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Supplemental instructions and guidance for filing under the excessive interest and financing expenses limitation rules

The sections Instructions for Form T2SCH130, Excessive Interest and Financing Expenses Limitation and Instructions for Form T3SCH130, Excessive Interest and Financing Expenses Limitation have been updated to remove content that is no longer relevant.

The excessive interest and financing expenses limitation (EIFEL) rules limit the deduction of excessive interest and financing expenses (IFE) by affected corporations and trusts.

The following supplemental instructions and guidance may assist corporations, trusts or partnerships to fulfil their filing obligations under the rules.

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Sections may be updated or added based on feedback received.

For general information on the rules, refer to: Excessive interest and financing expenses limitation rules.

For additional information on the rules, refer to: Explanatory Notes Relating to the Income Tax Act and the Income Tax Regulations.

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Note: All legislative references on this page are to the Income Tax Act (the “Act”), unless otherwise noted

General instructions

Lease financing amount

The EIFEL rules under subsection 18.2(1) include the definition “lease financing amount” (LFA). A LFA must be included in IFE by the lessee or in interest and financing revenues (IFR) by the lessor, unless it is in respect of an “excluded lease” or an election has been filed to treat the LFA as “excluded interest”, both defined under subsection 18.2(1).

A LFA is intended to reflect the financing component of a lease payment. Before calculating the LFA, the taxpayer must:

Determining IFE, IFR and exempt interest and financing expenses

Expressions “borrowing or other financing” and “loan or other financing”

The expression “borrowing or other financing” appears in the definition of exempt interest and financing expenses in subsection 18.2(1) and in paragraph (e) of variable A and paragraph (a) of variable B of the definition of IFE in subsection 18.2(1). The expression “loan or other financing” appears in paragraph (d) of variable A and paragraph (a) of variable B of the definition of IFR in subsection 18.2(1).

The CRA is developing additional guidance to clarify the administrative position in relation to these expressions for the purposes of computing IFE, IFR and exempt interest and financing expenses. Until this guidance is available, taxpayers should apply a textual, contextual and purposive approach to the application of these provisions, having regard to existing resources, including the explanatory notes to the Act, Income Tax Folio S3-F6-C1, Interest Deductibility, relevant technical interpretations, and Canadian jurisprudence.

Amounts under paragraph (a) of variable A of the IFE definition or paragraph (a) of variable A of the IFR definition

Paragraph (a) of variable A of the definition of IFE includes amounts that are paid, or payable in a year, or in respect of a year, as, on account of, in lieu of payment of, or in satisfaction of, interest. Similar wording appears in paragraph 12(1)(c), which contains the rule requiring a taxpayer to include interest received or receivable in computing their income.

Paragraph (a) of variable A of the definition of IFR includes amounts that are received or receivable as, on account of, in lieu of payment of, or in satisfaction of interest. This paragraph is intended to operate symmetrically with paragraph (a) of variable A of the IFE definition.

According to Canadian jurisprudence and the CRA’s administrative position, for an amount to be considered to have been receivable or payable on account of, in lieu of payment of, or in satisfaction of interest for the purposes of the Act, the amount:

On this basis, it is the CRA’s view that an embedded financing component of a payment that is not otherwise interest for purposes of the Act will not be included in paragraph (a) of variable A of the definitions of IFE or IFR.

However, if a provision of the Act specifically deems an amount to be paid in, or payable in or in respect of a year; or to be received or receivable in or in respect of a year as interest (for example, under subsections 16(1) and 18(9.1)), then those amounts should be included in paragraph (a) of variable A of the IFE or IFR definitions.

For additional information on what qualifies as interest under the Act, refer to Income Tax Folio S3-F6-C1.

Meaning of “received or receivable”

To be included under paragraph (a) of variable A of the IFR definition, an amount must also be received or receivable as interest. Certain amounts, for example, under subsection 12.7(3) or section 17, are included in computing a taxpayer’s income but are not received or receivable as interest or deemed to be received or receivable as such under the Act. These amounts do not, therefore, fall within the scope of paragraph (a) of variable A of the IFR definition.

The CRA intends to apply this narrow approach when determining if an anti-avoidance provision results in an amount being considered received or receivable for the purposes of the IFR definition.

Paragraph (b) of variable A of the IFR definition includes certain deemed amounts, even if they are not considered to be received or receivable under the Act. However, inclusion in the IFR definition under this provision is limited to deemed amounts specifically mentioned in paragraph (b), that is, deemed amounts under subsection 12(9) or section 17.1.

Applying non-capital losses (NCLs) in the determination of adjusted taxable income (ATI)

The following information is relevant for taxpayers resident in Canada earning taxable income in Canada only. This information does not take into account proposed amendments to the definition of ATI in Bill C-15 that will apply to tax years after August 15, 2025.

ATI, defined in subsection 18.2(1), is a measure of a taxpayer’s earnings before interest, taxes, depreciation and amortization (EBITDA) calculated based on tax, rather than accounting, concepts. It is determined by the formula:

A + B − C

Variable A is the positive or negative amount determined by the formula D − E.

Variable B provides various add-backs that effectively reverse the impact of certain deductions on the taxpayer’s ATI. This commentary and the examples below focus on the add-backs contained in paragraphs (a), (h), and (i).

Variable C is made up of various deductions that effectively reverse income inclusions for several amounts that are included in computing a taxpayer’s taxable income.

