to specified non-residents exceeds a debt-to-equity ratio of 1.5-to-1, subsection 18(4) limits the deductibility of interest on that debt to the extent that the interest would otherwise be deductible (i.e., in the absence of subsection 18(4)).

                  Subsection 18(4) is amended, consequential on the introduction of new section 18.2, which contains the main operative provisions of the new excessive interest and financing expenses limitation regime. This amendment provides that the limitation under subsection 18(4) applies only in respect of interest that would, in the absence of section 18.2 (as well as subsection 18(4)), be deductible in computing income from business or property. This is intended to ensure that the thin capitalization rules apply in priority to the interest restriction in new section 18.2.

                  For more information, see the commentary on new section 18.2.

                  This amendment applies in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                  Clause 58

                  Excessive interest and financing expenses limitation

                  Excessive interest and financing expenses limitation

                  Definitions

                  New subsection 18.2(1) defines a number of terms that apply for the purposes of sections 18.2 and 18.21 in determining the application of the new excessive interest and financing expenses limitation.

                  “absorbed capacity”

                  A taxpayer’s absorbed capacity for a taxation year is essentially the amount of its excess capacity, carried forward from previous years, that is used in a taxation year to reduce or eliminate a denial of deductions in respect of interest and financing expenses that would otherwise occur under subsection 18.2(2)

                  More specifically, the taxpayer’s excess capacity for its three immediately preceding taxation years is included in its cumulative unused excess capacity for a taxation year, and its absorbed capacity is essentially the lesser of its cumulative unused excess capacity for the year (determined before the reduction resulting from the taxpayer’s absorbed capacity for the year) and its amount of interest and financing expenses that would otherwise be denied in the year.

                  The taxpayer’s absorbed capacity is automatically included in variable E of the formula in subsection 18.2(2), thus reducing or eliminating a denial of interest and financing expenses that would otherwise arise under that subsection. The taxpayer’s cumulative unused excess capacity is reduced to the extent of the taxpayer’s absorbed capacity.

                  In effect, the consequences of an amount of absorbed capacity under the rules reflect a mandatory “ordering rule”, whereby a taxpayer is required to use its own excess capacity carryforwards first to deduct its own otherwise denied interest and financing expenses, before it can use any remaining excess capacity (reflected in its cumulative unused excess capacity) to effect a transfer to another group member by way of an election under subsection 18.2(4). Consequently, a taxpayer cannot transfer an amount of cumulative unused excess capacity to another group member to deduct their otherwise denied interest and financing expenses for the year in priority to the taxpayer using its carryforwards to deduct its own otherwise denied interest and financing expenses for the year.

                  Notably, a taxpayer cannot have excess capacity for a taxation year if it has absorbed capacity for that year. This is because a taxpayer has absorbed capacity only for a year where it has interest and financing expenses that exceed its capacity to deduct those expenses in the year. For more information, see the commentary on the definition “excess capacity”.

                  “adjusted taxable income”

                  A taxpayer’s adjusted taxable income is a measure of its earnings before interest, taxes, depreciation and amortization (EBITDA) and is determined based on tax, rather than accounting, concepts.

                  In basic terms, a taxpayer’s adjusted taxable income for a taxation year is its taxable income (or, in the case of a non-resident, its taxable income earned in Canada) for the year, adjusted to reverse: (i) any deductions for interest and financing expenses, certain tax expenses and capital cost allowance; and (ii) income inclusions for interest and financing revenues, untaxed income, and certain other amounts.

                  Since the starting point in determining adjusted taxable income is a taxpayer’s taxable income, notably, it effectively excludes dividends that are deductible under section 112 or 113 (being inter-corporate dividends and certain dividends received from foreign affiliates, respectively). It is also generally reduced by losses deducted by the taxpayer under section 111 (subject to an add-back under paragraph (g) of variable B to the extent a non-capital loss is attributable to deductions in respect of interest and financing expenses, as discussed below).

                  A taxpayer’s adjusted taxable income is relevant principally in determining the maximum amount a taxpayer is permitted to deduct in respect of interest and financing expenses, under the limitation in new subsection 18.2(2), in computing its income for a taxation year. Generally under subsection 18.2(2), a taxpayer’s deductions in respect of such expenses (net of the taxpayer’s interest and financing revenues) for a year are limited to no more than a fixed ratio of its adjusted taxable income for the year (although the limit is also a function of any carryforwards of excess capacity, or transfers of excess capacity received by the taxpayer in the year). For more information, see the commentary on new subsection 18.2(2).

                  Adjusted taxable income is also relevant in determining a taxpayer’s absorbed capacity or excess capacity for a taxation year (both as defined in this new subsection 18.2(1)). For more information, see the commentary on those definitions.

                  Adjusted taxable income for a taxation year is determined by the formula: A + B – C.

                  Variable A is capable of being a positive or negative number. It is either (i) the taxpayer’s taxable income (or, for non-residents, taxable income earned in Canada) for the year minus its net capital loss for the year, if any; or (ii) the negative number equal to its non-capital loss plus its net capital loss for the year, if any.

                  Allowing variable A to be a negative number where the taxpayer has a non-capital loss (or a net capital loss that exceeds its taxable income) ensures that the add-backs under variable B do not generate excessive adjusted taxable income. For example, if a taxpayer had a non-capital loss for a taxation year and its amount for variable A were treated as nil (instead of as a negative number), when its interest and financing expenses were added back under variable B, this could give the taxpayer adjusted taxable income – thus allowing it to deduct interest and financing expenses under subsection 18.2(2) – generated from the interest and financing expenses themselves, as opposed to operating earnings. This result would be inappropriate in policy terms.

                  The amounts in variable A are determined without regard to any denial of deductions for interest and financing expenses under subsection 18.2(2); thus, these denied amounts do not increase adjusted taxable income. This ensures that adjusted taxable income is not increased by the portion of any interest and financing expenses in respect of which a deduction is denied under that subsection.

                  Variable B “adds back” a number of amounts to, in effect, reverse the impact on the taxpayer’s adjusted taxable income of a taxpayer’s deductions for interest and financing expenses, certain tax expenses and capital cost allowance, among other deductions, all of which are reflected in its taxable income included under variable A. The amounts added back under variable B include:

                  • the taxpayer’s interest and financing expenses for the year, other than interest and financing expenses that are capitalized and therefore already added back under variable B as capital cost allowance;
                  • any amount deducted under paragraph 20(1)(a) as capital cost allowance;
                  • any amounts deducted, in computing the taxpayer’s taxable income for the year, under paragraph 110(1)(k) (in respect of Part VI.1 tax) or paragraph 111(1)(a.1) (in respect of restricted interest and financing expenses); and
                  • any amount deducted by the taxpayer under subsection 104(6), in order to ensure that deductions for interest and financing expenses of a trust are not denied solely because the trust claims a deduction in respect of income distributed to its beneficiaries.

                  In the case of amounts deducted under paragraph 20(1)(a) in computing the income of a partnership of which the taxpayer is a member, paragraph (c) of variable B adds back an amount in respect of the taxpayer’s share of those deducted amounts, in computing the taxpayer’s adjusted taxable income for its taxation year in which the partnership’s fiscal period ends. This provision applies on a source-by-source basis, with the partnership’s deduction under paragraph 20(1)(a) in computing its income from each source being attributed to the taxpayer based on its pro rata share of the partnership’s income or loss from the source.

                  Variable I in the formula in paragraph (c) reduces the amount of the add-back in respect of amounts that were deducted under paragraph 20(1)(a) in computing a partnership’s loss, to the extent the taxpayer is denied a deduction in respect of its share of the loss under the partnership “at-risk” rule in subsection 96(2.1). To the extent the taxpayer deducts an amount, in respect of the previously denied loss, under paragraph 111(1)(e) in a later year, paragraph (d) of variable B in turn provides relief by way of an add-back in the later year.

                  Finally, paragraph (g) of variable B adds back the portion of a non-capital loss for another taxation year that is deducted by the taxpayer under subsection 111(1)(a), to the extent that the loss can reasonably be considered to derive from amounts deducted by the taxpayer in the other year in respect of its interest and financing expenses (net of interest and financing revenues) for the other year or under paragraph 111(1)(a.1) as a restricted interest and financing expense from a previous year. This add-back is consistent with the add-back under paragraph (a) in respect of a taxpayer’s interest and financing expenses for a year. Notably, because a taxpayer’s interest and financing expenses do not include excluded interest (as defined in subsection 18.2(1)), this add-back does not apply to the extent the loss derives from excluded interest.

                  Variable C effectively reverses income inclusions for several amounts that are included in computing the taxpayer’s taxable income (and thus income under variable A), by reducing the taxpayer’s adjusted taxable income for the year by the following amounts:

                  • the taxpayer’s interest and financing revenues for the year (paragraph (a) of variable C);
                  • the taxpayer’s foreign-source income, to the extent it is sheltered from Canadian tax by foreign tax credits under subsection 126(1)) (in respect of non-business income) or subsection 126(2) (in respect of business income) (paragraphs (b) and (c) of variable C);
                  • notional income included in the taxpayer’s income under section 110.5 (paragraph (d) of variable C);
                  • an amount included in the income of a taxpayer as a beneficiary of a trust under subsection 104(13), to reflect that this amount is effectively included in the adjusted taxable income of the trust by virtue of the add-back under paragraph (f) of variable B (paragraph (e) of variable C);
                  • amounts included in the taxpayer’s income under paragraph 12(1)(l.2), in respect of the taxpayer’s share of interest and financing expenses of a partnership of which it is a member (paragraph (f) of variable C); and
                  • any amount of the taxpayer’s taxable income that is not subject to tax under Part I of the Act, because it is exempt from tax under the Act or any other Act of Parliament (paragraph (g) of variable C).

                  “cumulative unused excess capacity”

                  A taxpayer’s cumulative unused excess capacity for a particular year is the total of the taxpayer’s unused excess capacity for the year and the three immediately preceding years. Thus, cumulative unused excess capacity is the attribute that enables a three-year carry-forward of the taxpayer’s excess capacity. The term “excess capacity” is also defined in new subsection 18.2(1).

                  This definition reflects the taxpayer’s “unused” excess capacity in that the taxpayer’s excess capacity for the three immediately preceding years is reduced, under this definition, by amounts of transferred capacity (which are amounts that the taxpayer has previously transferred to eligible group corporations under subsection 18.2(4)) and amounts of absorbed capacity (which are amounts that have been used to reduce or eliminate a denial under subsection 18.2(2) of the taxpayer’s interest and financing expenses). The resulting balance, which is the taxpayer’s cumulative unused excess capacity for the year, is the maximum amount that the taxpayer may transfer to other eligible group corporations in that year.

                  An amount of transferred capacity reduces the taxpayer’s cumulative unused excess capacity for the year following a transfer year, whereas the reduction for absorbed capacity occurs in the same year in which the amount of absorbed capacity arises. This is because the taxpayer’s cumulative unused excess capacity for a particular year represents the total amount available for transfer in that year. Consequently, although any amount transferred in that year effectively comes out of the taxpayer’s excess capacity for that year and unused excess capacity for the three immediately preceding years, the consequent reductions to excess capacity apply for the purposes of determining the taxpayer’s cumulative unused excess capacity for years following the transfer year.

                  Because a taxpayer’s absorbed capacity for a taxation year reduces its cumulative unused excess capacity for that year, the total amount that a taxpayer can transfer to another group member in a year, by way of an election under subsection 18.2(4), is reduced by the taxpayer’s absorbed capacity in that year. Thus, there is in effect a mandatory “ordering rule”, whereby a taxpayer is required to use its excess capacity carryforwards first to deduct its own otherwise denied interest and financing expenses, before it can use any remaining excess capacity (reflected in its cumulative unused excess capacity) to effect a transfer to another taxpayer.

                  The reductions to excess capacity, in determining the taxpayer’s cumulative unused excess capacity, are made under subparagraph (b)(i) (in respect of transferred capacity) and (b)(ii) (in respect of absorbed capacity). Both subparagraphs follow the same general structure:

                  • First, they provide the total amount by which excess capacity is to be reduced, being the taxpayer’s total transferred capacity amount or absorbed capacity for the year when those amounts arose.
                  • Second, they specify the taxation years (each referred to as a “relevant year”) for which excess capacity is to be reduced. In the case where the taxpayer has one or more amounts of transferred capacity for a taxation year, there are to be reductions (in a total amount equal to the total of the taxpayer’s transferred capacity amounts for the year) to the taxpayer’s excess capacity for one or more of that year and the three immediately preceding years. Where the taxpayer has an amount of absorbed capacity for a taxation year, the reductions (in a total amount equal to the absorbed capacity) are made to the taxpayer’s excess capacity for one or more of the three immediately preceding years. Notably, in all cases, the relevant years are determined by reference to the transfer year or absorbed capacity year, as the case may be, rather than by reference to the taxation year for which the taxpayer’s cumulative unused excess capacity is being determined.
                  • Third, they provide that the reductions are made to the unused portion of the taxpayer’s excess capacity for the relevant years. The unused portion is the excess capacity remaining after reductions to reflect amounts of transferred capacity and amounts of absorbed capacity for the taxpayer’s taxation years preceding the transfer year or absorbed capacity year, as the case may be. In addition, reductions to excess capacity resulting from absorbed capacity that arises in the transfer year are also effected in determining the taxpayer’s unused excess capacity for the relevant years in respect of the transfer year. All of these reductions in determining the unused portion of excess capacity for the relevant years are made in accordance with the rules in paragraph (b) of this definition.
                  • Finally, they provide “ordering rules” to determine for which of the taxpayer’s relevant years its unused excess capacity will be reduced. The ordering rules are in paragraph (b) of the definition and ensure that a reduction will apply first to the earliest relevant year; then to the next-earliest relevant year; and so on.

                  In determining a taxpayer’s cumulative unused excess capacity for a particular taxation year, where one or more of the three taxation years immediately preceding the particular year is a taxation year in respect of which the EIFEL rules did not yet apply (subject to certain anti-avoidance rules, the EIFEL rules apply in respect of taxation years beginning on or after January 1, 2023), there are elective transitional rules that apply for the purpose of determining the taxpayer’s excess capacity for those preceding years. For more information, see the commentary on the transitional rules, following the commentary on new subsection 18.2(16).

                  Example

                  Assumptions

                  • At all relevant times, a taxable Canadian corporation (“Canco1”) is a member of a group of related corporations (collectively, the “group”) consisting of one other taxable Canadian corporation (“Canco2”) and several non-resident corporations.
                  • At no time is Canco1 or Canco2 an excluded entity or a relevant financial institution.
                  • Canco1 and Canco2 both have a December 31 taxation year-end, and they have the same reporting currency at all times.
                  • Canco1 and Canco2 do not elect under subsection 18.21(2) for the group ratio rule in subsection 18.21(3) to apply for any taxation year.
                  • For both Canco1 and Canco2, the 2023 taxation year is the first year in respect of which section 18.2 applies. Canco1 and Canco2 both have nil excess capacity for taxation years preceding 2023.
                  • Canco1 has interest and financing expenses of $15 million for each taxation year.
                  • Neither Canco1 nor Canco2 has any interest and financing revenues for any taxation year.
                  • For the 2023 taxation year, Canco1 has the deductibility of $10 million of its interest and financing expenses denied under subsection 18.2(2).
                  • For the 2024 taxation year, Canco1 has base deduction capacity (which, in this example, means a taxpayer’s ratio of permissible expenses for the year multiplied by its adjusted taxable income for the year) of $50 million.
                  • For the 2025 taxation year, Canco1 has base deduction capacity of $35 million.
                  • For the 2026 taxation year, Canco1 has base deduction capacity of $5 million.
                  • For its 2023 to 2026 taxation years, Canco2’s interest and financing expenses and base deduction capacity are such that a “transfer” under subsection 18.2(4) of Canco1’s cumulative unused excess capacity for any of those years would not increase the amount of interest and financing expenses or restricted interest and financing expense deductible by Canco2 in any of those years.
                  • For the 2027 taxation year:
                    • Canco1 has base deduction capacity of $30 million.
                    • Canco2 has excess interest (determined as the excess of its interest and financing expenses over its base deduction capacity) of $20 million and does not have any cumulative unused excess capacity.
                    • Canco1 has no base deduction capacity for the year.
                    • Canco2 has excess interest of $10 million.

                    In 2024, Canco1’s base deduction capacity of $50 million exceeds its interest and financing expenses of $15 million by $35 million. Thus, Canco1’s $10 million restricted interest and financing expense carryforward from 2023 is deductible under paragraph 111(1)(a.1).

                    Canco1’s excess capacity for its 2024 taxation year is $25 million, calculated as A – B – C where:

                    • A is its base deduction capacity of $50 million;
                    • B is its interest and financing expenses of $15 million; and
                    • C is its deductible restricted interest and financing expense of $10 million.

                    Canco1’s cumulative unused excess capacity for its 2024 taxation year is also $25 million, since it did not have any excess capacity for prior years.

                    In 2025, Canco1’s base deduction capacity of $35 million exceeds its interest and financing expenses of $15 million by $20 million, and it has no remaining restricted interest and financing expense carryforwards. Therefore, Canco1’s excess capacity for the 2025 taxation year is $20 million.

                    Canco1’s cumulative unused excess capacity for its 2025 taxation year is $45 million, being the total of its excess capacity of $20 million for 2025 and $25 million for 2024.

                    Canco1’s cumulative unused excess capacity for its 2025 taxation year is $45 million, being the total of its excess capacity of $20 million for 2025 and $25 million for 2024.

                    In 2026, Canco1’s base deduction capacity of $5 million is less than its $15 million of interest and financing expenses for the year. Therefore, Canco1 has no excess capacity for the year.

