Canada introduced a cap on corporate interest deductibility for taxation years beginning on or after October 1, 2023. It was designed as an anti-base-erosion measure aimed at multinationals, and for most Canadian private businesses it remains exactly that: someone else's problem. But the exemptions that keep it someone else's problem are not indexed, one of them is denominated in interest dollars rather than debt, and the cost of debt has roughly tripled since the rules were conceived. That combination deserves a closer look than it has received.
Key Takeaway
The Excessive Interest and Financing Expenses Limitation restricts net interest and financing expense deductions to 30% of tax EBITDA for taxation years starting on or after January 1, 2024, following a 40% transitional ratio for years starting on or after October 1, 2023. All Canadian-resident corporations and trusts are subject unless they qualify as an excluded entity, and there are three alternative routes to exclusion: a CCPC with taxable capital employed in Canada below $50 million including associated corporations; a taxpayer whose Canadian group's aggregate net interest and financing expenses are $1 million or less; or a Canadian group carrying on all or substantially all of its business in Canada with no non-resident owning more than 25% and substantially all interest payable to arm's-length, non-tax-indifferent persons. Most Canadian private businesses qualify under one of these. The exposed population is narrower and specific: foreign-controlled Canadian corporations, public corporations, large CCPCs, and sponsor-owned groups with significant non-resident ownership.
The Good News, Stated First
Coverage of EIFEL tends to open with alarm, which is unhelpful because the great majority of Canadian private companies are outside the regime and should spend their attention elsewhere. So the reassurance goes first.
The exclusions are alternatives, not cumulative conditions. An excluded entity is a taxpayer that meets at least one of the three criteria[1]. A Canadian-controlled private corporation with taxable capital employed in Canada below $50 million, including associated corporations, is excluded regardless of how much interest it pays[1][2]. That single test removes most Canadian SMBs from the regime entirely.
RCGT makes the practical point that the first criterion excludes small CCPCs and is assessed based on the taxable capital of associated corporations, a known figure already used for tax return purposes[3]. In other words, most businesses can answer this question from a number their accountant already computes, without a new analysis.
The rest of this article concerns the businesses that cannot answer it that way.
What EIFEL Actually Does
The mechanism, stated plainly.
The EIFEL rules limit the deduction of interest and other financing costs of affected Canadian corporations and trusts to a ratio of their earnings before interest, taxes, depreciation and amortization, and any corporation or trust resident in Canada is subject to these rules unless it is considered an excluded entity[3]. The rules restrict deductibility of interest and financing expenses to a percentage of the taxpayer's adjusted taxable income, which is EBITDA adjusted for tax purposes[4].
The policy origin is international rather than domestic. The legislation aligns with international efforts to combat base erosion and profit shifting, and as a BEPS measure EIFEL aims to prevent multinational entities from evading Canadian tax through disproportionately high financing leverage[1].
That origin explains the design, and it also explains why the rules catch some businesses that were plainly not the target. A cap expressed as a ratio of earnings will bind on any highly-leveraged business with compressed earnings, whether or not any base erosion is occurring, and the exclusions rather than the operative rule are what confine the regime to its intended population.
The Ratio And The Dates
The CRA sets out the fixed ratio precisely: 30% for tax years starting on or after January 1, 2024, and 40% for tax years starting on or after October 1, 2023 and before January 1, 2024[5]. Forvis Mazars describes the 40% as a transitional accommodation to facilitate the change[6].
The transitional year has long passed. Any Canadian corporation with a taxation year beginning in 2024 or later that is not an excluded entity faces the 30% ratio, which means several filing cycles have now occurred under the operative rule.
It is worth noting what the ratio applies to: net interest and financing expenses, meaning expenses reduced by interest and financing revenues, rather than gross interest paid. A business with meaningful interest income has a smaller net figure and correspondingly more room, which matters for groups holding cash or intercompany receivables.
The Three Exclusions
Setting out all three precisely, since the whole analysis turns on them.
Small CCPC exclusion. A Canadian-controlled private corporation whose taxable capital employed in Canada in the previous year is less than $50 million, including that of associated corporations[3][2].
De minimis exclusion. A taxpayer resident in Canada whose net interest and financing expenses, including exempt expenses, within the Canadian group do not exceed a threshold[3], expressed elsewhere as the taxpayer together with eligible group entities having aggregate net IFE of $1,000,000 or less[1].
All-Canadian exclusion. Canadian corporations and trusts, alone or as an eligible group entity, that carry on all or substantially all of their businesses, undertakings and activities in Canada[1], subject to two further conditions: no non-resident owns more than 25%, in votes or value, of an entity in the Canadian group; and all or substantially all of any eligible group member's interest and financing expenses is payable to persons or partnerships other than a non-arm's-length tax-indifferent person[3].
