EIFEL rules: net interest capped at 30% of adjusted taxable income

How does the EIFEL cap work?

The rules sit in sections 18.2 and 18.21 of the Income Tax Act and apply to tax years starting on or after October 1, 2023. They limit the deduction of interest and financing expenses (IFE) for corporations and trusts, and the bill that enacted them received royal assent on June 20, 2024 canada.ca.

The cap is a fixed ratio of adjusted taxable income, a tax version of EBITDA. Adjusted taxable income starts from taxable income, adds back IFE, capital cost allowance under paragraph 20(1)(a) and 25% of any specified pre regime loss deducted, and subtracts IFR canada.ca. Under subsection 18.2(2), the share of IFE above the cap plus IFR, excess received capacity and absorbed capacity is not deductible laws-lois.justice.gc.ca.

Which entities are excluded from EIFEL?

A taxpayer that meets any one of the three tests in the "excluded entity" definition in subsection 18.2(1) is outside the rules for that year laws-lois.justice.gc.ca.

The CCPC test reuses the small business deduction measure. For an associated group, the C amount adds up each corporation's taxable capital employed in Canada for its last tax year ending in the preceding calendar year laws-lois.justice.gc.ca. So a CCPC group whose business limit is fully ground away by the capital test (see /tax/small-business-deduction-2026/) has also lost the CCPC exclusion.

The $1 million test is a group number, not a per company number: it nets IFE against IFR across every Canadian resident eligible group entity. The domestic test also requires all or substantially all of the group's interest to go to lenders that are not non arm's length tax indifferent investors, a class that includes non residents and section 149 exempt entities laws-lois.justice.gc.ca. Interest paid to a foreign parent is the usual way a mostly Canadian group fails test (c).

Worked example: interest denied, then recovered

Your client is a calendar year corporation that meets none of the exclusions. Assume no group ratio election, no capacity transfers and no capacity left from earlier years.

In 2025, $5,000,000 of IFE against $3,500,000 of room leaves $1,500,000 denied. In 2026 the $600,000 of unused room lets your client deduct $600,000 of the 2025 restricted interest, because paragraph 111(1)(a.1) allows a deduction up to the year's excess capacity (computed before that deduction) plus any received capacity laws-lois.justice.gc.ca. The other $900,000 waits for a later year with room.

What happens to denied interest and unused capacity?

Denied IFE becomes restricted interest and financing expense. Paragraph 111(1)(a.1) reaches restricted amounts from any preceding tax year, with no 20 year limit like non capital losses, and paragraph 111(3)(b)(i.1) makes your client use the oldest years first laws-lois.justice.gc.ca. For the general loss carryover periods, see /tax/non-capital-loss-carryover/.

Unused room runs the other way. Excess capacity feeds cumulative unused excess capacity, which counts the year's own excess capacity plus that of the three immediately preceding tax years, less what was absorbed or transferred laws-lois.justice.gc.ca. A corporation with spare capacity can transfer it to another member of its group of eligible group entities by joint election under 18.2(4) on Form T2226, which raises how much IFE the receiver can deduct canada.ca.

An acquisition of control is the trap. Subsection 111(5) blocks restricted interest and financing expense from before a loss restriction event, the same way it blocks non capital losses, with a limited exception for a business carried on for profit or with a reasonable expectation of profit laws-lois.justice.gc.ca.

What does your client file?

A corporation files Form T2SCH130, Excessive Interest and Financing Expenses Limitation, for 2023 and later tax years canada.ca. It goes in with the T2 unless the corporation is exempt: section 149 exempt corporations, excluded entities, financial institutions or holding corporations with a nil proportion, certain general partners and treaty exempt non residents, in each case only if not party to an election. Trusts file T3SCH130, and partnerships with a corporate or trust member file T5013SCH130 canada.ca.

The CRA lists these elections: T2225 for the group ratio (and a one time choice, available only in the first group ratio year, to exclude fair value amounts), T2226 to transfer capacity, T2227 for excluded interest, T2228 for a specified pre regime loss and T2229 to forgo a foreign accrual property loss. Corporations can report the 25% specified pre regime loss add back on line 090 of T2SCH130 instead of filing T2228, but trusts still file T2228. The CRA is also waiving the 18.2(6) information return for received capacity for now canada.ca.

The CRA has a transitional form, T2224, that lets eligible group entities compute group net excess capacity for the three years before the rules started and add it to cumulative unused excess capacity in the first three EIFEL years canada.ca.

How EIFEL fits with thin capitalization and other limits

EIFEL works on interest that would be deductible in the absence of section 18.2 laws-lois.justice.gc.ca. So interest already denied by the thin capitalization rule in 18(4) or adjusted under transfer pricing never reaches the EIFEL calculation, and what survives those rules can still be cut by EIFEL. For the 1.5 to 1 test, see /tax/thin-capitalization-rules/, and for the basic deductibility test under 20(1)(c), see /tax/interest-deductibility/.

As of October 2026, section 18.2 contains no exception for purpose built rental housing or regulated utilities. Finance did release draft legislation on August 15, 2025 to exempt debt used to fund the acquisition, construction or conversion of purpose built residential rental buildings canada.ca, and Budget 2025 said it intends to proceed with those EIFEL proposals budget.canada.ca, but the exemption isn't in the consolidated Act. The closest carve out is exempt interest and financing expenses on borrowing tied to an agreement with a public sector authority to design, build and finance property laws-lois.justice.gc.ca. The consolidation we checked is current to September 21, 2026, so confirm the text if your client is relying on a later amendment.