                    Canco1 has absorbed capacity of $10 million for its 2026 taxation year, being the lesser of:

                    • its cumulative unused excess capacity of $45 million for 2026 (which, for the purpose of determining a taxpayer’s absorbed capacity for a year, is always computed before the reduction for that absorbed capacity); and
                    • the amount by which its interest and financing expenses exceed the total of its base deduction capacity and interest and financing revenues (which, in this case, are nil) for the year, which excess is $10 million for 2026.

                    Canco1’s base deduction limit under subsection 18.2(2) is increased by its absorbed capacity, which is reflected in variable E of the formula in that subsection, allowing it to deduct all of its interest and financing expenses for 2026.

                    Canco1’s cumulative unused excess capacity for 2026 is $35 million, calculated as A + B where:

                    • A is its excess capacity for 2026, which is nil; and
                    • B is the total of its excess capacity for 2023, 2024 and 2025. However, for the purpose of computing its cumulative unused excess capacity, its excess capacity for 2024 is reduced by its absorbed capacity for 2026. The relevant excess capacity amounts are as follows:
                      • Canco1’s excess capacity for 2023 is nil;
                      • Canco1’s 2024 excess capacity of $25 million is reduced to $15 million;
                        • The reduction is the lesser of its 2024 excess capacity and its absorbed capacity for 2026, which is $10 million; and
                        • It is not reduced to reflect Canco1’s absorbed capacity for 2026, since the reduction applies first to the earliest year in which there is unused excess capacity, being 2024.

                        In 2027, Canco1 can fully deduct its interest and financing expenses and has excess capacity of $15 million for the year (determined as its base deduction capacity of $30 million minus its interest and financing expenses of $15 million).

                        Canco1’s cumulative unused excess capacity for its 2027 taxation year is $50 million, calculated as A + B where:

                        • A is its excess capacity for 2027, which is $15 million; and
                        • B is the total of its excess capacity for 2024, 2025 and 2026, with its excess capacity for 2024 being reduced to reflect its absorbed capacity for 2026.
                          • Canco1’s excess capacity for 2024 is $15 million (after the $10 million reduction for its absorbed capacity for 2026);
                          • Canco1’s excess capacity for 2025 is $20 million; and
                          • Canco1’s excess capacity for 2026 is nil.

                          Canco1 and Canco2 can jointly elect under subsection 18.2(4) to “transfer” $20 million of Canco1’s cumulative unused excess capacity for 2027 to Canco2. This results in Canco2 having received capacity of $20 million for 2027, which increases Canco2’s base deduction limit under subsection 18.2(2) (by being reflected in variable D of that subsection) and allows Canco2 to deduct all of its interest and financing expenses for the year.

                          In 2028, as in 2026, Canco1’s interest and financing expenses exceed its base deduction capacity for the year. Thus, as in 2026, Canco1 will have absorbed capacity – provided it has a positive cumulative unused excess capacity for the year (determined before any reduction for its absorbed capacity for 2028).

                          For the purpose of determining Canco1’s absorbed capacity for 2028, its cumulative unused excess capacity for 2028 – which, for this purpose, is determined before the reduction for its absorbed capacity for 2028 – is $30 million, calculated as A + B where:

                          • A is Canco1’s excess capacity for 2028, which is nil; and
                          • B is the total of Canco1’s excess capacity for 2025, 2026 and 2027, taking into account reductions for its absorbed capacity of $10 million for 2026 and its transferred capacity of $20 million for 2027. The relevant excess capacity amounts are as follows:
                            • Canco1’s excess capacity for 2024 is not included (reflecting the three-year carry-forward period). However, its 2024 taxation year is a “relevant year” for the purpose of determining the reductions for its absorbed capacity for 2026 and transferred capacity for 2027, such that:
                              • Its excess capacity for 2024 continues to be treated as having been reduced to $15 million, to reflect its $10 million absorbed capacity for 2026; and
                              • This remaining $15 million of its excess capacity for 2024 is reduced to nil, to reflect its transferred capacity for 2027;

                              Canco1’s absorbed capacity for 2028 is, therefore, $15 million, being the lesser of:

                              • its cumulative unused excess capacity for the year (as determined above, before any reduction for its absorbed capacity for 2028), which is $30 million; and
                              • the excess of its interest and financing expenses over the total of its base deduction capacity and interest and financing revenues (which in this case, are nil) for the year, which excess is $15 million.

                              As a result of its absorbed capacity for 2028, Canco1’s cumulative unused excess capacity for 2028 is $15 million (being its $30 million cumulative unused excess capacity calculated above, before the reduction for its absorbed capacity, minus its $15 million absorbed capacity). More specifically, for the purpose of determining Canco1’s cumulative unused excess capacity for 2028, the 2028 absorbed capacity reduces the remaining portion of Canco1’s excess capacity for 2025 (after the $5 million reduction for its transferred capacity for 2027) from $15 million to nil.

                              Canco1 and Canco2 can jointly elect under subsection 18.2(4) to “transfer” $10 million of Canco1’s cumulative unused excess capacity for 2028 to Canco2. This results in Canco2 having received capacity of $10 million for 2028, which allows Canco2 to deduct all of its interest and financing expenses for the year. It also results in Canco1 having a $10 million transferred capacity for 2028, which will be applied as a reduction to its excess capacity for 2027 for the purpose of determining its cumulative unused excess capacity in subsequent taxation years.

                              “eligible group corporation”

                              An eligible group corporation, in respect of a particular corporation resident in Canada, at any time, is in general terms another corporation resident in Canada that the particular corporation is, at that time, related to or affiliated with.

                              For the purposes of this definition, two corporations are not considered to be related if they otherwise would be because of a right referred to in paragraph 251(5)(b). Nor are two corporations considered affiliated if they otherwise would be because of the definition “controlled” in subsection 251.1(3), which, for the purposes of determining whether two persons are affiliated, treats a corporation as being controlled by another corporation that exercises de facto control of the first corporation. As such, the applicable standard of corporate control for these purposes is de jure control.

                              Only corporations that are eligible group corporations in respect of one another are permitted to elect to treat an interest payment made between them as “excluded interest”, or to elect under new subsection 18.2(4) to transfer excess capacity (as defined in subsection 18.2(1)) from one to the other.

                              “eligible group entity”

                              An eligible group entity, in respect of a taxpayer resident in Canada, at any time, is in general terms a corporation or trust that is resident in Canada and that the taxpayer is, at that time, related to or affiliated with.

                              For purposes of this definition, persons are not considered to be related if they otherwise would be solely because of a right referred to in paragraph 251(5)(b). Nor are two persons considered affiliated if they otherwise would be solely because of the definition “controlled” in subsection 251.1(3). As such, the applicable standard of corporate control for these purposes is de jure control.

                              Paragraphs (c) and (d) are special rules for discretionary trusts. Paragraph (c) applies when the entity whose connection to the taxpayer is being tested is a trust, whereas paragraph (d) applies when the taxpayer itself is a trust. In either case, all discretionary beneficiaries of a trust are effectively treated as meeting the requisite connection standard in respect of the trust. Thus, the rules provide that a trust and a beneficiary with a discretionary interest in the trust are eligible group entities in respect of one another.

                              This definition is relevant for the purposes of applying the definition “excluded entity” and for the group ratio rules in subsections 18.21(2) and (3).

                              “excess capacity”

                              A taxpayer’s excess capacity for a taxation year is essentially a measure of the amount by which the taxpayer’s “capacity” for deducting interest and financing expenses under the EIFEL rules, generated by its own taxable income and interest and financing revenues for the year, exceeds the amount of its actual interest and financing expenses for the year plus its carryforwards of restricted interest and financing expenses from previous years. Thus, the taxpayer’s excess capacity for a taxation year is determined without regard to its excess capacity carried forward from preceding years, or any “received capacity” of the taxpayer resulting from transfers from other group entities in the year.

                              More specifically, a taxpayer’s excess capacity for a taxation year is the amount determined by the formula A – B – C, where:

                              • Variable A represents the taxpayer’s capacity to deduct interest and financing expenses for the year, measured as its ratio of permissible expenses multiplied by its adjusted taxable income, plus its interest and financing revenues for the year (subject to the reduction described below).
                              • Variable B is the taxpayer’s total interest and financing expenses for the year; and
                              • Variable C is the amount of restricted interest and financing expenses from previous years that are deductible by the taxpayer under paragraph 111(1)(a.1) in the year.

                              In determining a taxpayer’s deduction capacity under variable A for a taxation year, there is a reduction that applies if:

                              • the taxpayer has net interest and financing revenues for the year (i.e., its interest and financing revenues exceed its interest and financing expenses), and
                              • the taxpayer would have “negative” adjusted taxable income for the year if the definition of that term allowed it to be a negative amount (i.e., if it contained an override of section 257).

                              The amount of this reduction is determined as the taxpayer’s ratio of permissible expenses multiplied by the lesser of the absolute value of the amount that would be its negative adjusted taxable income for the year and its net interest and financing revenues for the year (i.e., variable H multiplied by variable I).

                              Absent this reduction, the amount that would be the taxpayer’s negative adjusted taxable income would not, in these circumstances, be appropriately reflected in its deduction capacity.

                              In general, negative adjusted taxable income is reflected as a non-capital loss, which reduces the “positive” adjusted taxable income – and thus the taxpayer’s deduction capacity – that would otherwise arise in the year in which the non-capital loss carry-over is deducted. This ensures the taxpayer does not have deduction capacity to the extent it does not have adjusted taxable income on a net basis across those years.

                              If a taxpayer has net interest and financing revenues for a taxation year, however, its non-capital loss, if any, will be less than the absolute value of its negative adjusted taxable income. Thus, the deduction of the non-capital loss carry-over by the taxpayer in another year will not reduce the taxpayer’s deduction capacity by an amount commensurate with its negative adjusted taxable income. The reduction described above ensures that the portion of the negative adjusted taxable income that is not reflected as a non-capital loss is nonetheless reflected as a reduction to deduction capacity.

                              For an illustration of this reduction in determining a taxpayer’s excess capacity, see the example in the commentary to the definition “excluded interest”.

                              A taxpayer’s excess capacity can be used for three purposes.

                              First, pursuant to paragraph 111(1)(a.1), a taxpayer’s restricted interest and financing expense carryforwards from previous years are deductible to the extent of the taxpayer’s excess capacity for the year (as determined without regard to such deductions). By virtue of variable C in the definition “excess capacity”, a taxpayer’s deductible restricted interest and financing expense carryforwards from previous years automatically reduce its excess capacity for the year. This reduction occurs regardless of whether the taxpayer in fact deducts these amounts in the year, to ensure that it cannot choose to effectively preserve its cumulative unused excess capacity to transfer to other group members, in preference to deducting its restricted interest and financing expense carryforwards. This reflects a mandatory “ordering rule”, whereby a taxpayer is, in effect, required to first apply its excess capacity against its restricted interest and financing expense carryforwards from previous years (to enable their deduction), before it can use any remaining excess capacity to effect a transfer of excess capacity to another group member by way of an election under subsection 18.2(4).

                              Second, a taxpayer’s excess capacity for a taxation year is included in its cumulative unused excess capacity for the year and for the three immediately following years, which a corporate taxpayer can effectively transfer to an eligible group corporation in respect of the taxpayer for the year by designating it as “received capacity” of the transferee in an election under subsection 18.2(4). For more information, see the commentary on the definition “cumulative unused excess capacity” and subsection 18.2(4).

                              Third, a taxpayer can use its excess capacity to allow the deduction of interest and financing expenses for a later taxation year that would otherwise be denied under subsection 18.2(2). More specifically, a taxpayer’s cumulative unused excess capacity for a taxation year – which, as noted, includes the taxpayer’s excess capacity from the three immediately preceding years – is automatically applied to enable the taxpayer to deduct amounts of interest and financing expenses that would otherwise have been denied in the year. This occurs by virtue of the taxpayer’s “absorbed capacity” for the year being included in variable E of the formula in subsection 18.2(2). For more information, see the commentary on the definition “absorbed capacity”.

                              A taxpayer that elects, along with its corporate group, to have the group ratio rules in section 18.21 apply for a taxation year is treated as having nil excess capacity for that year. This reflects, first, that the group ratio rules in subsections 18.21(2) and (3) provide a separate mechanism for calculating the capacity to deduct interest and financing expenses at the group level and then allocating this capacity among group members for a year. Second, it reflects an intention that, for any taxation year in respect of which a taxpayer is subject to the group ratio, it cannot accrue excess capacity that is carried forward to later years as cumulative unused excess capacity.

                              “excluded entity”

                              A taxpayer that is an excluded entity for a taxation year is not subject to the deduction restrictions under new subsection 18.2(2), nor an income inclusion under new paragraph 12(1)(l.2), in respect of its interest and financing expenses for the year.

                              Excluded entities generally do not pose significant base erosion and profit shifting risks targeted by the new EIFEL rules.

                              A taxpayer is an excluded entity for a particular taxation year if it satisfies the conditions in any of paragraphs (a) to (c).

                              Under paragraph (a), a taxpayer is an excluded entity for a particular taxation year if, throughout the particular year, it is a Canadian-controlled private corporation that, together with any associated corporations, has taxable capital employed in Canada of less than $15 million (i.e., the top end of the phase-out range for the small business deduction). These entities are relieved from the application of the EIFEL rules because they are Canadian controlled and their operations are of a relatively small scale.

                              Under paragraph (b), a taxpayer is an excluded entity for a taxation year if it is part of a group whose Canadian members have total interest and financing expenses (net of interest and financing revenues) for the year of $250,000 or less. These taxpayers are excluded from the application of the EIFEL rules because they do not have significant net interest and financing expenses on a Canadian group-wide basis. The group can include corporations and trusts. Notably, the interest and financing revenues of any group member that is a relevant financial institution are excluded to ensure their net interest and financing revenues do not shelter the interest and financing expenses of other group members.

                              Under paragraph (c), a particular Canadian-resident taxpayer is an excluded entity if it is a standalone entity or a member of a group (defined to include all “eligible group entities” in respect of the particular taxpayer) that consists exclusively of Canadian-resident taxpayers, and the particular taxpayer and any other group members carry on all or substantially all of their business in Canada, provided that:

                              • no non-resident is
                                • a foreign affiliate of the particular taxpayer or of any eligible group entity in respect of the particular taxpayer; or
                                • a specified shareholder or specified beneficiary (both as defined in subsection 18(5), for the purposes of the thin capitalization rules) of the particular taxpayer or any eligible group entity; and

                                Subsection 18.2(15) provides an anti-avoidance rule that deems certain recipients of interest and financing expenses to be tax-indifferent investors.

                                “excluded interest”

                                The definition “excluded interest” sets out the conditions that must be satisfied in order for two members of the same corporate group to elect to have a payment of interest made from one to the other excluded from the limitation under subsection 18.2(2). This election is principally intended to ensure that the EIFEL rules do not negatively impact on corporate transactions that are often undertaken within Canadian corporate groups to allow the losses of one group member to be offset against the income of another group member.

                                More specifically, excluded interest is not included in determining the interest and financing expenses (as defined in subsection 18.2(1)) of a taxpayer for a taxation year. As a result, a deduction in respect of excluded interest will not be denied under subsection 18.2(2). However, excluded interest is also not included in the interest and financing revenues of the payee, which limits the extent to which it can “shelter” the payee’s interest and financing expenses from the limitation under subsection 18.2(2) or increase the payee’s excess capacity (as defined in subsection 18.2(1)), as the case may be.

                                In general, interest expenses and interest income are disregarded in computing a taxpayer’s adjusted taxable income. This occurs by virtue of the “add-back” for interest and financing expenses under variable B of the definition “adjusted taxable income” in subsection 18.2(1), and the exclusion of interest and financing revenues under variable C of that definition. Because excluded interest is not reflected in the payer’s interest and financing expenses or the payee’s interest and financing revenues, however, it is not disregarded in computing adjusted taxable income, but rather generally reduces that of the payer and increases that of the payee.

                                For an amount of interest to be excluded interest it must satisfy a number of conditions.

                                Notably, the amount must be paid or payable by a corporation to another corporation (referred to as the “payer corporation” and “payee corporation”, respectively) in respect of a debt that is, throughout the period during which the interest accrued (referred to as the “relevant period”), owed by the payer corporation to the payee corporation. Thus, excluded interest treatment is not available, for example, where the interest accrues during a period when the debt is held by another person or partnership, and the debt is subsequently transferred to the payee corporation, or assumed by the payer corporation, before the interest is paid or payable.

                                In addition, throughout the relevant period and at the time of payment, the payer corporation and payee corporation must both be taxable Canadian corporations, and eligible group corporations (as defined in subsection 18.2(1)) in respect of one another.

                                Finally, the payer corporation and payee corporation are required to jointly elect in writing in prescribed manner and specify the amount of interest they wish to have treated as excluded interest, as well as the amount of the debt to which that interest relates. Taxpayers may treat all or any portion of an interest payment as excluded interest. The result of this election is that the interest is excluded interest for the single taxation year in respect of which the election was filed.

                                Example

                                Assumptions

                                • Canco is a wholly-owned subsidiary of Forco, a non-resident corporation.
                                • For its taxation year ending December 31, 2025, Canco has a non-capital loss carryforwards balance of $50 million, consisting of losses incurred as a result of transactions entered into in the ordinary course of its retail sales business.
                                • Canco is the sole shareholder of CanSub, which is expected to have significant income from its wholesale business in its taxation year ending December 31, 2025.
                                • Canco and CanSub enter into a series of transactions, the effect of which is that CanSub becomes indebted to Canco and has $10 million in interest (the “Interest”) paid and payable in 2025 in respect of the debt. The series of transactions has no material interprovincial effects.
                                • In 2025, CanSub would have taxable income of $10 million, before taking into account the Interest.
                                • Canco deducts $10 million under paragraph 111(1)(a) in respect of its non-capital loss carryforwards, in computing its taxable income for 2025.
                                • Throughout the period during which Interest accrues, both Canco and CanSub are taxable Canadian corporations and Canco is an eligible group corporation in respect of CanSub.
                                • The group ratio rule in subsection 18.21(3) does not apply in respect of Canco or CanSub for their 2025 taxation year.