The All-Canadian Carve-Out Is The Big One
The third exclusion receives the least attention and does the most work for domestic mid-market businesses, so it deserves emphasis.
A purely Canadian business, operating substantially all of its activities in Canada, without significant non-resident ownership, borrowing from an arm's-length lender such as a Canadian bank or an unrelated private credit fund, is excluded from EIFEL regardless of how leveraged it is and regardless of its taxable capital. That is a very substantial carve-out, and it means a domestic Canadian company that has taken on significant debt to fund growth is generally not caught even where its interest expense far exceeds $1 million and its taxable capital exceeds $50 million.
The conditions attached are where the carve-out fails, and both are worth understanding. The 25% non-resident ownership test is a bright line that a single foreign investor, or an accumulation of smaller foreign holdings, can breach without management focusing on it. And the tax-indifferent person condition targets interest payable to non-arm's-length parties who would not be taxed on receiving it, which is precisely the base-erosion pattern the regime exists to address.
The practical instruction is that a Canadian business relying on this exclusion should treat its non-resident ownership percentage as a monitored tax attribute rather than a passive fact, because crossing 25% can move the company into the regime with no other change in its affairs.
Who Is Actually Exposed
Synthesizing the exclusions into a description of the affected population.
The commentary is consistent. The EIFEL rules are expected to impact public corporations, large CCPCs, related groups with greater than $1 million of IFE, and foreign-controlled Canadian corporations[1], and MNP frames it the same way, expecting impact on public corporations, large CCPCs and foreign-controlled Canadian corporations[7]. PwC notes there are limited sector-specific exceptions, meaning the rules apply to most corporations and trusts that cannot meet one of the excluded entity tests[2].
One commentary identifies specific business profiles worth flagging: CCPCs engaged in real estate development, manufacturing with significant capital investments, or businesses with leveraged buyout structures, for which EIFEL can have substantial implications on after-tax cash flow and financial planning[8].
Reading these together, the Canadian business most exposed is a leveraged, capital-intensive operating company with meaningful non-resident ownership, which describes a recognizable population: sponsor-owned mid-market companies where the private equity fund is foreign, Canadian subsidiaries of foreign parents, and real estate and infrastructure structures with international capital. It is not the ordinary owner-operated Canadian business, and coverage suggesting otherwise overstates the reach.
The Threshold That Shrank
This section is our own analysis rather than a finding in the cited sources, and we flag it as such, but the arithmetic is straightforward and we have not seen the point made elsewhere.
The de minimis exclusion is denominated in dollars of net interest and financing expense, $1 million, not in dollars of debt or in any measure of company size. The amount of borrowing that figure shelters therefore depends entirely on the prevailing cost of debt.
At an effective borrowing cost of 3%, roughly the environment in which these rules were being designed and consulted on, $1 million of net interest corresponds to approximately $33 million of debt. At the all-in yields of 11% to 13% documented for senior secured middle-market private credit facilities and examined elsewhere in this publication, $1 million of net interest corresponds to roughly $8 million of debt. Same threshold, same legislation, roughly a quarter of the borrowing capacity sheltered.
Two qualifications keep this from being alarming for most readers. The de minimis is only one of three alternative exclusions, so a business breaching it may still be excluded as a small CCPC or under the all-Canadian test, and most will be. And the figure is net of interest and financing revenues.
But for the exposed population, foreign-owned and sponsor-backed Canadian companies that cannot use the other two exclusions, the effect is real: the regime has broadened materially without any legislative change, purely through the interest rate environment. A company that modelled itself comfortably below the de minimis when it borrowed at low rates may be well above it after refinancing at current pricing, and nothing about that transition would have generated a tax advisory trigger.
The De Minimis Is A Group Test
A structural feature that surprises groups organized across multiple entities.
The threshold is calculated on a group basis, meaning all Canadian members of a corporate group must aggregate their interest and financing expenses, and if the combined total exceeds $1 million, all members of the group become subject to EIFEL even if individually they would fall below the threshold[8]. The exclusion is framed in terms of the taxpayer together with eligible group entities[1] and net IFE within the Canadian group[3].
The consequence is that separating debt across entities does not multiply the shelter. A group with four operating companies each carrying $400,000 of net interest has $1.6 million at group level and every member is in the regime, not merely the ones with larger balances.
For groups approaching the threshold, this makes the group-level interest figure a number worth computing deliberately and monitoring, rather than something that emerges from consolidating four separate tax files after year end.
The Group Ratio Election And Its Catch
The principal relief available to genuinely leveraged businesses, and the reason it frequently does not help the ones that need it.
