For every CFO in Metro Vancouver who signed off on a leveraged deal between 2022 and 2024, one number should be front of mind: 30. That is the percentage of adjusted taxable income (ATI)—a specific CRA-defined figure distinct from revenue or EBITDA—above which interest and financing expenses are no longer deductible. Canada's Excessive Interest and Financing Expenses Limitation (EIFEL) is now fully operative for fiscal years beginning on or after January 1, 2024. As the second full cycle of filings approaches this autumn, many local operators remain unprepared for the impact.
EIFEL is Canada's domestic implementation of the OECD's Base Erosion and Profit Shifting framework, which caps net interest deductions as a share of earnings. The policy aims to prevent multinationals from loading Canadian subsidiaries with intercompany debt to shift income offshore. Ottawa’s solution limits deductible interest to 30% of ATI, a metric that, while resembling EBITDA, includes specific adjustments that can significantly tighten the effective threshold.
The mechanics are challenging. A company that completed a $30-million acquisition in 2023 using $20 million in senior debt at a blended rate of 7% to 8%—a common scenario given the Bank of Canada's recent rate cycle—carries approximately $1.4 million to $1.6 million in annual interest. Whether this clears the 30% ATI threshold depends on earnings. For a business with $6 million in ATI, the cap is $1.8 million. However, if integration costs or margin compression push ATI down to $4 million, the cap drops to $1.2 million, rendering $200,000 to $400,000 of interest expense non-deductible.
The situation is more acute for companies with intercompany financing structures. Under EIFEL, related-party interest payments count toward the cap, potentially stacking exposures across a corporate group. A Vancouver holding company that borrowed to acquire regional businesses and then lent those proceeds to operating entities may find the 30% cap applying at multiple levels simultaneously.
Precise local data on affected companies is difficult to isolate, but Canadian Venture Capital and Private Equity Association data on BC deal activity indicates significant mid-market transaction volume between 2022 and 2024. Companies that modelled acquisitions against pre-2022 interest rate assumptions are the most exposed.
Technical complexity remains a barrier. The ATI calculation requires specific adjustments for items like terminal losses, resource allowances, and certain reserves, as detailed in the Department of Finance's explanatory notes. For mid-market firms relying on smaller accounting practices, there is a risk that EIFEL compliance is only addressed during T2 preparation rather than through proactive tax planning.
Relief mechanisms exist. Canadian-controlled private corporations with taxable capital below $50 million can elect excluded-entity status. Additionally, groups with net interest expenses below $1 million annually are exempt. A group ratio election allows Canadian members of a multinational to use the group’s consolidated interest-to-EBITDA ratio, which may prove more generous. While disallowed interest can be carried forward for 20 years or back 3 years, this does not resolve the immediate cash-flow impact.
CFOs should prioritize a rigorous review before autumn filings: calculate ATI using the specific tax definition, aggregate all interest and financing expenses across the group, and assess whether the excluded-entity or group ratio elections are applicable. Most importantly, firms should revisit acquisition models to determine if the post-EIFEL effective tax rate alters the deal's return profile.
As deal activity continues into 2025 and 2026, EIFEL must become a standard input in acquisition modelling. The 30% cap is not a marginal adjustment; for many mid-market deals, it can shift effective tax rates by several percentage points.
What to watch
- Whether the CRA issues additional administrative guidance on ATI calculations for common mid-market structures.
- The inclusion of EIFEL representations and tax indemnities in BC M&A purchase agreements.
- Carry-forward balances on corporate group returns, which will signal the true scale of EIFEL's impact.
- Potential federal budget or technical amendments that may adjust thresholds or expand the excluded-entity definition.