                                Analysis – with “excluded interest” election

                                If CanSub and Canco duly elect under paragraph (c) of the definition “excluded interest” in respect of the Interest, this amount is treated as excluded interest.

                                Because excluded interest is not included in computing CanSub’s interest and financing expenses, subsection 18.2(2) does not limit the amount that CanSub may deduct in respect of the Interest in computing its income for its 2025 taxation year.

                                As a result of the Interest, CanSub’s taxable income for 2025 is nil. Consequently, in computing CanSub’s adjusted taxable income, the amount determined for variable A in the definition “adjusted taxable income” is nil. No amount in respect of the Interest is added back under paragraph (a) of variable B of that definition, since excluded interest is not included in CanSub’s interest and financing expenses. Thus, assuming CanSub does not have any other amounts described in variable B (e.g., interest and financing expenses) or C (e.g., interest and financing revenues) of that definition, its adjusted taxable income for 2025 is nil.

                                The Interest is included in computing Canco’s income for its 2025 taxation year. Canco’s $10 million deduction in respect of its non-capital loss carryforwards reduces its taxable income – and thus the amount determined for variable A in computing its adjusted taxable income for the year – to nil. In addition, since excluded interest is not included in computing Canco’s interest and financing revenues, the Interest is not subtracted in computing Canco’s adjusted taxable income, under variable C of the definition of that term. Assuming Canco does not have any amounts described in variable B or C of that definition, Canco’s adjusted taxable income for 2025 is nil.

                                Because excluded interest is not included in computing Canco’s interest and financing revenues, the Interest does not increase Canco’s deduction capacity (under variable C in subsection 18.2(2)) or its excess capacity (under variable F of the definition of that term).

                                Analysis – without “excluded interest” election

                                If CanSub and Canco do not jointly elect to treat the Interest as excluded interest, $10 million will be included in CanSub’s interest and financing expenses and in Canco’s interest and financing revenues for their 2025 taxation year.

                                As a result, the amount that CanSub may deduct in respect of the Interest is subject to the limitation in subsection 18.2(2).

                                In determining CanSub’s adjusted taxable income for 2025, the amount determined for variable A of the definition of that term (which is determined without regard to any interest deductions denied under subsection 18.2(2)) is nil, since CanSub’s taxable income is nil. However, because the Interest is included in CanSub’s interest and financing expenses, it is added back under paragraph (a) of variable B in computing CanSub’s adjusted taxable income. Thus, assuming CanSub does not have any other amounts described in variable B or C, its adjusted taxable income for 2025 is $10 million.

                                CanSub’s adjusted taxable income of $10 million results in $3 million of deduction capacity under subsection 18.2(2) (determined, under paragraph (b) of variable B of that subsection, by multiplying $10 million of adjusted taxable income by a ratio of permissible expenses of 30%). In order for CanSub to deduct the remaining $7 million of the Interest, absent any cumulative unused excess capacity or interest and financing revenues of its own, CanSub will require a transfer, under the election in subsection 18.2(4), out of Canco’s cumulative unused excess capacity.

                                In determining Canco’s adjusted taxable income, Canco’s $10 million deduction in respect of its non-capital loss carryforwards reduces its taxable income – and thus the amount determined for variable A in the definition “adjusted taxable income” – to nil. The $10 million included in Canco’s interest and financing revenues in respect of the Interest (as a result of not electing “excluded interest” treatment) is subtracted under variable C in computing its adjusted taxable income. In the absence of section 257, this would cause Canco’s adjusted taxable income for 2025 to be negative $10 million. However, because of section 257, Canco’s adjusted taxable income cannot be a negative amount and is thus nil.

                                Although Canco has nil adjusted taxable income, it nonetheless has excess capacity, derived from its interest and financing revenues, by virtue of variable F in paragraph (b) of the definition “excess capacity”. However, because Canco’s adjusted taxable income would, absent section 257, be negative $10 million, variables H and I of the “excess capacity” definition reduce Canco’s excess capacity deriving from its interest and financing revenues from $10 million to $7 million (i.e., $10 million minus the product of 30% and $10 million). For further information on this reduction, see the commentary to the definition “excess capacity”.

                                Assuming Canco does not have any interest and financing expenses or deductible restricted interest and financing expense for the year, its excess capacity for 2025 is $7 million. This amount is included in determining Canco’s cumulative unused excess capacity for 2025, under paragraph (a) of the definition of that term.

                                Provided that the requirements of subsection 18.2(4) are met, Canco and CanSub may jointly elect to designate Canco’s $7 million cumulative unused excess capacity as an amount of transferred capacity of Canco and received capacity of CanSub for the 2025 taxation year. In computing CanSub’s interest deduction limit for the year under subsection 18.2(2), this $7 million received capacity is, under variable D in that subsection, added to CanSub’s $3 million deduction capacity deriving from its adjusted taxable income, such that CanSub is entitled to deduct $10 million in respect of the Interest.

                                “excluded lease”

                                A “lease financing amount”, representing an implicit interest expense in respect of a lease, is included in the lessee’s interest and financing expenses, and the lessor’s interest and financing revenues, unless the lease is an excluded lease.

                                A lease to which subsection 16.1(1) applies is treated as an excluded lease, because the effect of the lessor and lessee jointly electing under that subsection is that the lessee has a deemed interest expense in respect of the lease, which is already included in its income and financing expenses (as defined under subsection 18.2(1)).

                                In recognition that the specified leasing property rules in the Regulations, like the new EIFEL rules, generally seek to distinguish leases that are (or are more likely to be) used as substitutes for financing from those that are used for operational purposes (which are generally excluded from the rules), the other categories of excluded lease are based on exclusions from the “specified leasing property” definition in of subsection 1100(1.11) of the Regulations. Generally, these other categories of excluded lease are leases with a term of less than one year, leases of property with a fair market value of $25,000 or less, and leases in respect of “exempt property”.

                                The reason that paragraphs (b) and (c) of the definition “excluded lease” refer to leases or property that would (or would not) be considered, for the purposes of the specified leasing property rules, to satisfy certain requirements for exclusions from the definition “specified leasing property”, is to ensure that various anti-avoidance and application rules in section 1100 also apply for the purposes of determining whether a lease or property satisfies the requirements in the definition “excluded lease”. These include, for example, the various rules relating to exempt property in paragraphs 1100(1.13)(a) to (a.2); and the anti-avoidance rules in paragraphs 1100(1.13)(b) and (c), relating to leases with a term of less than one year and leases of property with a fair market value of $25,000 or less, respectively.

                                Certain other types of lease (or leases in respect of certain types of property) that are excluded from the “specified leasing property” definition are not excluded leases for the EIFEL rules. For example, leases in respect of non-depreciable property and intangible property, and leases entered into between non-arm’s length persons, are specifically excluded from “specified leasing property” but are not excluded leases (unless they meet the specific requirements in the definition “excluded lease”).

                                “interest and financing expenses”

                                The definition “interest and financing expenses” includes interest and various other financing-related expenses and losses. In addition, the anti-avoidance rule in new subsection 18.2(13) can cause certain amounts that would otherwise not be included in a taxpayer’s interest and financing expenses to be so included. For more information, see the commentary on that subsection.

                                The deductibility of a taxpayer’s interest and financing expenses that are described in paragraphs (a) to (f) and (h) of this definition is potentially subject to denial under new subsection 18.2(2). If the expenses are incurred at the level of a partnership and attributed to the taxpayer under paragraph (g) of this definition, they may instead give rise to an income inclusion to the taxpayer under new paragraph 12(1)(l.2).

                                A taxpayer’s interest and financing expenses are “added back” in determining its adjusted taxable income for the year, under paragraph (a) of variable B of that definition.

                                A taxpayer’s interest and financing expenses for a taxation year are the total of the amounts described in paragraphs (a) to (h) of variable A, minus the amount described in variable B.

                                Paragraph (a) includes, in a taxpayer’s interest and financing expenses for a taxation year, amounts paid or payable as, on account of, in lieu of payment of or in satisfaction of, interest. This description is similar to that in paragraph 12(1)(c), which is the rule requiring a taxpayer to include interest received or receivable in computing its income. For greater certainty, it includes amounts that are deemed or treated as interest under the Act.

                                The amounts described in subparagraph (a)(i) are included if, absent the new limitation under subsection 18.2(2), they would be deductible in the year. The year in which they are deductible need not be the same year in, or in respect of which, they are paid or payable.

                                These amounts are included regardless of the particular provision of the Act under which they are deductible, except that paragraph (a) does not include amounts that are deductible under a provision referred to in subparagraph (c)(i). In addition to preventing double-counting in computing interest and financing expenses, this exception is intended to ensure that certain discretionary deductions in respect of mainly capitalized interest and financing expenses are included in interest and financing expenses (by virtue of paragraph (c) in this definition) only to the extent that a deduction is in fact claimed for the year.

                                The following amounts are not included in the taxpayer’s interest and financing expenses under paragraph (a):

                                • “Excluded interest”, which is generally interest paid or payable by the taxpayer to another member of its corporate group that the parties have jointly elected to treat as such. For more information, see the commentary on the definition “excluded interest”.
                                • An amount that is interest and financing expenses under another paragraph of the definition, to prevent double-counting of such amounts in determining interest and financing expenses.

                                Paragraph (b) includes in a taxpayer’s interest and financing expenses for the year amounts that, absent subsection 18.2(2), would otherwise be deductible in the year

                                • under any of subparagraphs 20(1)(e)(ii) to (ii.2) and paragraphs 20(1)(e.1) and (e.2), in respect of various financing-related expenses; or
                                • under paragraph 20(1)(f), for amounts paid in respect of the principal amount of certain debt obligations issued at a discount.

                                In certain cases, financing expenses may be otherwise described in, for example, paragraph 20(1)(e) but a taxpayer may take the position that the expenses are deductible under another provision of the Act (such as section 9), such that they are not deductible under paragraph 20(1)(e). In paragraph (b), the phrase “and on the assumption that [the amount] is not deductible under another provision of this Act” is intended to ensure that these expenses are nonetheless included in a taxpayer’s interest and financing expenses.

                                Paragraph (c) includes in interest and financing expenses amounts that are in respect of interest, or any of the various financing-related expenses that would otherwise be included in the taxpayer’s interest and financing expenses for some year by virtue of paragraph (b) of this definition, but that generally have been “capitalized” or otherwise included in resource-expense pools (for example, by virtue of subsection 18(3.1) for certain costs in relating to construction; or as a result of an election under any of subsections 21(1) to (4), in respect of interest or various financing expenses). These amounts are included in the taxpayer’s interest and financing expenses for the year in which the taxpayer claims them as deductions in respect of capital cost allowance under paragraph 20(1)(a), or in respect of resource expenses under any of the provisions listed in subparagraph (c)(i). This includes where the taxpayer claims a deduction under section 66.7 in respect of amounts that have been included in successor pools. Because amounts are included in interest and financing expenses under paragraph (c) only in the year in which they are claimed, they are not included for any year in which they have become deductible but have not yet been claimed as deductions by the taxpayer.

                                Since a taxpayer’s undepreciated capital cost, or remaining balance in its resource expense pools, generally will not be attributable exclusively to interest and financing expenses, paragraph (c) requires that the taxpayer determine the portion of an amount it claims in respect of its capital cost allowance or resource expenses for a year that can “reasonably be considered” to be attributable to the interest or financing expenses. It is expected that this portion would generally correspond to the proportion of the claimed amount that the interest and financing expenses included in the relevant expense pool are of the taxpayer’s undepreciated capital cost or undeducted balance of a resource expense pool, as the case may be.

                                If subsection 18.2(2) denies a deduction for any portion of an amount included in the taxpayer’s interest and financing expenses by virtue of paragraph (c) of this definition, then the rule provided in subsection 18.2(3) ensures that the denied portion is excluded from the taxpayer’s undepreciated capital cost or resource expense pool, as the case may be. For more information, see the commentary on subsection 18.2(3).

                                Paragraph (d) includes in interest and financing expenses certain amounts that are not included under any of the other paragraphs in this definition, but can reasonably be considered to be part of the cost of funding of the taxpayer or a non-arm’s length person or partnership. This is intended to include amounts that are, in economic terms, part of the costs incurred in relation to the funding of a business or investment. This would include, for example, an amount that is not included under paragraph (a) because it does not have the legal character of interest, but which is economically equivalent to interest.

                                An amount is included in a taxpayer’s interest and financing expenses for a taxation year under paragraph (d) only if all the conditions in that paragraph are met.

                                First, subparagraph (d)(i) requires that the amount be paid or payable by, or a loss of, the taxpayer and deductible in computing its income for the year (absent section 18.2). Alternatively, the amount must be a capital loss that is offset against the taxpayer’s taxable capital gains for the year, or is deductible under paragraph 111(1)(b) in computing its taxable income for the year. It is not expected that equity financings would satisfy all the requirements of paragraph (d). These types of financings do not typically give rise to a deduction, a loss or a capital loss that would satisfy the requirement in subparagraph (d)(i), which excludes amounts that are deductible under subparagraph 20(1)(e)(i) as expenses incurred in the course of issuing equity interests in the taxpayer.

                                Second, subparagraph (d)(ii) requires that the amount arise under or as a result of an agreement or arrangement that is entered into as, or in relation to, a borrowing or other financing of the taxpayer or a non-arm’s length person or partnership. Thus, the agreement or arrangement can either itself constitute or provide a financing, or be ancillary to a financing. The reference to “borrowing or other financing” is intended to describe a range of agreements or arrangements that procure financing, in an economic sense.

                                The agreements and arrangements contemplated by subparagraph (d)(ii) include, among other things, derivative contracts used in a wide range of situations. For example, it can include a derivative contract that is entered into for the purpose of hedging any risk in relation to a borrowing or other financing, and a derivative contract that itself includes a material financing or funding component. The types of derivative contracts that can meet the conditions in paragraph (d) of this definition include cash or physically-settled swap agreements, forward purchase or sale agreements, forward rate agreements, futures agreements, securities lending agreements, sale and repurchase agreements (“repos”), and option agreements.

                                Derivative contracts can be considered to include a financing or funding component, for example, where they have mismatched payment or delivery requirements, which can, in economic terms, result in a financing or funding of either party during all or part of the term of the particular contract. This can result from either party having the right to use any cash, cash equivalents or other securities transferred or delivered to them during the term of the particular agreement or arrangement (net of any amounts they are obligated to transfer or deliver to the other party during the term of particular agreement or arrangement). Examples include (i) forward agreements with material prepayment or predelivery obligations, (ii) swap agreements with material mismatched payment or collateralization requirements, and (iii) securities lending agreements or repos (whether or not they are “securities lending arrangements” for the purposes of section 260).

                                An amount under a derivative contract could satisfy the necessary conditions in subparagraph (d)(ii) even where the derivative contract is in relation to a borrowing or other financing that is anticipated to be entered into sometime in the future, and even if it is subject to a contingency, since subparagraph (d)(ii) provides that the borrowing or financing can be entered into “currently or in the future, and absolutely or contingently”.

                                Third, to be included in interest and financing expenses under paragraph (d), an amount must satisfy the requirement in subparagraph (d)(iii) such that it can reasonably be considered to be “part of the cost of funding”. In the case of a derivative contract entered into for the purpose of hedging a risk in relation to a borrowing or other financing, an amount paid or payable under, or a loss resulting from, the contract constitutes a cost of funding. The phrase “cost of funding” would include any amount that can reasonably be considered compensation for the time value of money. In the context of the derivative contracts examples outlined above, where the effect of the agreement or arrangement is to fund a business or investment, the combined cash flows must economically include an amount that can reasonably be considered to be in respect of compensation for the use of the cash, cash equivalents or securities that constitute the funding.

                                While not definitive for purposes of paragraph (d), the manner in which an amount is characterized under the applicable generally accepted accounting principles may provide guidance with respect to the types of amounts considered economically equivalent to interest or otherwise treated as financing expenses.

                                Where the taxpayer has an amount received or receivable in the year, or a gain for the year, in connection with an agreement or arrangement that meets the conditions in subparagraph (d)(ii), variable B in this definition reduces the taxpayer’s interest and financing expenses for the year by that amount, if the conditions in paragraphs (a) and (b) are met. In addition to being included in the taxpayer’s income for the year, the amount must also reduce funding costs of the taxpayer or a non-arm’s length person or partnership. These conditions could be met, for example, in the case of a gain on a derivative contract that hedges a risk in relation to a borrowing of the taxpayer.

                                Paragraph (e) includes in interest and financing expenses generally any expenses or fees, in respect of agreements or arrangements described in paragraph (d), that would, in the absence of section 18.2, be deductible by the taxpayer in the year and are not included in the taxpayer’s interest and financing expenses under paragraph (b) of this definition. The policy is that expenses and fees in respect of an agreement or arrangement that is treated as a financing transaction should themselves be included in the taxpayer’s interest and financing expenses. Because these agreements or arrangements may, in many cases, not be described in any of the provisions listed in paragraph (b), the associated expenses and fees would consequently not be included under paragraph (b). Including these expenses and fees in a taxpayer’s interest and financing expenses ensures neutrality between taxpayers’ choice of financing arrangements. These expenses and fees are included if they are incurred in contemplation of, in the course of entering into or in relation to, the agreement or arrangement. Expenses or fees incurred “in relation to the agreement or arrangement” would include, for example, those incurred in making payments under the agreement or arrangement, taking steps to secure the receipt of payments under the agreement or arrangement, or modifying the terms and conditions of the agreement or arrangement.