Canadian members of a group may jointly elect for a group ratio rule to apply, allowing a taxpayer to deduct interest and financing expenses in excess of the fixed ratio where the taxpayer is a member of a consolidated accounting group whose ratio of net third-party interest expense to book EBITDA exceeds its fixed ratio[6]. The election is made on Form T2225, and the allocated group ratio amount is determined using audited consolidated financial statements[5]. Forvis Mazars specifies that the group must demonstrate this based on audited consolidated financial statements under IFRS[6].
PwC identifies the problem directly: highly-leveraged businesses are expected to rely on the group ratio rules as the main mitigation strategy where a group's proportion of external interest expense to EBITDA exceeds the 30% fixed ratio, but the application of the group ratio has challenges, in particular for private groups that do not have audited consolidated financial statements at the level of the ultimate parent[2].
This is a significant practical gap. The relief designed for leveraged businesses requires audited consolidated statements at the ultimate parent level, and many private groups, including sponsor-owned structures where the ultimate parent is a fund vehicle, simply do not produce them. A business in that position faces the fixed ratio with no realistic access to the alternative, and obtaining audited consolidated statements is a substantial undertaking that must be planned well ahead of the filing that needs them.
EIFEL Applies After Everything Else
An ordering point that determines how the rules interact with existing restrictions.
EIFEL restricts deductions of interest and financing expenses that are otherwise deductible after the application of other provisions in Canada's Income Tax Act, including general interest deductibility and thin-capitalization rules[4].
So EIFEL is not an alternative to thin capitalization; it sits on top of it. Interest must first survive the general deductibility requirements, then the thin-cap rules, and whatever remains deductible is then subject to the EIFEL cap. A group that has structured carefully around thin capitalization has not thereby addressed EIFEL, and the two analyses must be run in sequence rather than treated as substitutes.
Partnerships Are Not A Way Around It
A structuring point worth closing off.
Although partnerships are not directly affected, any interest and financing expenses allocated to corporate or trust partners are included in their respective EIFEL calculations[4]. The CRA similarly notes the rules affect corporations or trusts that are members of, or have controlled foreign affiliates that are members of, partnerships with interest and financing expenses and revenues[5].
Holding leveraged assets through a partnership therefore does not remove the interest from the regime; it relocates where the calculation happens. Any structuring analysis premised on partnership interposition should be tested against this specifically.
A Worked Case: The Sponsor-Owned Manufacturer
A Canadian manufacturer acquired several years ago by a US-based private equity fund, operating entirely in Canada, with an acquisition facility that was refinanced in the current market. The reconstruction below illustrates the interaction rather than reporting a specific engagement.
Test the three exclusions in turn. It is not a CCPC, because it is controlled by non-residents, so the small CCPC exclusion is unavailable regardless of its taxable capital. It carries on all of its business in Canada, but the all-Canadian exclusion fails because a non-resident owns more than 25% in votes and value. That leaves the de minimis, and the refinancing at current market pricing took group net interest and financing expenses comfortably past $1 million on a facility that would have sat below the threshold at the rates prevailing when the acquisition was structured.
The company is therefore inside EIFEL and faces the 30% fixed ratio. Its natural mitigation is the group ratio election, but the ultimate parent is a fund vehicle that does not produce audited consolidated financial statements under IFRS, which is precisely the gap PwC identifies[2]. Manufacturing is capital-intensive, so depreciation is significant, which affects the tax EBITDA computation the ratio applies to.
Nothing about the company's operations changed. Its Canadian business, its arm's-length lender and its leverage strategy are all unremarkable. What put it inside the regime was the combination of an ownership structure that failed two exclusions and an interest rate environment that pushed it past the third, and the mitigation designed for its situation is unavailable for a reporting reason rather than a substantive one.
Excluded Today Is Not Excluded Forever
MNP's advice on this point is worth repeating because it identifies an ongoing obligation rather than a one-time assessment: taxpayers who meet the definition of an excluded entity for the year should continue to monitor their situation carefully, since future changes in structure could impact their excluded status[7].
Each exclusion has a variable that can move without anyone treating the movement as a tax event. Taxable capital grows as a business retains earnings and acquires assets, and can cross $50 million on the strength of a good few years. Non-resident ownership crosses 25% through a financing round, a secondary sale, or the accumulation of individually small foreign holdings. And net interest crosses $1 million through refinancing at higher rates without any increase in borrowing at all.
The corollary is that an EIFEL assessment concluded in 2023 or 2024 is not a durable answer. It is a snapshot of three variables, all of which drift, and at least one of which has drifted substantially across the market as a whole.
What To Do
Answer the small CCPC question first. Prior-year taxable capital employed in Canada, including associated corporations, against $50 million. It uses a figure your accountant already computes, and for most Canadian private businesses it ends the analysis.