                                Paragraph (f) includes in interest and financing expenses the portion, of any lease payment that would be deductible in the absence of subsection 18.2(2), that is a “lease financing amount”. This essentially imputes a financing cost to lessees in respect of their lease payments. Lease payments made in respect of excluded leases do not give rise to interest and financing expenses under paragraph (f). For more information, see the commentary on the definitions “lease financing amount” and “excluded lease”.

                                Paragraph (g) essentially includes in a taxpayer’s interest and financing expenses its share of interest and financing expenses described in paragraphs (a) to (f) that are deducted in computing the income of a partnership of which the taxpayer is a member. This attribution applies on a source-by-source basis, with the partnership’s interest and financing expenses deducted in computing its income or loss from each source being attributed to the taxpayer based on its pro rata share of the partnership’s income or loss from the source. These amounts are included in the taxpayer’s interest and financing expenses for its taxation year in which the partnership’s fiscal period ends.

                                The amount included under paragraph (g) is subject to reductions under variable F and G of that paragraph, if applicable. The reduction under variable F ensures that, if paragraph 12(1)(l.1) of the thin capitalization rules applies to include an amount in the taxpayer’s income in respect of the taxpayer’s share of partnership-level interest and financing expenses, that amount reduces the amount that is included in the taxpayer’s interest and financing expenses under paragraph (g).

                                The reduction under variable G applies where the partnership deducts interest and financing expenses in computing its loss from a source, and the limited partnership “at-risk” rule in subsection 96(2.1) applies to restrict the taxpayer’s ability to deduct its share of the partnership loss.

                                Paragraph (h) is related to variable G of paragraph (g). It applies where the taxpayer deducts an amount under paragraph 111(1)(e), in respect of a partnership loss, that was previously denied under subsection 96(2.1) for a preceding taxation year. In that case, the portion of the amount deducted under paragraph 111(1)(e) that is attributable to a variable G amount from a previous taxation year is included in the taxpayer’s interest and financing expenses.

                                “interest and financing revenues”

                                The interest and financing revenues of a taxpayer for a taxation year include interest income and certain other financing-related income and gains, to the extent that these amounts are included in computing the taxpayer’s income for the year.

                                This definition is relevant in two key respects. First, a taxpayer’s interest and financing revenues for a taxation year increase the amount of interest and financing expenses it is permitted to deduct in that year under subsection 18.2(2). In effect, the limitation under that subsection applies to the taxpayer’s net interest and financing expenses (i.e., its interest and financing expenses minus its interest and financing revenues).

                                Second, interest and financing revenues are included in computing a taxpayer’s “excess capacity” for a taxation year. For more information, see the commentary on the definition “excess capacity”.

                                A taxpayer’s interest and financing revenues for a year are subtracted in determining the taxpayer’s adjusted taxable income for the year, under paragraph (a) of variable C of that definition.

                                A taxpayer’s interest and financing revenues for a taxation year are the total of the amounts described in paragraphs (a) to (e) of variable A, minus the amount described in variable B.

                                Paragraph (a) includes interest income, but does not include:

                                • “Excluded interest”, which is generally interest received or receivable by the taxpayer from another member of its corporate group that the parties have jointly elected to treat as such. For more information, see the commentary on the definition “excluded interest”.
                                • An amount that is interest and financing revenues under another paragraph of this definition, to prevent double-counting of such amounts in determining interest and financing revenues.

                                Paragraph (b) includes in a taxpayer’s interest and financing revenues for the year guarantee fees, to the extent they are included in computing the taxpayer’s income for the year.

                                Paragraph (c) includes in interest and financing revenues certain amounts that are not included under any of the other paragraphs in this definition, but that effectively increase the taxpayer’s return on a debt obligation owing to the taxpayer. These amounts are roughly the converse of the amounts included in a taxpayer’s interest and financing expenses under paragraph (d) of that definition. They include amounts that are not included under paragraph (a) because they do not have the legal character of interest, but which are economically equivalent to interest.

                                The amounts under paragraph (c) are included in the taxpayer’s interest and financing revenues for a taxation year only if all of the conditions in that paragraph are met. The amount must be included in computing the taxpayer’s income for the year (if the amount is a capital gain, only the taxable portion will be included in interest and financing revenues). In addition, the amount must be received or receivable, or be a gain, under or as a result of an agreement or arrangement that is entered into by the taxpayer as, or in relation to, a loan made or financing provided by the taxpayer. An example of such an agreement or arrangement is a derivative contract that the taxpayer enters into to hedge a risk in relation to a loan or financing.

                                Conversely, if a taxpayer has an amount paid or payable, or a loss or capital loss, under or as a result of the type of agreement or arrangement described in paragraph (c), variable B of this definition applies to subtract this amount in computing the taxpayer’s interest and financing revenues if the amount can reasonably be considered to reduce the taxpayer’s return on a debt obligation owing to the taxpayer.

                                Paragraph (d) includes in a taxpayer’s interest and financing revenues the portion of a lease payment included in the taxpayer’s income that is a “lease financing amount” (as defined in subsection 18.2(1)). This essentially imputes a financing return on lease payments received by lessors. Lease payments received in respect of excluded leases do not give rise to interest and financing revenues. For more information, see the commentary on the definitions “lease financing amount” and “excluded lease”.

                                Paragraph (e) essentially includes in a taxpayer’s interest and financing revenues its share of interest and financing revenues described in paragraphs (a) to (d) that are included in computing the income of a partnership of which the taxpayer is a member. This attribution applies on a source-by-source basis, with the partnership’s interest and financing revenues included in computing its income or loss from each source being attributed to the taxpayer based on its pro rata share of the partnership’s income or loss from the source. These amounts are included in the taxpayer’s interest and financing revenues for its taxation year in which the partnership’s fiscal period ends.

                                In addition, there are two new anti-avoidance rules, in new subsections 18.2(12) and (14), that can cause an amount not to be included in interest and financing revenues. For more information, see the commentary on those subsections.

                                “lease financing amount”

                                The portion of any lease payment (other than in respect of an excluded lease) that is a lease financing amount that would, absent subsection 18.2(2), be deductible by a lessee or included in income of a lessor, is included in the lessee’s interest and financing expenses and the lessor’s interest and financing revenues, respectively. For more information, see the commentary on the definition “excluded lease”.

                                A lease financing amount is an implicit financing expense that is imputed in respect of certain lease payments for purposes of determining a taxpayer’s interest and financing expenses or interest and financing revenues. This approach is intended to reflect that, economically, a lease and a loan may be readily substitutable for one another.

                                The quantum of the lease financing amount is calculated in accordance with the rules and assumptions set out in paragraphs (a) to (c) of the definition. Essentially, the lease is treated as a notional loan with a principal amount equal to the fair market value of the leased property, and the lease payments are re-characterized as blended payments of principal and interest, with the interest (which is the lease financing amount) being calculated in accordance with the prescribed rate in effect at the time the lease began, determined under section 4302 of the Regulations.

                                “ratio of permissible expenses”

                                A taxpayer’s ratio of permissible expenses is the percentage that is multiplied by the taxpayer’s adjusted taxable income in determining the taxpayer’s capacity to deduct interest and financing expenses under the formula in subsection 18.2(2), before amounts in respect of a taxpayer’s interest and financing revenues, received capacity and absorbed capacity for the year are added. A taxpayer’s ratio of permissible expenses is also relevant to the determination of its excess capacity and absorbed capacity for a taxation year. For more information, see the commentary on the definitions of those terms.

                                For most years and for most purposes, a taxpayer’s ratio of permissible expenses is 30%.

                                To facilitate the transition to the EIFEL rules, however, this percentage is 40% for any taxation year of the taxpayer that begins in the 2023 calendar year, subject to an anti-avoidance rule that is included in transitional rules in the enacting legislation for the EIFEL rules. The anti-avoidance rule applies a ratio of 30% (instead of 40%) for a taxpayer’s taxation years beginning in the 2023 calendar year, if a transaction or event, or series of transactions or events, results in the taxpayer having an “early” year-end in that calendar year, and it is reasonable to consider that one of the reasons for the transaction, event or series was to delay the application of the 30% ratio (in other words, to have the 40% ratio apply for a longer period, or for more taxation years, than it otherwise would have).

                                Because the purpose of providing a 40% ratio for the 2023 transitional year is to facilitate taxpayers’ adjustment to the new EIFEL regime, rather than to allow the creation of additional tax attributes that can be realized in later years, the 40% ratio does not apply for the purpose of determining the taxpayer’s cumulative unused excess capacity for any taxation year in which the 30% ratio applies (i.e., any taxation year beginning after 2023). Instead, for any such taxation year, the taxpayer’s cumulative unused excess capacity is determined on the basis that its excess capacity for any taxation year beginning in 2023 is computed using the 30% ratio. In effect, this ensures that a taxpayer does not accumulate excess capacity based on a 40% ratio and then carries this forward (through its cumulative unused excess capacity) to a year in which a 30% ratio applies.

                                “received capacity”

                                A taxpayer has received capacity for a taxation year if the taxpayer is the transferee in respect of an election under subsection 18.2(4) for the year and all the conditions of subsection 18.2(4) are met. In that case, the amount designated in the election is an amount of received capacity of the taxpayer for the year. A taxpayer can have multiple amounts of received capacity for a taxation year, if it is the transferee under multiple elections filed under subsection 18.2(4) for the year.

                                A taxpayer’s received capacity for a taxation year is relevant in determining the amount the taxpayer can deduct in the year under paragraph 111(1)(a.1) in respect of its carryforwards of restricted interest and financing expense. It is also relevant in determining the amount of a taxpayer’s restriction for interest and financing expenses under subsection 18.2(2) (received capacity is variable D in the formula in that subsection).

                                For more information, see the commentary on subsections 18.2(2) and 18.2(4), and paragraph 111(1)(a.1).

                                “relevant financial institution”

                                A relevant financial institution is subject to certain constraints under sections 18.2 and 18.21, in order to address anomalies associated with applying these rules in respect of corporate groups that include such institutions. In particular, the nature of financial institutions’ regular business activities is such that their interest income often exceeds their interest expense. These constraints are intended to ensure that this net interest income cannot be used to shelter the interest expense of other members of the relevant financial institution's group from the limitation under subsection 18.2(2).

                                In general terms, the taxpayers included as “relevant financial institutions” are ones that may have net interest income because their regular business activities involve the lending of money, dealing or investing in indebtedness, or other financing transactions.

                                The constraints in respect of groups that include a relevant financial institution are set out below.

                                First, for the purpose of paragraph (b) in the definition “excluded entity” in subsection 18.2(1), which generally provides an exclusion from the limitation in subsection 18.2(2) for taxpayers that are members of groups with net interest expense of $250,000 or less in a taxation year, the interest and financing revenues of a relevant financial institution are excluded in computing the group’s net interest and financing expenses.

                                Second, the condition in paragraph 18.2(4)(c) effectively prevents a relevant financial institution from transferring any portion of its cumulative unused excess capacity for a year to another member of its group. There is an analogous constraint in the transitional rules contained in the enacting legislation, which applies in determining a taxpayer’s excess capacity for a “pre-regime year”.

                                Finally, paragraph 18.21(2)(b) effectively prevents a corporate group from electing into the group ratio rules if any Canadian group member is a relevant financial institution.

                                The definition “taxpayer” provides that references to a taxpayer in sections 18.2 and 18.21 do not include a natural person or a partnership. As a result, the limitation on deductions for interest and financing expenses in subsection 18.2(2) applies only to corporations and trusts, including in respect of their share of the interest and financing expenses of any partnerships of which they are members.

                                For further information on the application of the EIFEL rules in relation to corporations and trusts that are members of partnerships, see the commentary on paragraph (g) of the definition “interest and financing expenses”, as well new paragraph 12(1)(l.2).

                                “transaction”

                                The definition “transaction” provides that a transaction includes an arrangement. This is relevant for the purposes of the anti-avoidance rules in new subsections 18.2(13) to (15) and 18.21(6).

                                “transferred capacity”

                                A taxpayer has an amount of transferred capacity for a taxation year if the taxpayer is the transferor in respect of an election under subsection 18.2(4) for the year and all the conditions of subsection 18.2(4) are met. In that case, the amount designated in the election is an amount of transferred capacity of the taxpayer for the year. A taxpayer can have multiple amounts of transferred capacity for a taxation year, if it is the transferor under multiple elections filed under subsection 18.2(4) for the year.

                                A taxpayer’s transferred capacity for a taxation year reduces the taxpayer’s cumulative unused excess capacity, starting in the following year. The total of a taxpayer’s amounts of transferred capacity for a taxation year can never exceed its cumulative unused excess capacity for that year.

                                For more information, see the commentary on the definition “cumulative unused excess capacity” and subsection 18.2(4).

                                Excessive interest and financing expenses limitation

                                New subsection 18.2(2) is the main operative rule of the new EIFEL regime, which implements the recommendations of the BEPS Action 4 report to limit certain taxpayers’ deductions for interest and financing expenses to a proportion of their earnings. It applies to taxpayers that are corporations or trusts (“taxpayer” is defined in subsection 18.2(1) to exclude natural persons and partnerships), including non-resident corporations and trusts. The rule does not apply to a taxpayer for a taxation year if the taxpayer is an excluded entity for the year. For more information, see the commentary on the definition “excluded entity” in subsection 18.2(1).

                                In general terms, subsection 18.2(2) denies a deduction for a proportion (determined under the formula in that subsection) of each of a taxpayer’s interest and financing expenses. So, for example, if the formula calculates to 1/5 in respect of a taxpayer for a particular taxation year, and the taxpayer’s interest and financing expenses for the year consist of $180 million of interest payable in respect of a particular loan and a $50 million guarantee fee payable, then $36 million of the interest expense and $10 million of the guarantee fee are non-deductible under new subsection 18.2(2) (and become a restricted interest and financing expense within the meaning of new subsection 111(8)). However, subsection 18.2(2) does not apply to a taxpayer’s share of the interest and financing expenses of any partnerships of which it is a member, which is included in the taxpayer’s interest and financing expenses under paragraph (g) of that definition in subsection 18.2(1). Instead, the taxpayer is subject to an income inclusion under new paragraph 12(1)(l.2) in respect of such expenses. For more information, see the commentary on that paragraph.

                                Subsection 18.2(2) only denies a deduction in respect of amounts of interest and financing expenses that would be deductible absent section 18.2. Thus, if another provision of the Act (e.g., the thin capitalization rules in subsection 18(4)) denies a deduction for a portion of an interest or financing expense, subsection 18.2(2) does not apply in respect of that non-deductible portion, which is not included in the taxpayer’s interest and financing expenses for the purposes of these rules.

                                The proportion of a taxpayer’s interest and financing expenses that are denied is determined by the formula (A – (B + C + D + E))/A. In general terms, variable A is the taxpayer’s total interest and financing expenses for the year, and B + C + D + E represents the maximum amount the taxpayer is permitted to deduct in the year in respect of interest and financing expenses. Thus, the numerator in the formula represents the taxpayer’s “excessive” interest and financing expenses: the amount by which the taxpayer’s expenses exceed the amount it is allowed to deduct in the year. The denominator is the taxpayer’s interest and financing expenses for the year. The proportion determined by the formula is, therefore, the proportion of the taxpayer’s interest and financing expenses for the year that exceed the amount of deductions in respect of such expenses that it is permitted under subsection 18.2(2) for the year.

                                As noted, variable A is the taxpayer’s total interest and financing expenses for the year. Notably, this amount includes the taxpayer’s share of the interest and financing expenses of a partnership (included under paragraph (g) of that definition); thus, these expenses are relevant in determining the proportion under the formula, notwithstanding that subsection 18.2(2) does not deny a deduction in respect of these expenses (but, as noted, they are instead subject to an income inclusion under new paragraph 12(1)(l.2)).

                                The taxpayer’s interest and financing expenses do not include “excluded interest”, which is interest paid or payable to another taxable Canadian corporation in the same group that the taxpayer and the other corporation jointly elect to have treated as such (and that satisfies the other conditions in the “excluded interest” definition in subsection 18.2(1)). Thus, subsection 18.2(2) does not restrict the deductibility of such intra-group payments of interest. For more information, see the commentary on the definition “excluded interest”.

                                Variable B reflects the “earnings stripping” approach of the new rules, which generally limit the amount of interest and financing expenses (net of interest and financing revenues) that may be deducted in computing a taxpayer’s income to no more than a fixed ratio of the taxpayer’s “adjusted taxable income” (defined in subsection 18.2(1)). A taxpayer’s adjusted taxable income is a version of earnings before interest, taxes, depreciation and amortization (EBITDA) that is based on tax, rather than accounting, concepts.

                                Unless the taxpayer is a member of a corporate group that elects into the “group ratio” rules for a taxation year, the amount determined for variable B for the year is the taxpayer’s adjusted taxable income for the year multiplied by its ratio of permissible expenses for the year (being 40%, if the year begins on or after January 1, 2023 but before January 1, 2024; and 30% for all subsequent years).

                                If the taxpayer is a member of a group that elects to apply the group ratio for a taxation year, then the amount for variable B is determined under subsection 18.21(3). In essence, the group ratio rules allow a taxpayer to deduct interest and financing expenses in excess of the 30% fixed ratio (or 40% for the transitional year) where the taxpayer is able to demonstrate that the ratio of its consolidated group’s net third-party interest expense to book EBITDA (referred to as the “group ratio”) exceeds the fixed ratio. For more information, see the commentary on section 18.21.

                                If the taxpayer’s interest and financing expenses for a taxation year exceed the applicable ratio of its adjusted taxable income, the taxpayer may nonetheless be able to avoid having the deductibility of this excess denied under subsection 18.2(2). There are three additional sources of “capacity” to deduct interest and financing expenses, reflected in variables C, D and E, respectively.

                                Variable C is the taxpayer’s interest and financing revenues for the year. It reflects that the EIFEL regime is intended to limit a taxpayer’s net interest and financing expenses (i.e., its interest and financing expenses net of interest and financing revenues) to a fixed percentage of adjusted taxable income.

                                Variable D is only available to corporate taxpayers and is the taxpayer’s total received capacity for the year, which essentially represents any amounts of excess capacity of another group member that have been “transferred” to the taxpayer for the year under the joint election in new subsection 18.2(4). This amount must, however, first be reduced by any amounts deductible by the taxpayer in the year under new paragraph 111(1)(a.1) in respect of restricted interest and financing expense for a preceding taxation year. In effect, these rules require the taxpayer to apply its received capacity first against its restricted interest and financing expenses from previous years, before it can apply received capacity to enable the deduction of current-year interest and financing expenses that would otherwise be non-deductible under the EIFEL rules.

                                For more information, see the commentary on the definition “cumulative unused excess capacity” in subsection 18.2(1), subsection 18.2(4) and paragraph 111(1)(a.1).

                                Variable E of the formula is relevant where the taxpayer would otherwise have interest or financing expenses denied under subsection 18.2(2) for the year but has excess capacity carried forward from any of the three immediately preceding taxation years that it has not yet used. In these circumstances, the taxpayer has “absorbed capacity” for the year, which increases its deduction capacity and thereby reduces the amount of its interest and financing expenses that are denied under subsection 18.2(2) for the year. The absorbed capacity essentially is the portion of the taxpayer’s excess capacity carryforwards that are automatically applied to allow the taxpayer to deduct interest and financing expenses that would otherwise be denied under subsection 18.2(2). For more information, see the definition “absorbed capacity” in subsection 18.2(1).

                                Amount deemed deducted

                                Subsection 18.2(3) applies where new subsection 18.2(2) denies the deductibility, in computing a taxpayer’s income for a taxation year, of all or a portion of a particular amount that is described in paragraph (c) of the definition “interest and financing expenses”. The amounts described in that paragraph are generally amounts of interest or other financing-related expenses that are capitalized or otherwise included in resource-expense pools, and are claimed by the taxpayer as deductions in respect of capital cost allowance, foreign exploration and development expenses, foreign resource expenses, Canadian exploration expenses, Canadian development expenses, Canadian oil and gas property expenses or section 66.7 successor expenses. For more information, see the commentary on the definition “interest and financing expenses” in subsection 18.2(1).)

                                Subsection 18.2(3) deems the denied portion of the particular amount to have been deducted by the taxpayer, to ensure it is deducted in computing a taxpayer’s total depreciation allowed for property of a prescribed class (as defined in subsection 13(21)) or the balance of its undeducted resource expenses, as the case may be. This is intended to ensure that the taxpayer does not get a “double benefit”, by retaining these amounts within its undepreciated capital cost or undeducted resource expenses and deducting them in a future year, while at the same time deducting an amount under paragraph 111(1)(a.1) in a later year as a restricted interest and financing expense in respect of the denied portion.

                                The deeming rule in this subsection applies for the purposes of determining the amounts referred to in paragraphs 18.2(3)(a) to (g) in respect of any taxpayer at any time, and not only the taxpayer that incurred the expense or had its deduction denied under subsection 18.2(2). This ensures the rule applies, for example, in relation to “successor pools” of resource expenses, as well as in cases where expense pools are “inherited” by a new corporation on an amalgamation or by a parent corporation on a winding-up.

                                Transfer of cumulative unused excess capacity

                                New subsection 18.2(4) provides an election that allows a taxable Canadian corporation (referred to as the “transferor”) to effectively transfer all or a portion of its cumulative unused excess capacity to another taxable Canadian corporation (referred to as the “transferee”) that is a member of the same corporate group. This transfer mechanism is intended to accommodate misalignments between net interest and financing expenses and adjusted taxable income among the Canadian group members, which could result in some group members exceeding the 30% fixed ratio (or 40% fixed ratio, for the transitional year) permitted under the EIFEL rules, and other group members having ratios below the permitted fixed ratio.

                                Where all of the conditions of subsection 18.2(4) are met, the amount that a transferor and a transferee designate in their joint election is an amount of “transferred capacity” of the transferor and an amount of “received capacity” of the transferee for their respective taxation years.

                                A transferor’s transferred capacity for a taxation year reduces its cumulative unused excess capacity for the following year. For more information, see the commentary to the definition “cumulative unused excess capacity” in subsection 18.2(1).

                                To ensure the integrity of the rules, paragraph 18.2(4)(e), in effect, renders all of the transferor’s transfers for the year invalid if the total of the transferred capacity amounts designated by the transferor in elections for the year exceeds its cumulative unused excess capacity for that year. As a consequence, all of the amounts of received capacity otherwise accruing to the transferees under those elections would be nullified. However, to accommodate situations where a reassessment results in an over-transfer (e.g., by increasing the amount of the transferor’s interest and financing expenses for its taxation year in which the transfer election was made), paragraphs 18.2(4)(d) and (f) provide for the filing of an amended election. Paragraph 18.2(4)(f) also ensures that an amended election supersedes the prior election. The ability to file an amended election is provided for the sole purpose of allowing taxpayers to alter the amount designated in the election in cases where a reassessment results in a change in the transferor’s cumulative unused excess capacity, or in the transferee’s restricted interest and financing expense; it is not intended to be used for retroactive tax planning.

                                Although the mechanism under subsection 18.2(4) is described as a “transfer”, the transferred amount is not included in the transferee’s excess capacity or cumulative unused excess capacity. Thus, the transferee cannot carry it forward for use in later years or transfer it to other taxpayers. Rather, as noted, the transferred amount is “received capacity” of the transferee, which can be used only in the taxation year of the transferee in respect of which it was received – and in only two ways.

                                First, received capacity is automatically applied against any restricted interest and financing expense of the transferee (which is defined in subsection 111(8) generally as carryforwards of interest and financing expenses denied under subsection 18.2(2) in a previous year), thereby allowing the taxpayer to deduct these under paragraph 111(1)(a.1).

                                Second, any remaining received capacity is included in variable D of the formula in subsection 18.2(2), which has the effect of reducing the amount of the transferee’s interest and financing expenses for which deductibility is denied under that subsection.

                                Because received capacity can only be used by the transferee in the year in respect of which it is received, and for only the two purposes described above, if, by virtue of one or multiple transfers under subsection 18.2(4) in a taxation year, a transferee is transferred received capacity in excess of the amount it can use in the year, this excess reduces the transferor’s cumulative unused excess capacity but cannot be used by the transferee for any purpose (and thus is of no benefit).

                                The deduction of restricted interest and financing expense under paragraph 111(1)(a.1) is discretionary. However, the fact that the amount of received capacity of the taxpayer that is included in variable D of subsection 18.2(2) is reduced for amounts deductible in the year under paragraph 111(1)(a.1) effectively creates an “ordering rule”, which prevents a transferee from using its received capacity to deduct its current-year interest and financing expenses in priority to any restricted interest and financing expense carryforwards.

                                Notable aspects of the conditions in paragraphs 18.2(4)(a) to (g), all of which must be met to have an effective transfer, are as follows:

                                • Paragraph (a) requires that the transfer is of the cumulative unused excess capacity of the transferor for a taxation year that ends in the taxation year of the transferee in which the transferee receives the received capacity. Paragraph 249(2)(a) allows this condition to be met where the taxation year of the transferor is coterminous with that of the transferee.
                                • Paragraph (b) requires, among other things, that the transferor and transferee be eligible group corporations (as defined in subsection 18.2(1)) in respect of one another at the end of their respective taxation years, which is intended to ensure they are members of the same corporate group. The corporations are not required to be eligible group corporations in respect of one another throughout the entirety of their respective taxation years, since such a requirement would not accommodate certain corporate reorganizations. However, the manipulation of eligible group corporation status in order to meet this condition and be eligible to make an election under subsection 18.2(4) could trigger the application of the anti-avoidance rule in subsection 18.2(8).
                                • Paragraph (c) provides that the transferor cannot be a relevant financial institution, to ensure that such entities cannot transfer their excess capacity resulting from net interest income. For more information, see the commentary on the definition “relevant financial institution” in subsection 18.2(1).
                                • Paragraph (d) provides certain filing requirements in respect of the election, including that it must specify the amount of transferred capacity, which will also be received capacity of the transferee.
                                • Paragraph (g) in effect provides that the transfer is not valid and effective unless the transferee files (or is deemed by subsection 18.2(6) to have filed) an information return that meets the requirements of subsection 18.2(5). This essentially requires reporting of all the transfers under subsection 18.2(4) received by group members within the calendar year. For more information, see the commentary on subsections 18.2(5) and (6).

                                Summary – cumulative unused excess capacity transfers

                                New subsection 18.2(5) applies if a transferor and a particular transferee jointly elect under subsection 18.2(4) to designate all or a portion of the transferor’s cumulative unused excess capacity to be received capacity of the particular transferee for a taxation year.

                                The particular transferee is required to file an information return within six months after the end of the calendar year in which its taxation year, in respect of which it has received capacity, ends. The return must contain the information required by the Canada Revenue Agency to be reported in respect of all elections under subsection 18.2(4) that are filed by:

                                • The particular transferee for the year; or
                                • Any other transferee that is an eligible group corporation in respect of the particular transferee for a taxation year ending in the calendar year.

                                Summary – filing by designated filer

                                New subsection 18.2(6) allows transferees that are eligible group corporations in respect of one another to jointly elect to designate a corporation (referred to as the “designated filer”) to file an information return required by subsection 18.2(5) for a calendar year. The effect of designating a designated filer is to relieve the electing transferees (other than the designated filer) of the reporting requirement under subsection 18.2(5) for the calendar year.

                                New subsection 18.2(7) requires the Minister of National Revenue to assess or reassess any corporation to take into account an election or amended election filed under subsection 18.2(4), even where the assessment or reassessment would otherwise be statute-barred.

                                Eligible group corporations and entities

                                New subsection 18.2(8) is an anti-avoidance provision that prevents the manipulation of eligible group corporation or eligible group entity status where it is reasonable to consider that one of the main purposes of either becoming or ceasing to be an eligible group corporation or entity in respect of another taxpayer is to enable any taxpayer to obtain a “tax benefit”, as that term is defined in subsection 245(1).

                                There are a number of scenarios in which the manipulation of eligible group corporation or eligible group entity status could give rise to a tax benefit and thus trigger the application of this subsection. For example, a corporation may seek to become an eligible group corporation in respect of another corporation in order to be eligible to elect to make or receive a transfer of cumulative unused excess capacity under subsection 18.2(4), to treat certain interest payments as “excluded interest” or to have the group ratio rule in subsection 18.21(3) apply. Conversely, a taxpayer may seek to cease being an eligible group entity in respect of another taxpayer in order to qualify (or allow another taxpayer to qualify) as an “excluded entity” for the year. Another example is that a corporation could seek to either become or cease to be an eligible group corporation in respect of one or more other corporations in order to obtain a certain advantage under the transitional rules (contained in the enacting legislation for section 18.2) that apply for the purposes of determining taxpayers’ excess capacity for pre-regime years.

                                In all of these scenarios, tax benefits would generally result, directly or indirectly, in the absence of this anti-avoidance rule.

                                The reference in subsection 18.2(8) to enabling “any taxpayer” to obtain a tax benefit allows the anti-avoidance rule to apply whether the tax benefit sought is that of either of the taxpayers that have become or ceased being eligible group corporations or entities in respect of one another, or that of a third taxpayer.

                                Benefits conferred

                                New subsection 18.2(9) provides that, for the purpose of Part I, a benefit is not considered to have been conferred on a transferee as a consequence of an election or amended election under subsection 18.2(4) between the transferor and the transferee. This new subsection applies whether or not property is acquired by the transferor as consideration for filing the election or amended election.

                                Consideration for election

                                New subsection 18.2(10) provides rules that apply where property is acquired by a transferor as consideration for filing an election or amended election under subsection 18.2(4). If the property is owned by the transferee immediately before that time, the transferee is deemed to have disposed of the property at its fair market value but is not entitled to deduct any amount in respect of the transfer except any loss resulting from the deemed disposition. The cost at which the property was acquired by the transferor is considered to be equal to the property’s fair market value. Neither the transferor nor the transferee is required to add any amount in computing income only because of the acquisition of the property or because of the filing of the election or amended election under subsection 18.2(4) (although the deemed disposition could result in an amount being added in computing the transferee’s income).

                                Partnerships

                                New subsection 18.2(11) is intended to effectively “look through” tiers of partnerships for the purposes of subsection 18.2.

                                Subsection 18.2(11) provides that a person or partnership that is a member of a partnership that is in turn a member of another partnership is also deemed to be a member of the other partnership. It also provides that a person’s share of a partnership’s income or loss includes the person’s direct or indirect, through one or more other partnerships, share of that income or loss. In other words, a member’s share of the income or loss of a lower-tier partnership includes the amount to which it is directly or indirectly entitled.

                                Exclusions from interest and financing revenues

                                Subsection 18.2(12) is intended to ensure the integrity of the EIFEL rules, by requiring that an amount received or receivable by a taxpayer from a payer that is a non-arm’s length person or partnership is treated symmetrically by the parties for the purposes of these rules, in order for the amount to be included in the taxpayer’s interest and financing revenues. The rule ensures that, to the extent the amount is not included in the interest and financing expenses of the payer, it will not be included in the taxpayer’s interest and financing revenues, regardless of the reason for the asymmetry.

                                It is expected that a payer and payee would treat a payment symmetrically for the purposes of the EIFEL rules, regardless of whether they are dealing at arm’s length. However, in recognition that a payee may be unable to determine how an arm’s length payer reports a transaction in its tax return, this rule is limited to transactions between non-arm’s length persons and partnerships.

                                Anti-avoidance – interest and financing expenses

                                New subsection 18.2(13) is an anti-avoidance rule that includes in a taxpayer’s interest and financing expenses for a taxation year certain amounts that would otherwise not be so included, for the purposes of the EIFEL regime.

                                For this provision to apply, two conditions must be met. First the amount must arise in the course of a transaction, event or series of transactions or events. “Transaction” is defined in subsection 18.2(1) to include an arrangement. The “amount” can be, for example, in respect of an expense, a loss or a discount.

                                Second, it must be reasonable to consider that one of the purposes of the transaction, event or series is to cause the amount not to be included in the taxpayer’s interest and financing expenses for the year. If a purpose of any of the transactions or events in a series is to avoid the inclusion of the amount in the taxpayer’s interest and financing expenses, this purpose test is met. In addition, the taxpayer in respect of whose interest and financing expenses the non-inclusion is intended need not be the same person or partnership to whom the amount is deductible.

                                Subsection 18.2(13) focuses on amounts arising in the course of a transaction, event or series, one of the aims of which is to avoid an amount being included in interest and financing expenses. The provision is thus necessarily concerned with obtaining funds or credit. A taxpayer’s commercial or investment purposes for obtaining funds or credit are therefore not material in assessing if there is a purpose to avoid an amount being included in interest and financing expenses. Nor would the fact that a transaction, event or series has the effect of reducing overall financing costs be relevant in assessing if the manner in which it was implemented, or the inclusion of some transaction or event within the series, is intended to avoid an amount being included in interest and financing expenses.

                                In addition, if one purpose of the transaction, event or series is to obtain some other tax benefit, such as to avoid including an amount in computing a recipient’s income or the application of withholding tax, this does not preclude a concurrent purpose to avoid an inclusion in a taxpayer’s interest and financing expenses.

                                As is the case with purpose tests generally, in applying the purpose test in paragraph 18.2(13)(b) it is not necessary that all participants in the transaction, event or series intend that the transaction, event or series cause the amount not to be included in interest and financing expenses. Rather, the focus is on whether it is reasonable to consider that one of its purposes is to have this effect. This would generally be determined from the perspective of the taxpayer in whose interest and financing expenses the amount would not otherwise be included, the person or partnership for whom the amount is deductible or any other taxpayer that would benefit from a reduction to the taxpayer’s interest and financing expenses.

                                Anti-avoidance – interest and financing revenues

                                New subsection 18.2(14) is an anti-avoidance rule that excludes certain amounts in determining a taxpayer’s interest and financing revenues for a taxation year. If an amount would, absent this subsection, be included in a taxpayer’s interest and financing revenues for a taxation year, it is not so included if two conditions are met.

                                First, the amount must arise in the course of a transaction or event or series of transactions or events. “Transaction” is defined in subsection 18.2(1) to include an arrangement.

                                Second, one of the purposes of the transaction, event or series must be to increase the taxpayer’s interest and financing revenues in order to obtain a tax benefit for any taxpayer. If a purpose of any of the transactions or events in a series is to increase the taxpayer’s interest and financing revenues in order to achieve a tax benefit for any taxpayer, this purpose test is met. For this purpose, “tax benefit” has the same meaning as in subsection 245(1).

                                Because a purpose of increasing interest and financing revenues must be linked to an intention to obtain a tax benefit, a mere intention to enhance a commercial or other investment return in the form of interest and financing revenue that is unconnected with an intention to achieve a tax benefit, such as increased deduction capacity under subsection 18.2(2)), is not within the scope of subsection 18.2(14).

                                The taxpayer whose interest and financing revenues the transaction, event or series is intended to increase and the taxpayer obtaining the tax benefit need not be the same. As a result, this subsection can apply in respect of, for example, a transaction, event or series that is intended to increase the interest and financing revenues of a taxpayer that “transfers” an amount from its cumulative unused excess capacity to another taxpayer under the election in new subsection 18.2(4), in order to increase the amount the other taxpayer is permitted to deduct under new subsection 18.2(2) or new paragraph 111(1)(a.1), or to avoid or reduce an income inclusion under new paragraph 12(1)(l.2).