If that fails, test the all-Canadian exclusion carefully. Substantially all business in Canada, no non-resident above 25% in votes or value anywhere in the Canadian group, and substantially all interest payable to arm's-length non-tax-indifferent persons. This carve-out protects most domestic leveraged businesses.
Compute group net interest, not entity interest. The de minimis aggregates across Canadian group members, so a per-entity view will understate the position.
Recompute after any refinancing. This is the specific recommendation this article exists to make. A refinancing that leaves borrowing unchanged can still move a group across the de minimis threshold on rate alone.
If the group ratio is your intended mitigation, confirm the audited statements exist. Audited consolidated financial statements at the ultimate parent level are a precondition, and producing them is a long-lead undertaking that cannot be arranged at filing time.
Model the cash consequence, not just the deduction. MNP's recommendation for non-excluded taxpayers is to model their non-deductible interest and examine its impact on cash flows and taxes payable[7], which is the correct framing: a denied deduction is a cash tax cost in the year, whatever its treatment thereafter.
The Limits Of This Analysis
Several caveats matter, and this is a genuinely technical area where a summary is a poor substitute for advice. EIFEL is among the most complex provisions in recent Canadian tax legislation, and this article addresses only the exclusion tests, the fixed ratio and the group ratio in outline; it does not address the treatment of restricted interest carried forward, excess capacity, transitional rules, controlled foreign affiliate mechanics, the definition of tax EBITDA in detail, or the sector-specific exceptions that exist. The central argument about the de minimis threshold shrinking in debt terms is our own arithmetic, using illustrative interest rates, and is offered to prompt a recalculation rather than as a finding. Draft legislative proposals released August 15, 2025 included technical amendments touching this area[2] whose current status we have not established. Nothing here is tax advice; any business that cannot clearly satisfy an exclusion should engage a Canadian tax professional with specific EIFEL experience.
Frequently Asked Questions
Does EIFEL apply to my private Canadian business?
What is the limit if I am caught?
I am a domestic Canadian company with a lot of debt. Am I caught?
Why does the article say the threshold shrank?
Can I split debt across entities to stay under $1 million?
What is the group ratio election and why might it not help?
References
- Manning Elliott LLP. (2025, July 7). Understanding The Excessive Interest And Financing Expense Limitation (EIFEL) Regime, on the exclusion tests, the affected population and the BEPS origin. manningelliott.com/blog/understanding-the-eifel-regime
- PwC Canada. (2025, September 16 update). Tax Insights: Bill C-59 ─ Excessive Interest And Financing Expenses Limitation (EIFEL) Regime, on excluded entities, limited sector exceptions, the group ratio challenge for private groups, and the August 15, 2025 draft proposals. pwc.com/ca/en/services/tax/publications/tax-insights/bill-59-eifel-regime-2023.html
- Raymond Chabot Grant Thornton. (2025, September 8). Excessive Interest And Financing Expenses Limitation Rules, on the three exclusion criteria and the tax-indifferent person and 25% ownership conditions. rcgt.com/en/insights/expert-advice/excessive-interest-financing-expenses-limitation-rules
- CPABC. (2023, May; updated 2025). Understanding The Proposed EIFEL Rules, on adjusted taxable income, the interaction with general interest deductibility and thin capitalization, and partnership allocations. bccpa.ca/news-events/cpabc-newsroom/2023/may/understanding-the-proposed-eifel-rules
- Canada Revenue Agency. Excessive Interest And Financing Expenses Limitation Rules. Government of Canada, on the fixed ratios, Form T2225 and affected taxpayers. canada.ca/en/revenue-agency/.../excessive-interest-financing-expenses-limitation-rules.html
- Forvis Mazars. Canada Introduces Excessive Interest And Financing Expense Limitation Rules, on the transitional 40% ratio and the group ratio election requiring audited IFRS consolidated statements. forvismazars.com/ca/en/insights/publications-webinars/tax-news/canada-introduces-eifel-rules
- MNP. (2024, September 24). How The New EIFEL Rules Will Affect Canadian Taxpayers, on the expected affected population, ongoing monitoring of excluded status and cash flow modelling. mnp.ca/en/insights/directory/how-the-new-eifel-rules-will-affect-canadian-taxpayers
- BKC ProHub. (2025, October 9). Excessive Interest And Financing Expenses Limitation (EIFEL) Rules In Canada, on the group-basis de minimis calculation and exposed business profiles. bkcprohub.com/excessive-interest-and-financing-expenses-limitation-eifel-rules-in-canada
This article discusses Canadian tax legislation and professional commentary and is provided for general informational purposes. It is not tax advice. EIFEL is highly technical and this article addresses only selected elements in outline; carried-forward restricted interest, excess capacity, transitional rules and affiliate mechanics are not covered. Engage a Canadian tax professional with EIFEL experience.