                                In applying the purpose test in paragraph 18.2(14)(b), a commercial or other investment purpose for holding an asset is not material in determining if one of the purposes for the manner in which a transaction, event or series is implemented is to increase interest and financing expenses in order to obtain a tax benefit.

                                Anti-avoidance – excluded entity

                                New subsection 18.2(15) is an anti-avoidance rule for the definition “excluded entity” in new subsection 18.2(1). In general terms, an excluded entity is not subject to the deduction restrictions under new subsection 18.2(2), nor an income inclusion under paragraph 12(1)(l.2), in respect of its interest and financing expenses for the year.

                                The new definition “excluded entity” contains a condition, in subparagraph (c)(iv), that requires that, in order for a taxpayer to be an excluded entity, all or substantially all of its interest and financing expenses must be paid or payable to persons or partnerships that are not tax-indifferent investors. For this purpose, new subsection 18.2(15) deems a person or partnership to be a tax-indifferent investor if an amount of interest and financing expenses is paid or payable to the person or partnership as part of a transaction or event or series of transactions or events, and it can reasonably be considered that one of the purposes of the transaction, event or series is to avoid that amount being paid or payable to a tax-indifferent investor.

                                Example 1

                                Back-to-Back Transaction

                                Assumptions:

                                • Canco1 is a corporation resident in Canada;
                                • Pensionco is a Canadian pension fund that is a tax-indifferent investor;
                                • Canco2 is a corporation resident in Canada that is not a tax-indifferent investor;
                                • Pensionco enters into a transaction with Canco2, and Canco2 enters into a transaction with Canco1 (the “Back-to-Back Transactions”); and
                                • Under the Back-to-Back Transactions, Pensionco loans funds to Canco2, and Canco2 loans funds to Canco1 on which interest is paid or payable to Canco2.

                                If it can reasonably be considered that one of the purposes of either of the Back-to-Back Transactions, or of the series that includes those transactions, is to avoid any portion of the interest and financing expenses of Canco1 being paid or payable to a tax-indifferent investor (in this case Pensionco), Canco2 will be deemed to be a tax-indifferent investor in respect of Canco1.

                                Example 2

                                Interest Strip Transaction

                                Assumptions:

                                • Canco1 is a corporation resident in Canada;
                                • Forco is a non-resident corporation that is a tax-indifferent investor;
                                • Canco2 is a corporation resident in Canada that is not a tax-indifferent investor;
                                • Forco loans funds to Canco1 on which interest is paid or payable (the “Loan”); and
                                • Canco2 enters into a transaction with Forco (the “ Interest Strip Transaction”), whereby Canco2 acquires the right to receive the amount of interest paid or payable on the Loan from Canco1, but not the principal amount of the Loan.

                                If it can reasonably be considered that one of the purposes of the Interest Strip Transaction is to avoid any portion of the interest and financing expenses of Canco1 being paid or payable to a tax-indifferent investor (in this case Forco), Canco2 will be deemed to be a tax-indifferent investor in respect of Canco1.

                                Deemed eligible group entities

                                New subsection 18.2(16) is a deeming rule for the definition “eligible group entity” in new subsection 18.2(1). It deems two taxpayers to be eligible group entities in respect of each other where they are eligible group entities in respect of the same third taxpayer. The use of the term “taxpayer” in this provision is meant to include both corporations and trusts.

                                Allocated Group Ratio Amount

                                Section 18.21 sets out the “group ratio” rules that are available to potentially reduce a taxpayer’s excessive interest and financing expenses limitation under subsection 18.2(2). In general terms, the group ratio rules allow a taxpayer to deduct interest in excess of the fixed ratio where the taxpayer is able to demonstrate that the ratio of the consolidated group’s net third-party interest expense (referred to in the rules as “group net interest expense”, as defined in subsection 18.21(1)) to the consolidated group’s book EBITDA (referred to in the rules as the “group adjusted net book income”, also defined in subsection 18.21(1)) exceeds the fixed ratio. In that case, the consolidated group can elect to determine its deductible amount of interest and financing expenses based on the group’s ratio multiplied by the adjusted taxable incomes of the Canadian group members, subject to certain limitations. The group then allocates this deductible amount among the Canadian group members in the form that effects the election. This “flexible” allocation mechanism allows taxpayers to allocate the group ratio deduction capacity where it is most needed. The amount so allocated, referred to in these notes as the “allocated group ratio amount” or AGRA, replaces the fixed ratio amount otherwise applicable for variable B of the formula in subsection 18.2(2).

                                The group ratio rules contain certain limitations that are mainly intended to account for the possibility that some group members may have negative book EBITDA, or the group as a whole may have negative book EBITDA, such that a simple formulaic determination of the group ratio could give unreasonably high or meaningless results. First, in the definition “group ratio” in subsection 18.21(1), there are reductions to the ratio where the percentage otherwise calculated is higher than 40%, and a rule that deems the group ratio to be nil where the consolidated group does not have overall positive book EBITDA. Second, subsection 18.21(3) limits the AGRA to the lesser of the consolidated group’s net third-party interest expense and the net adjusted taxable income of the Canadian group members.

                                Group ratio – definitions

                                Subsection 18.21(1) sets out definitions that apply in determining the “allocated group ratio amount” (AGRA) of a taxpayer. Certain definitions in subsection 18.2(1) also apply in determining AGRA.

                                “acceptable accounting standards”

                                The definition “acceptable accounting standards” is relevant for the definition “consolidated financial statements” and, by virtue of subsection 18.21(4), the definitions “consolidated group”, “equity-accounted entity”, “group adjusted net book income”, “specified interest expense”, “specified interest income” and “ultimate parent”. It means International Financial Reporting Standards (IFRS) and generally accepted accounting principles in Canada, Australia, the People’s Republic of China, Hong Kong, the Republic of India, Japan, the Republic of Korea, New Zealand, Singapore, and the United States. This list is predicated on the notion that differences between IFRS and generally accepted accounting principles in these jurisdictions would not provide a material competitive advantage or disadvantage to any entity using these standards.

                                “consolidated financial statements”

                                The definition “consolidated financial statements” is relevant for the definitions “consolidated group”, “equity-accounted entity”, “group adjusted net book income”, “relevant period”, “specified interest expense”, “specified interest income” and “ultimate parent”. It is also referred to in subsections 18.21(2), (4) and (5). It means financial statements prepared in accordance with a relevant “acceptable accounting standard”, also defined in subsection 18.21(1), in which the assets, liabilities, income, expenses and cash flows of two or more entities are presented as those of a single economic entity.

                                For greater certainty, the consolidated financial statements include, for these purposes, the notes to the financial statements. The use of the word “relevant” before “acceptable accounting standards” is meant to ensure that there must be a logical connection between the entities so consolidated and the accounting standards that are used to present their economic results. For example, generally accepted accounting principles in New Zealand would not likely be relevant for presenting the financial results of a group of companies based entirely in North America.

                                This definition is subject to the interpretation rule in paragraph 18.21(4)(a), as described below.

                                “consolidated group”

                                The definition “consolidated group” is central to the AGRA rules in section 18.21.

                                A consolidated group means two or more entities in respect of which “consolidated financial statements” (also defined in subsection 18.21(1)) are required to be prepared for financial reporting purposes, or would be so required if the entities were subject to IFRS. Within the “consolidated group” definition, a “member of the consolidated group” is also defined for the purposes of section 18.21, being each such entity of the group, which includes an “ultimate parent” (also defined in subsection 18.21(1)). An “equity-accounted entity”, also defined in subsection 18.21(1), is not considered a member of the group.

                                There are interpretive rules in paragraph 18.21(4)(a) and subsection 18.21(5) that apply for the purposes of this definition.

                                “equity-accounted entity”

                                The definition “equity-accounted entity” is relevant for the definitions “consolidated group”, “group adjusted net book income”, “specified interest expense” and “specified interest income”. It means an entity the net income or loss of which is included in the consolidated financial statements of a consolidated groupunder the equity method of accounting. In general terms, these entities are not accounted for on a line-by-line basis in consolidated financial statements.

                                This definition is subject to the interpretive rule in paragraph 18.21(4)(a).

                                “equity interest”

                                The definition “equity interest” is relevant for the definition “specified non-member”, also defined in subsection 18.21(1). It means a share of the capital stock of a corporation, an interest as a beneficiary under a trust and an interest as a member of a partnership.

                                “group adjusted net book income”

                                The definition “group adjusted net book income” (GANBI) is a key term in the AGRA rules as it is the amount used as the denominator in the “group ratio” determination. In essence, it is a consolidated group’s EBITDA, as adjusted for certain items. It is based on the consolidated financial statements of the group for a relevant period.

                                GANBI is calculated by formula, in a similar fashion to the calculation of EBITDA in that items in respect of interest, tax, depreciation and amortization are added back to the net profit or loss of the enterprise to obtain an adjusted net profit or loss amount. The items identified to determine the GANBI, or the information required to determine the amount of certain items, generally will be found in the consolidated financial statements of the group, or may be found in the notes to such statements. Further work to determine amounts in the relevant working papers or from other sources may be necessary in order to properly calculate the GANBI.

                                Variables C, D, E, F and G are additions, and variables H, I, J, K and L are subtractions, in determining GANBI.

                                Variable C is the amount, if any, of the group’s net income for the year as reported in its consolidated financial statements for the relevant period. If the group has a net loss for the year, it is picked up in variable H. “Relevant period” is also defined in subsection 18.21(1) and is described below.

                                Representing the “T” in EBITDA, variable D adds back the income tax expense of the group as reported in the consolidated financial statements.

                                Representing the “I” in EBITDA, variable E adds back the group’s interest expense, by reference to the definition “specified interest expense”, as described below. However, the latter definition is modified for GANBI purposes so that capitalized interest is not included in the add back, as it should be taken into account in the group’s depreciation and amortization amount, because it is generally added to the capital cost of an asset and depreciated over time.

                                Variable F is generally intended to represent the “DA” in EBITDA, being the add backs for depreciation and amortization. Variable F also adds back charges taken in computing profit that are in respect of the impairment or the write-off of a fixed asset and also any loss from the disposition of a fixed asset. Finally, variable F adds back any expenses, charges, deductions or losses that are similar to those specifically enumerated.

                                Variable G relates to equity-accounted entities. As a general matter, the AGRA rules are intended to recognize the income (or loss) generated by such entities for purposes of GANBI. However, consistent with the EBITDA concept, the portions of such income or loss that relate to the typical EBITDA addbacks must also be accounted for. As such, it is necessary to obtain information in respect of the income tax (per variable D) and depreciation and amortization (per variable F) amounts of any equity-accounted entities and to add back the consolidated group’s share of these amounts in the calculation of GANBI. As the definition “specified interest expense” already includes interest and related expenses in respect of equity-accounted entities, no further adjustment is required in this regard.

                                Variable H is the first of the negative adjustments in GANBI and addresses net losses reported in the consolidated financial statements.

                                Variables I to L essentially mirror the addback items but reflect income or receipts rather than expenses or charges that have been taken into account in the computation of the group’s net profit or loss.

                                If the result of the GANBI formula is negative, it is intended that section 257 would make GANBI nil.

                                This definition is subject to the interpretive rule in paragraph 18.21(4)(a) in respect of the use of accounting terms.

                                “group net interest expense”

                                The definition “group net interest expense” (GNIE) is a key term in the AGRA rules as it is the amount used as the numerator in the “group ratio” determination. In essence, it is a consolidated group’s net third party interest expense for a relevant period.

                                Variable A is the main component of the GNIE and is the amount by which the “specified interest expense” of the group exceeds the “specified interest income” of the group, for a relevant period. For more information, see the commentary on these defined terms.

                                Variable B represents the amount by which the variable A amount is reduced in arriving at the GNIE. It is generally meant to back out any interest paid to “specified non-members”, which are essentially entities that are not members of the consolidated group but that have a significant connection with the group. For more information, see the commentary on that defined term.

                                Variable E is the main component of variable B in that it adds up all amounts of “specified interest expense” that are paid or payable to specified non-members of the group. Variable F represents the amount by which the variable E amount is reduced for“specified interest income” received or receivable from the specified non-member in respect of which “specified interest expense” is paid or payable. Section 257 is intended to make E minus F nil in respect of a particular “specified non-member” where the amount for variable F is greater than the amount for variable E. In other words, “specified interest income” in respect of a “specified non-member” is only taken into account to the extent that it does not exceed “specified interest expense” in respect of the “specified non-member”.

                                “group ratio”

                                The definition “group ratio”, as its name suggests, is a key component of the group ratio rules in section 18.21. However, it is only one component of the AGRA – determined under subsection 18.21(3) – which is the ultimate amount that is used in the EIFEL provision in subsection 18.2(2).

                                The “group ratio” definition contemplates a number of different scenarios.

                                If GANBI is a positive amount, the “group ratio” will generally be determined by reference to the ratio of GNIE to GANBI, as set out in paragraphs (a) to (c). If GANBI is not a positive amount, paragraph (d) provides that the group ratio is nil.

                                Paragraph (a) provides the basic rule under which, if the ratio of GNIE to GANBI is 40% or less, that ratio will be applied without modification.

                                Paragraph (b) provides that if the ratio of GNIE to GANBI is greater than 40% but less than or equal to 60%, the group ratio is 40% plus 50% of the amount by which the ratio of GNIE to GANBI exceeds 40%. For example, if the ratio of GNIE to GANBI is 48%, the group ratio will be 44%.

                                Paragraph (c) provides that if the ratio of GNIE to GANBI is greater than 60%, the group ratio is 50% plus 25% of the amount by which the ratio of GNIE to GANBI exceeds 60%. For example, if the ratio of GNIE to GANBI is 80%, the group ratio will be 55%. However, in no case can the percentage determined under paragraph (c) exceed 100%. As such, if the ratio of GNIE to GANBI is 260% or greater, the group ratio will be 100%.

                                “relevant period”

                                The definition “relevant period” refers to the period for which the consolidated financial statements of a consolidated group are presented. It is essentially the period in respect of which the amounts under section 18.21 are computed.

                                “specified interest expense”

                                The definition “specified interest expense” is a key component of the numerator (i.e., the GNIE) in the group ratio determination. It generally includes amounts of interest and similar types of financing expenses, as determined for financial reporting purposes.

                                Variable A adds up the various interest and financing expenses referred to in paragraphs (a) to (d). Variable B backs out any dividends included in those variable A amounts.

                                Paragraph (a) is the principal component of “specified interest expense” and includes all amounts of interest expense, whether reported as a line item itself in the consolidated financial statements or included in determining other such amounts.

                                Paragraph (b) deals with capitalized interest. This is generally intended to capture interest that is included in the balance sheet value of an asset.

                                Paragraph (c) includes guarantee fees, standby charges and arrangement or similar fees. These expense are not interest but are similar in nature in that they are generally related to borrowings or other credit facilities.

                                Paragraph (d) includes the consolidated group’s share of the interest and similar expenses of equity-accounted entities.

                                Variable B is the total amount of dividends included in the determination of the amounts referred to in paragraphs (a) to (d) of variable A. It addresses the fact that some shares of corporations may be treated as debt for financial reporting purposes. Thus, any payment of dividends on such shares may be treated as a payment of interest expense for financial reporting purposes. However, these dividend payments are not deductible in computing the income of the paying corporation for tax purposes. As such, these dividends are excluded from “specified interest expense”.

                                This definition is subject to the interpretation rules in paragraphs 18.21(4)(a) and (b).

                                “specified interest income”

                                The definition “specified interest income” is the income analogue to the definition “specified interest expense” and is structured in a similar manner. The only exception is that capitalized interest has no income analogue.

                                “specified non-member”

                                The definition “specified non-member” is relevant for the GNIE definition. GNIE does not include any amount of “specified interest expense” that is paid or payable to a specified non-member. (These excluded amounts are reduced by “specified interest income” that is received or receivable from the specified non-member). Essentially, the concept of a “specified non-member” is intended to identify those persons or partnerships that are considered to have a close connection to a consolidated group, while not being members of the group.

                                Paragraph (a) includes certain persons or partnerships that do not deal at arm’s length with a member of the consolidated group.

                                Paragraph (b) looks up an ownership chain and targets certain situations where a person or partnership, alone or together with non-arm’s length parties, has “equity interests” (as defined, and discussed elsewhere in these notes) that give it 25% or more of the votes or value of a member of the consolidated group.

                                Paragraph (c) looks down an ownership chain and targets certain situations where a member of the consolidated group, alone or together with non-arm’s length parties, has “equity interests” (as defined, and discussed elsewhere in these notes) that give it 25% or more of the votes or value of another entity.

                                This definition is subject to the anti-avoidance rule in subsection 18.21(6).

                                “ultimate parent”

                                The definition “ultimate parent” is mainly relevant in relation to the definition “consolidated group” and refers to the top entity in the group’s organizational structure. It is the entity in respect of which the consolidated financial statements of the group are prepared.

                                This definition is subject to the interpretation rule in paragraph 18.21(4)(a).

                                Conditions for subsection (3)

                                Subsection 18.21(2) sets out the conditions for the application of subsection 18.21(3), which is the operative provision of the group ratio rules in section 18.21. Corporations and trusts that are “eligible group entities” in respect of each other and that are members of the same consolidated group may, if they satisfy all the conditions in paragraphs 18.21(2)(a) to (d), allocate an amount to each such entity (referred to as a “Canadian group member”) under the election referred to in paragraph 18.21(2)(d). That amount (referred to in these notes as the “allocated group ratio amount” or AGRA) becomes, subject to the limitations set out in subsection 18.21(3), the amount determined under subsection 18.21(3) that replaces the amount otherwise used in variable B of subsection 18.2(2) under the fixed ratio rules.

                                “Eligible group entity” is defined in subsection 18.2(1) and requires each such entity to be resident in Canada.

                                Allocated group ratio amount

                                Subsection 18.21(3) determines the “allocated group ratio amount” (AGRA) that may be used as an alternative to the fixed ratio’s interest deduction capacity under subsection 18.2(2).

                                Subsection 18.21(3) simply picks up the amount allocated in the election referred to in paragraph 18.21(2)(d), but sets a limit on the total amount allocated. If that limit is exceeded, the AGRA is nil.

                                The AGRA limitation is the least of the following amounts:

                                • (a) The total of each amount that is a Canadian group member’s adjusted taxable income multiplied by the “group ratio” of the consolidated group. This paragraph will not apply if the group ratio is nil. In that case, the limit will be the lesser of the amounts determined under paragraphs (b) and (c).
                                • (b) The “group net interest expense” (GNIE) of the consolidated group.
                                • (c) The total of the “adjusted taxable income”, determined without reference to section 257, of each Canadian group member for the year. The override of section 257 is intended to ensure that aggregate taxable income is reduced by losses of any Canadian group members.

                                Use of accounting terms

                                Subsection 18.21(4) ensures that the allocated group ratio amount (AGRA) is determined largely by reference to accounting concepts. However, a specific exception is provided in the case of the term “dividend”, as used in the definitions “specified interest expense” and “specified interest income”. For these purposes, the term “dividend” is to be given its meaning for the purposes of the Income Tax Act.

                                Single member group

                                Subsection 18.21(5) provides a number of deeming rules in respect of a “single member group”. These rules are intended to enable the application of the group ratio rules in section 18.21 to taxpayers that are not members of a consolidated group.

                                Anti-avoidance

                                Subsection 18.21(6) provides an anti-avoidance rule in respect of the “group net interest expense” (GNIE) computation. It is intended to address the risk that the allocated group ratio amount could be deliberately inflated with amounts of interest and similar expenses that are paid or payable to certain third parties outside the consolidated group.

                                Specifically, where a portion of “specified interest expense” is paid or payable by a member of a consolidated group to a person or partnership that is not a member of the group as part of a transaction or event, or a series of transactions or events, and it can reasonably be considered that one of the purposes of the transaction, event or series is to avoid that portion being carved out of GNIE (which is what variable E of that definition would otherwise do), then the person or partnership is deemed to be a “specified non-member” in respect of the group for the relevant period. This would bring that portion and any other amount of specified interest expense paid or payable by a group member to that person or partnership for the relevant period squarely into variable E of the GNIE definition.

                                Example 1

                                Back-to-Back Transactions

                                Assumptions:

                                • Canco is a corporation resident in Canada that is a member of a consolidated group (the “Group”);
                                • Forco1 is a non-resident corporation that is not a member of the Group nor is it (absent the application of subsection 18.21(6)) a specified non-member of the Group;
                                • Forco2 is a non-resident corporation that is not a member of the Group but is a specified non-member of the Group;
                                • Forco2 loans funds to Forco1, and Forco1 loans funds to Canco on which interest is paid or payable to Forco1.

                                If it can reasonably be considered that one of the purposes of these transactions is to avoid the inclusion of any portion of the interest paid or payable by Canco in the amount for variable E in the GNIE definition, Forco1 will be deemed to be a specified non-member. If this is the case, the interest would be included in variable E of GNIE.

                                Example 2

                                Interest Strip Transaction

                                Assumptions:

                                • Canco is a corporation resident in Canada that is a member of a consolidated group (the “Group”);
                                • Forco1 is a non-resident corporation that is not a member of the Group nor is it (absent the application of subsection 18.21(6)) a specified non-member of the Group;
                                • Forco2 is a non-resident corporation that is not a member of the Group but is a specified non-member of the Group;
                                • Forco2 loans funds to Canco on which interest is paid or payable (the “Loan”);
                                • Forco2 enters into a transaction with Forco1 (the “Interest Strip Transaction”) whereby Forco1 acquires the right to receive the amount of interest paid or payable on the Loan from Canco, but not the principal amount of the Loan.

                                If it can reasonably be considered that one of the purposes of the Interest Strip Transaction is to avoid the inclusion of any portion of the interest paid or payable by Canco on the Loan in the amount for E in the GNIE definition, Forco1 will be deemed be a specified non-member. If this is the case, the interest would be included in variable E of GNIE .

                                Coming Into Force

                                Coming Into Force

                                New sections 18.2 and 18.21 apply in respect of taxation years of a taxpayer that begin on or after January 1, 2023, subject to an anti-avoidance rule and a transitional election.

                                Where applicable, the anti-avoidance rule accelerates the application of sections 18.2 and 18.21, as well as various related provisions, to a taxation year that begins before 2023 and ends in that year. The anti-avoidance rule applies if, as a result of a transaction or event, or series of transactions or events, any of the taxpayer’s three taxation years immediately preceding its first taxation year that begins on or after January 1, 2023, is a “short” taxation year, and it is reasonable to consider that one of the reasons for the transaction, event or series was:

                                • to defer the application of the EIFEL rules to the taxpayer, or
                                • in effect, to increase the amount of any taxpayer’s excess capacity, as determined under the transitional rules discussed below, for a taxation year preceding the effective date of the EIFEL rules.

                                Transitional Rules

                                Transitional Rules

                                There are two separate sets of transitional rules included in the enacting legislation for the EIFEL rules. The first is an anti-avoidance rule that denies a taxpayer the benefit of the 40% ratio of permissible expenses otherwise applicable for taxation years that begin in the 2023 calendar year, generally where the taxpayer undertakes a transaction to extend the period for which the 40% ratio applies. For more information, see the commentary on the definition “ratio of permissible expenses” in subsection 18.2(1).

                                The second set of transitional rules applies for the purpose of determining a taxpayer’s cumulative unused excess capacity for a taxation year, which is by definition determined based on the taxpayer’s excess capacity for the year plus its excess capacity for the three immediately preceding taxation years (reflecting a three-year carry-forward of excess capacity). Absent these transitional rules, a taxpayer would not have excess capacity for any of the three taxation years (referred to as the “pre-regime years”) immediately preceding its first taxation year (referred to as the “first regime year”) in respect of which the EIFEL rules apply, because the EIFEL rules otherwise do not apply in respect of the pre-regime years. These transitional rules, in effect, allow taxpayers to elect to determine their excess capacity for the pre-regime years in accordance with special rules and carry forward their excess capacity so determined for a pre-regime year for three taxation years, by including it in computing their cumulative unused excess capacity.

                                In order to benefit from these transitional rules, a taxpayer and all eligible group corporations in respect of the taxpayer must jointly elect to have these rules apply. Absent a valid joint election, the taxpayer’s excess capacity for all its pre-regime years is deemed to be nil. For the purposes of these transitional rules, the eligible group corporations in respect of the taxpayer are determined at the end of the taxpayer’s first regime year. The joint election must be filed by the filing-due date of the group member with the earliest filing-due date for the first regime year. The election must allocate the “group net excess capacity” (described below) for the pre-regime years among the taxpayer and eligible group corporations in respect of the taxpayer, and these allocated amounts are treated as their excess capacity for the specific pre-regime years to which they are allocated. The rules governing these allocations are explained in more detail below.

                                If a valid joint election is filed, a taxpayer’s excess capacity for the pre-regime years is determined in accordance with special rules, which are required because a taxpayer’s cumulative unused excess capacity for a taxation year is intended to include only the unused portions of its excess capacity for the three immediately preceding taxation years. In the steady-state system after the rules apply generally, the unused portion of excess capacity is determined, under the definition “cumulative unused excess capacity”, by reducing excess capacity by the taxpayer’s “absorbed capacity” and “transferred capacity”, which represent the portions of its excess capacity that the taxpayer has already used in prior years to deduct its own excess interest and financing expenses (i.e., such expenses exceeding the amount it would have been permitted to deduct for the year under subsection 18.2(2)) or to allow other group members to deduct their excess interest and financing expenses in prior years. Since the EIFEL rules do not otherwise apply in respect of the pre-regime years, however, the taxpayer necessarily will not have used any of its excess capacity for pre-regime years for these purposes.

                                Special transitional rules are therefore provided to determine the taxpayer’s unused excess capacity for the pre-regime years, in order to ensure consistency with the usual rules for determining a taxpayer’s cumulative unused excess capacity and prevent it from being overstated. They are intended to approximate what the taxpayer’s unused excess capacity would have been had the EIFEL rules applied in respect of the pre-regime years. Thus, they seek to replicate, in a relatively simple and administrable way, the extent to which the excess capacity of the taxpayer and eligible group corporations for pre-regime years would have been used to allow for the deduction of the excess interest and financing expenses of the taxpayer and eligible group corporations for pre-regime years.

                                In effect, the transitional rules net any excess interest and financing expenses of the taxpayer and eligible group corporations in respect of the taxpayer for any pre-regime years against any excess capacity of the taxpayer and those eligible group corporations for those years, in determining a taxpayer’s excess capacity (as well as the excess capacity of the eligible group corporations). This is intended to approximate reductions for transfers of excess capacity to other group members that have excess interest and financing expenses in pre-regime years, which would have occurred had the EIFEL rules applied for pre-regime years, as well as reductions for where a taxpayer’s excess capacity for one pre-regime year would have been used to allow the taxpayer to deduct its own excess interest and financing expenses in another pre-regime year.

                                The special rules for determining the taxpayer’s excess capacity for each pre-regime year (which is, notionally, the unused portion of its excess capacity) can be broken down into three main steps.

                                The first step is to determine the “excess capacity otherwise determined” or “excess interest” of the taxpayer and each eligible group corporation for each pre-regime year. A corporation’s “excess capacity otherwise determined” for a pre-regime year is the amount that would be determined as its excess capacity for that year if that definition applied in respect of the pre-regime year. A corporation’s “excess interest” for a pre-regime year is the amount by which its interest and financing expenses for the year exceed the amount of interest and financing expenses that it would have been permitted to deduct for that year had subsection 18.2(2) applied in respect of that year. Subject to any group ratio election made by the taxpayer, the amount the corporation would have been permitted to deduct is determined as its ratio of permissible expenses multiplied by its adjusted taxable income, plus its interest and financing revenues.

                                In determining the excess capacity otherwise determined or excess interest of the taxpayer and each eligible group corporation for each pre-regime year:

                                • If a corporation was subject to a loss restriction event in a pre-regime year, its excess capacity otherwise determined or excess interest for any pre-regime year preceding that event is deemed to be nil.
                                • The ratio of permissible expenses that is to be used in determining these amounts is the one that, under the definition “ratio of permissible expenses” in subsection 18.2(1) (and subject to the above-noted anti-avoidance rule provided in the transitional rules), applies for the taxation year for which the taxpayer’s cumulative unused excess capacity is being determined. Thus, the excess capacity otherwise determined or excess interest of the taxpayer and each eligible group corporation for each pre-regime must all be determined twice: once using the 40% ratio of permissible expenses that generally applies for taxation years beginning in 2023, for the purpose of determining the taxpayer’s cumulative unused excess capacity for those years; and a second time using the 30% ratio that applies for subsequent taxation years, for the purpose of determining the taxpayer’s cumulative unused excess capacity for those subsequent years (this will generally be relevant for taxation years that begin in 2024 and 2025, given the three-year carry-forward period for excess capacity).
                                • As an alternative to using the applicable ratio of permissible expenses in determining excess capacity otherwise determined or excess interest, corporate groups can elect to have the group ratio rule in subsection 18.21(3) apply for one or more pre-regime years, provided they meet the conditions in subsection 18.21(2) (but with the filing deadline for the requisite election being determined by reference to the first regime year rather than a pre-regime year). While a group ratio election results in the taxpayer and eligible group corporations having nil excess capacity for the group ratio year, electing into the group ratio for a pre-regime year can nonetheless be beneficial in certain cases, in that it generally results in lower amounts of excess interest of the taxpayer or eligible group corporations for a pre-regime year.

                                The reason that taxpayers are required to determine excess capacity otherwise determined and excess interest twice – once using the 40% ratio, and then again using the 30% ratio – is that no excess capacity that derives from the 40% transitional fixed ratio (in excess of what would be derived under a 30% ratio) is permitted to be carried forward to a taxation year in which the 30% ratio applies. Thus, these amounts must be computed using the 30% ratio in determining cumulative unused excess capacity for any taxation year for which the 30% ratio applies.

                                The second step is to determine the “group net excess capacity” for the pre-regime years, which is the total of the excess capacity otherwise determined of the taxpayer and all eligible group corporations for all pre-regime years, net of the total of the excess interest of the taxpayer and eligible group corporations for all pre-regime years. Thus, the group net excess capacity represents the net excess capacity of the corporate group for the period spanning the pre-regime years. Consistent with the approach under the EIFEL rules more generally, the excess capacity otherwise determined of any relevant financial institution is excluded in the determination of group net excess capacity.

                                The group net excess capacity is computed twice: the first time based on the excess capacity otherwise determined and excess interest of the taxpayer and each eligible group corporation for each pre-regime year as determined using the 40% ratio, and the second time based on those amounts determined using the 30% ratio.

                                The third step is to allocate, in the joint election under the transitional rules, the group net excess capacity to the taxpayer and the eligible group corporations for specific pre-regime years. The portion of the group net excess capacity that is allocated to a taxpayer or eligible group corporation for a pre-regime year is deemed to be the excess capacity of the taxpayer or eligible group corporation, as the case may be, for that pre-regime year. The allocated amount for a given pre-regime year thus effectively replaces the amount that would otherwise have been determined as the taxpayer’s excess capacity (the taxpayer’s “excess capacity otherwise determined”) for the given pre-regime year under the definition “excess capacity” in subsection 18.2(1), if that definition applied in respect of pre-regime years. The taxpayer’s deemed excess capacity for a pre-regime year is, in effect, subject to both the usual three-year carry-forward by virtue of being included in the taxpayer’s cumulative unused excess capacity, and the ordinary rules under that definition that reduce excess capacity to reflect its utilization in the form of amounts of transferred capacity and absorbed capacity.

                                The group must make two allocations in its joint election: one for the group net excess capacity as determined using the 40% ratio, and the other for the group net excess capacity determined using the 30% ratio. The first allocation determines the excess capacity, for each pre-regime year, of the taxpayer and each eligible group corporation, for the purpose of determining their respective cumulative unused excess capacity for taxation years in which the 40% ratio applies (generally, taxation years beginning in 2023). The second allocation applies for the purpose of determining the respective cumulative unused excess capacity of the taxpayer and eligible group corporations for subsequent taxation years (given the three-year carry-forward period for excess capacity, this will generally be relevant for taxation years beginning in 2024 and 2025, being the second and third taxation years in respect of which the EIFEL rules apply). This means that the amount deemed to be a taxpayer’s excess capacity for a given pre-regime year will in many cases be different for the purpose of computing its cumulative unused excess capacity for its first regime year than for the purpose of computing its cumulative unused excess capacity for subsequent years.

                                In addition, these allocations must meet three specific requirements set out in the transitional rules, or else the taxpayer’s excess capacity for a pre-regime year is deemed to be nil. The first requirement is that the total amount of excess capacity that a taxpayer is allocated for its pre-regime years, from the group net excess capacity, cannot exceed its net excess capacity for its pre-regime years. A taxpayer’s net excess capacity for its pre-regime years is the amount, if any, by which the total of all amounts each of which is its excess capacity otherwise determined for any pre-regime year exceeds the total of all amounts each of which is its excess interest for any pre-regime year. Thus, if a taxpayer’s total excess interest for its pre-regime years is greater than or equal to its total excess capacity otherwise determined for its pre-regime years, then it cannot be allocated any excess capacity for any pre-regime years, and thus its excess capacity for each of those years will be nil for the purpose of determining its cumulative unused excess capacity for any taxation year. In that case, any net group excess capacity for the pre-regime years can be allocated only to eligible group corporations in respect of the taxpayer that have net excess capacity for the pre-regime years.

                                The second requirement is that the excess capacity allocated to a taxpayer for a given pre-regime year cannot exceed its excess capacity otherwise determined for that pre-regime year.

                                The third requirement is that the total excess capacity allocated to the taxpayer and eligible group corporations for their pre-regime years cannot exceed the group net excess capacity. If the corporate group allocates a total amount greater than the group net excess capacity, then the excess capacity of the taxpayer and all of the eligible group corporations for each of their pre-regime years is deemed to be nil.

                                Clause 59

                                Non-capital losses, etc., of predecessor corporations

                                Subsection 87(2.1) allows a corporation formed on an amalgamation of two or more other corporations (referred to as a “new corporation” and the “predecessor corporations”, respectively) to deduct the unclaimed losses of its predecessor corporations, subject to the restrictions on the use of losses imposed by section 111 and subsection 149(10) of the Act.

                                Consequential on the introduction of new section 18.2 and new paragraph 111(1)(a.1), which are part of the new excessive interest and financing expenses limitation regime, paragraphs 87(2.1)(a) and (b) are amended to provide similar “continuity” treatment in respect of unused restricted interest and financing expense of each predecessor corporation. “Restricted interest and financing expense” is the amount of interest and financing expenses for which deductions were denied under subsection 18.2(2) (or amounts were included in income under paragraph 12(1)(l.2)) in prior years. For more information, see the commentary on paragraph 111(1)(a.1) and the definition “restricted interest and financing expense” in subsection 111(8).

                                Subsection 87(2.1) is also amended to add new paragraph 87(2.1)(a.1).

                                New subparagraph 87(2.1)(a.1)(i) provides a similar continuity treatment in respect of the various amounts that are relevant in computing a taxpayer’s cumulative unused excess capacity, which is defined in new subsection 18.2(1) and essentially reflects the three-year carry-forward of a taxpayer’s excess capacity (as also defined in that subsection). This is intended to allow the cumulative unused excess capacity of the new corporation to be determined as though the new corporation were the same corporation as, and a continuation of, the predecessor corporations.

                                If new subsection 111(5.01) applies on a loss restriction event to restrict the cumulative unused excess capacity of a predecessor corporation, this restriction will also apply to the new corporation because subsection 111(5.01) provides that the restriction applies in respect of all taxpayers for all taxation years ending after the loss restriction event. For further information, see the commentary on that subsection.

                                New subparagraph 87(2.1)(a.1)(ii) applies a continuity rule where a non-capital loss of a predecessor corporation is attributable to deductions in respect of net interest and financing expenses. To the extent the new corporation deducts an amount in respect of the loss in a post-amalgamation year, this continuity rule is intended to ensure that an amount in respect of the portion of the loss deriving from the net interest and financing expenses is added back in determining the new corporation’s “adjusted taxable income” (as defined in new subsection 18.2(1)) for the year. Thus, for the limited purpose of determining this add-back amount, subparagraph 87(2.1)(a.1)(ii) deems the new corporation to be the same corporation as the predecessor corporation, such that, for this purpose, the predecessor’s interest and financing expenses and interest and financing revenues for the pre-amalgamation years are considered those of the new corporation.

                                Finally, paragraph 87(2.1)(d) is amended to ensure that the general rule that subsection 87(2.1) has no effect on the income of the new corporation does not prevent an amount in respect of interest and financing expenses from being deductible in a post-amalgamation year where the new corporation has cumulative unused excess capacity resulting from subparagraph 87(2.1)(a.1).

                                This amendment applies in respect of amalgamations that occur on or after January 1, 2023.

                                Clause 60

                                Non-capital losses, etc., of subsidiary

                                Subsection 88(1.1) allows a parent corporation under certain circumstances to carry forward the non-capital losses, restricted farm losses, farm losses and limited partnership losses of a subsidiary corporation that has been wound up.

                                Consequential on the introduction of new section 18.2 and new paragraph 111(1)(a.1), which are part of the new excessive interest and financing expenses limitation (EIFEL) regime, subsection 88(1.1) is amended in a number of respects to provide similar carry-forward treatment to a parent corporation in respect of the wound-up subsidiary’s unused restricted interest and financing expense. A “restricted interest and financing expense” is the amount of the subsidiary’s interest and financing expenses for which deductions were denied under new subsection 18.2(2), or amounts were included in income under paragraph 12(1)(l.2), in a prior taxation year. For more information, see the commentary on paragraph 111(1)(a.1) and the definition “restricted interest and financing expense” in subsection 111(8).

                                Subsection 88(1.1) is amended such that the carry-forward treatment in respect of the subsidiary’s restricted interest and financing expense applies in respect of a parent corporation for the purposes of paragraph 111(1)(a.1), which is the provision that in certain circumstances allows such amounts to be deducted in computing a taxpayer’s taxable income.

                                Consistent with the current approach to losses under subsection 88(1.1), the subsidiary’s restricted interest and financing expense for a particular taxation year (referred to as the “subsidiary expense year”) is allocated between a particular business carried on by the subsidiary (referred to as the “subsidiary’s expense business”), to the extent it can reasonably be regarded as an expense or loss incurred in the course of carrying on the subsidiary’s expense business, and any other source.

                                New paragraph 88(1.1)(d.2) deems the portion of the subsidiary’s restricted interest and financing expense that is attributable to the subsidiary’s expense business to be restricted interest and financing expense of the parent from carrying on the subsidiary’s expense business for the parent’s year in which the subsidiary’s expense year ended. However, this deeming rule applies only to the extent that the conditions in paragraphs (a) and (b) of subsection 88(1.1) are met, which essentially require that the portion of a restricted interest and financing expense was not deducted by the subsidiary and would have been deductible to the subsidiary after the commencement of the winding-up. Consistent with the current treatment of losses under this subsection, the deemed restricted interest and financing expense is also deemed not to have been deductible by the parent for years beginning before the winding-up commenced.

                                New paragraph 88(1.1)(d.3) provides for similar treatment of the subsidiary’s restricted interest and financing expense allocated to any other source.

                                Paragraph 88(1.1)(e) currently limits the use that can be made of the subsidiary corporation’s non-capital losses and farm losses if either the parent or the subsidiary undergoes an acquisition of control. This paragraph is amended to ensure that this limitation applies similarly in respect of the subsidiary corporation’s restricted interest and financing expenses.

                                Finally, paragraph 88(1.1)(f) currently allows the parent to elect to deem a loss of the subsidiary that would otherwise be a loss of the parent for a taxation year beginning after the commencement of the winding up to be a loss of the parent for the immediately preceding taxation year. New paragraph 88(1.1)(g) allows the parent to make a similar election if a portion of the subsidiary’s restricted interest and financing expense would otherwise be the parent’s restricted interest and financing expense for a taxation year beginning after the commencement of the winding up.

                                These amendments apply in respect of windings-up that begin on or after January 1, 2023.

                                Cumulative unused excess capacity of subsidiary

                                New subsection 88(1.11) is part of the new excessive interest and financing expenses limitation regime located mainly in sections 18.2 and 18.21.

                                If a subsidiary corporation has been wound up in circumstances described in subsection 88(1.1), new subsection 88(1.11) applies for the purposes of determining the parent’s cumulative unused excess capacity, which is defined in new subsection 18.2(1) and essentially reflects a three-year carry-forward of excess capacity (as also defined in that subsection).

                                This subsection is introduced to provide continuity treatment to the parent in respect of the subsidiary’s cumulative unused excess capacity.

                                This is achieved by attributing to the parent the principal amounts that are relevant in determining the subsidiary’s cumulative unused excess capacity. In particular, any absorbed capacity, excess capacity or transferred capacity (each as defined in subsection 18.2(1)) of the subsidiary for a taxation year is deemed to be absorbed capacity, excess capacity or transferred capacity, respectively, of the parent for its taxation year in which the subsidiary’s year ends. By attributing to the parent not only the subsidiary’s excess capacity, but also its absorbed capacity and transferred capacity, this rule, in effect, provides continuity in the parent only in respect of the subsidiary’s excess capacity that is not “used” by the subsidiary before the winding-up.

                                Notably, if new subsection 111(5.01) applies on a loss restriction event to restrict the cumulative unused excess capacity of the subsidiary, that restriction will also apply to the parent because that subsection provides that the restriction applies in respect of all taxpayers for all taxation years ending after the loss restriction event. For further information, see the commentary on subsection 111(5.01).

                                New subsection 88(1.11) applies in respect of windings-up that begin on or after January 1, 2023.

                                Clause 61

                                Deemed corporation

                                Subsection 94.2(2) of the Act provides certain deeming rules that are relevant for the purposes of applying a number of provisions of the Act in respect of a trust that meets the conditions in subsection 94.2(1) of the Act. Paragraph 94.2(2)(a) deems such a trust to be a non-resident corporation that is controlled by the beneficiary referred to in that subsection and, where applicable, by a taxpayer whose controlled foreign affiliate (within the meaning of subsection 95(1)) is such a beneficiary. Paragraph 94.2(2)(b) deems each beneficiary to own a proportion of the issued shares of each class that is commensurate with the fair market value of the beneficiary's beneficial interest in the corresponding class of interests in the trust.

                                Consequential on the introduction of new section 18.2, which is part of the new excessive interest and financing expenses limitation (EIFEL) regime, subsection 94.2(2) is amended to provide that these deeming rules also apply for the purposes of subparagraph (c)(ii) of the definition “excluded entity” in new subsection 18.2(1).

                                This amendment applies in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                                Clause 62

                                Restricted interest and financing expenses

                                New paragraph 111(1)(a.1) permits taxpayers to deduct in computing taxable income for a taxation year such portion as they may claim of their restricted interest and financing expense for the 20 taxation years immediately preceding the year, not exceeding the amount determined by the formula A + B included in the provision, as described below.

                                A taxpayer’s “restricted interest and financing expense” for a taxation year is a new defined term in subsection 111(8). Generally, it represents the amount of the taxpayer’s interest and financing expenses for the year for which deductions were denied under new subsection 18.2(2) (or in respect of which amounts were included in income under new paragraph 12(1)(l.2)).

                                For more information, see the commentary on the new definition “restricted interest and financing expense” in subsection 111(8).

                                The amount a taxpayer may deduct under paragraph 111(1)(a.1) for a taxation year in respect of its restricted interest and financing expense for prior years is limited to the taxpayer’s excess capacity for the year plus its total received capacity for the year (where both of those terms are as defined in new subsection 18.2(1)). For this purpose, the taxpayer’s excess capacity is the amount it would be if no amount were deductible by the taxpayer under paragraph 111(1)(a.1). The effect, when taken together with the reduction to excess capacity under variable C in the definition of that term, is that a taxpayer’s excess capacity for a taxation year is first applied to allow the taxpayer to deduct its unused restricted interest and financing expense from prior years, and the taxpayer can then elect to transfer any remaining excess capacity to other group members under subsection 18.2(4). For more information, see the commentary to the definition “excess capacity” in subsection 18.2 and to subsection 18.2(4).

                                While, unlike certain losses to which subsection 111(1) applies, restricted interest and financing expense can only be carried forward to future taxation years, and not back to prior years, the rules, in effect, provide a three-year carry-forward of excess capacity, as reflected in the taxpayer’s cumulative unused excess capacity (as defined in subsection 18.2(2)). This provides comparable results to a three-year carry-back of restricted interest and financing expense.

                                New paragraph 111(1)(a.1) applies in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                                Limitation on deductibility

                                Subsection 111(3) of the Act sets out limitations on the amount that can be deducted or claimed under subsection 111(1) in respect of a non-capital loss, net capital loss, restricted farm loss, farm loss or limited partnership loss.

                                Subparagraph 111(3)(a)(i) reduces the amount that a taxpayer can deduct, in computing taxable income for a particular taxation year, in respect one of these losses for a taxation year by the total of amounts deducted in respect of the loss in preceding taxation years. Paragraph 111(3)(b) is an ordering rule that provides that no amount is deductible in respect of a non-capital loss, net capital loss, restricted farm loss, farm loss or limited partnership loss for a taxation year until a loss of the same type for a preceding taxation year has been deducted (i.e., losses of each type must be deducted in the order in which they arose).

                                Subparagraph 111(3)(a)(i) and paragraph (b) are amended consequential on the introduction of new paragraph 111(1)(a.1), which is part of the new excessive interest and financing expenses limitation regime whose core rules are in new sections 18.2 and 18.21. These amendments ensure that deductions under paragraph 111(1)(a.1) for restricted interest and financing expense are subject to limitations similar to those that already apply to losses.

                                The amendment to subparagraph 111(3)(a)(i) ensures that amounts deducted in respect of a restricted interest and financing expense in preceding taxation years under paragraph 111(1)(a.1), in computing taxable income or a non-capital loss, will reduce the amount deductible in respect of the restricted interest and financing expense in later taxation years. As a result of the amendment to the ordering rule in paragraph 111(3)(b), the same first-in, first-out rules that apply to losses will also apply to restricted interest and financing expense.

                                This amendment applies in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                                Loss restriction event – certain losses and expenses

                                Paragraph 111(5)(a) of the Act provides that, if a taxpayer is subject to a loss restriction event, the taxpayer’s non-capital losses and farm losses for a taxation year ending before that event are deductible by it in computing its taxable income for later years only if certain conditions are met.

                                Consequential on the introduction of new paragraph 111(1)(a.1), which is part of the new excessive interest and financing expenses limitation (EIFEL) regime whose core rules are in new sections 18.2 and 18.21, paragraph 111(5)(a) is amended to restrict, in a manner similar to non-capital losses and farm losses, the deductibility of a taxpayer’s restricted interest and financing expenses for taxation years ending before a loss restriction event. Such expenses will be deductible by the taxpayer in a taxation year ending after that event only to the extent they can reasonably be regarded as having been incurred in the course of carrying on a business, the taxpayer carries on that business in the later year and the conditions in subparagraphs 111(5)(a)(i) and (ii) are satisfied.

                                This amendment applies in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                                Loss restriction event – cumulative unused excess capacity

                                New subsection 111(5.01) of the Act is introduced in connection with the new excessive interest and financing expenses limitation (EIFEL) regime, the core rules of which are in new sections 18.2 and 18.21. This subsection is intended to ensure that, where a particular taxpayer is subject to a loss restriction event at any time, its excess capacity for taxation years ending before that time cannot be utilized by the particular taxpayer (or any other taxpayer) in a taxation year ending after that time.

                                To ensure this result, in general terms, certain pre-loss-restriction-event amounts are disregarded for taxation years ending after the loss restriction event. In particular, the cumulative unused excess capacity of any taxpayer for any taxation year ending after that time is determined without regard to the various amounts of the particular taxpayer for taxation years ending before that time that are otherwise relevant to the determination of cumulative unused excess capacity (specifically, the particular taxpayer’s absorbed capacity, excess capacity and transferred capacity).

                                A taxpayer’s “cumulative unused excess capacity” for a taxation year generally represents the unused portion of its excess capacity for the three immediately preceding years. It can be used by a taxpayer, in certain circumstances, to either deduct interest and financing expenses that would otherwise be denied under subsection 18.2(2), or to allow another member of the corporate group to do so by designating a portion of the cumulative unused excess capacity as “received capacity” of the other member in an election under subsection 18.2(4). Thus, the main effect of subsection 111(5.01) is to prevent the excess capacity of the particular taxpayer that was subject to the loss restriction event, for taxation years ending before that event, from being used for any of these purposes in taxation years ending after that event. For more information, see the commentary on the definition “cumulative unused excess capacity” in new subsection 18.2(1).

                                Notably, the restriction in subsection 111(5.01) applies in respect of “any taxpayer for any taxation year” that ends after the loss restriction event. Thus, for example, if the particular corporation that was subject to the loss restriction event subsequently amalgamates with another corporation, the restriction in subsection 111(5.01) will apply in determining the cumulative unused excess capacity of the new corporation resulting from the amalgamation, notwithstanding subsection 87(2.1).

                                New subsection 111(5.01) applies in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                                Definitions

                                Subsection 111(8) set out the definitions that apply for the purpose of section 111. The amendments to this subsection apply in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                                “non-capital loss”

                                The definition “non-capital loss” determines a taxpayer’s non-capital loss for a taxation year using a formula. Variable E of this formula lists certain amounts to be included in a taxpayer’s non-capital loss.

                                Consequential on the introduction of new paragraph 111(1)(a.1), which is part of the new excessive interest and financing expenses limitation regime, variable E is amended to include, in determining a taxpayer’s non-capital loss for a taxation year, an amount deducted in the year under paragraph 111(1)(a.1), in respect of the taxpayer’s restricted interest and financing expense for a preceding taxation year.

                                “restricted interest and financing expense”

                                New definition “restricted interest and financing expense” is introduced in conjunction with the new excessive interest and financing expenses limitation in new section 18.2.

                                A taxpayer’s restricted interest and financing expense for a taxation year is, in general terms, the portion of its interest and financing expenses for the year (as defined in new subsection 18.2(1)) for which a deduction is denied by new subsection 18.2(2), or that results in an income inclusion under paragraph 12(1)(l.2) in respect of the taxpayer’s share of the interest and financing expenses of a partnership of which it is a member.

                                The definition “restricted interest and financing expense” is most directly relevant to new paragraph 111(1)(a.1), which generally allows a taxpayer to carry forward its restricted interest and financing expense for a taxation year and deduct it in computing its taxable income for any of its next 20 taxation years, to the extent of its excess capacity and received capacity for any of those years, subject to any applicable restrictions under subsection 111(3), paragraph 111(5)(a) and section 256.1.

                                For more information, see the commentary on paragraph 111(1)(a.1).

                                The amendments to section 111 apply in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                                Subsection 111(9) restricts the loss carryovers that a taxpayer may claim for a year during which the taxpayer was not resident in Canada. The general purpose of the rule is to ensure that non-residents cannot apply, against Canadian-source income, losses from sources that are outside the Canadian tax system.

                                The preamble of this subsection is amended to add a reference to a taxpayer’s restricted interest and financing expense for a taxation year. This amendment ensures that a taxpayer’s restricted interest and financing expense for a year during which it is not resident in Canada is subject to the same restrictions that apply in respect of loss carryovers.

                                This amendment applies in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                                Clause 63

                                Definitions

                                Subsection 248(1) of the Act defines various terms that apply for the purposes of the Act.

                                Subsection 248(1) is amended to add the definitions “absorbed capacity”, “cumulative unused excess capacity”, “excess capacity”, “interest and financing expenses”, “interest and financing revenues” and “transferred capacity”, so that the definitions of these terms in subsection 18.2(1) apply for the purposes of the Act (except, in the case of the definition “interest and financing expenses”, for the purposes of the definition “economic profit” in subsection 126(7)).

                                Subsection 248(1) is also amended to add the definition “restricted interest and financing expense”, so that the definition of this term in subsection 111(8) applies for the purposes of the Act.

                                This amendment applies in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.

                                Clause 64

                                Definitions

                                “specified provision”

                                The definition “specified provision” is relevant in applying the anti-avoidance rules in subsections 256.1(3) and (6), which deem an acquisition of control to occur in certain circumstances.

                                This definition is amended to add a reference to new subsection 111(5.01), which restricts the extent to which amounts may be included in determining a taxpayer’s cumulative unused excess capacity (as defined in new subsection 18.2(1)) following a loss restriction event. This amendment ensures that the restriction in subsection 111(5.01) is treated similarly to other provisions referred to in this definition.

                                This amendment applies in respect of taxation years beginning on or after January 1, 2023. However, it also applies in respect of a taxation year that begins before and ends after that date if any of the three immediately preceding taxation years is shorter as a result of a transaction or event or series of transactions or events and it can reasonably be considered that one of the reasons for the transaction, event or series was to defer the application of the EIFEL regime.