ATI, once determined, is a component in Variable B of the EIFEL formula in subsection 18.2(2). This subsection limits the deductibility of IFE to the extent of the proportion determined by the formula:

(A − (B + C + D + E))  ∕ F

If the result of this formula is positive, a portion of IFE will be non-deductible and a taxpayer will have to carry forward or back additional NCLs, following the application of the EIFEL rules, if they want to bring taxable income down to nil to shelter the income resulting from the application of subsection 18.2(2).

Excluded entities

There is some uncertainty on the application of the EIFEL rules in circumstances where a taxpayer, categorized as an excluded entity in prior years, no longer qualifies as an excluded entity in the particular year. For further clarification on the application of the EIFEL rules in such fact-specific situations, consult the Income Tax Ruling Directorate.

Incorporating relevant amounts from a T5013 slip, Statement of Partnership Income

If a taxpayer is a member of a partnership and requires instructions on how to incorporate the relevant amounts from a T5013 slip when completing Schedule 130, refer to: T5013-INST Statement of Partnership Income - Instructions for recipient.

If a partnership receives a T5013 slip that includes an amount relevant to determining the EIFEL under subsection 18.2(2), it must provide a letter to its corporate or trust members informing them of their share of each such amount. For a list of the relevant T5013 slip box numbers, refer to: T5013-INST Statement of Partnership Income - Instructions for recipient.

Failure to file and late filing of Form T2SCH130, Excessive Interest and Financing Expenses Limitation or Form T3SCH130, Excessive Interest and Financing Expenses Limitation

Subsection 18.2(18) requires a taxpayer that is subject to the EIFEL rules to file Schedule 130 to determine the deductibility of their IFE and to determine their exempt IFE. The CRA has, under subsection 220(2.1), waived this requirement for taxpayers that meet certain conditions in a tax year. For information on these conditions, refer to Excessive interest and financing expenses limitation rules.

If a taxpayer does not file Schedule 130 with its corporation income tax return or trust income tax and information return for a relevant tax year, it will be considered a failure to provide the prescribed information required under subsection 18.2(18). Accordingly, under paragraph 152(4)(b.8), the commencement of the normal reassessment period will be delayed until Schedule 130 is fully completed and submitted.

Although there is no specific penalty for failing to file Schedule 130 or for filing it late, a general penalty, under paragraph 162(7)(b) may apply. The general penalty for failing to comply is $25 per day for up to 100 days (minimum $100 and maximum $2,500).

Errors and omissions on Schedule 130

Schedule 130 should generally be refiled if errors or omissions are discovered after filing. If it is not refiled, paragraph 152(4)(b.8) may apply to delay the commencement of the normal reassessment period until the errors or omissions are corrected.

Requesting a reassessment of a tax return when the EIFEL rules apply

A taxpayer can ask the CRA to reassess  its corporation income tax return or trust income tax and information return under certain conditions, for example, to apply a loss to a previous year, correct an error, or include a late-filed election. If the request results in a change to the taxable income or NCL for the year, it will also affect the EIFEL calculations. This means that, in addition to any other applicable schedules, a revised Schedule 130 will need to be submitted with the reassessment request.

For corporations requesting a loss carryback

To carry back a loss to a prior year, a corporation usually submits a request on Form T2SCH4, Corporation Loss Continuity and Application, for the year the loss occurred (the “loss year”).

If the prior year’s corporation tax return included Form T2SCH130, the corporation must also submit, for that prior year:

These revised schedules should be submitted with the return for the loss year.

Sometimes, carrying back a loss will mean the corporation now needs to submit Form T2SCH130 for a prior year, even if that form was not required when that prior year’s return was originally filed. For example, if a capital loss that is carried back increases IFE in the prior year, a corporation that previously was an excluded entity under paragraph (b) of the excluded entity definition in subsection 18.2(1) may no longer qualify. In such a case, the corporation must submit, with the return for the loss year:

For a trust requesting a loss carryback

To carry back a NCL to a prior year, a trust must file Form T3A, Request for Loss Carryback by a Trust on or before the due date of the trust’s income tax and information return for the loss year.

Where applicable, a trust may need to file Form T3-ADJ, T3 Adjustment Request. If the prior year’s return had Form T3SCH130, the trust must also submit for that prior year a revised Form T3SCH130.

Sometimes, carrying back a loss may mean a trust now needs to submit Form T3SCH130 for a prior year, even if that form was not required when that prior year’s return was originally filed. For example, if a capital loss that is carried back increases the IFE in the prior year, a trust that previously was an excluded entity under paragraph (b) of the definition of an excluded entity in subsection 18.2(1) may no longer qualify. In such a case, the trust must submit, with the return for the loss year:

Keeping records

Corporations, trusts and partnerships are required to keep records of detailed calculations supporting all amounts reported on the Schedule 130 forms and election forms.

For more information on the responsibilities and requirements associated with keeping records, refer to: Keeping records.

Instructions for Form T2SCH130 Excessive Interest and Financing Expenses Limitation

Part 1C — Information on borrowings and other financings and related derivatives

Column 2: Report the greatest total amount of borrowing or other financing outstanding at any time in the tax year.

In the case of a public offering or a syndicated financing (other than a private placement), report an estimated breakdown of the amounts between Canadian arm’s length and non-resident arm’s length parties.

Column 3: Report the greatest total of the notional amount of derivatives entered in respect of a borrowing or other financing outstanding at any time in the tax year.

Columns 2 and 3: For additional clarification, the term “borrowing or other financing” refers to any borrowing or other financing of the corporation, including a borrowing or other financing that is non-interest bearing and one that is the subject of an election under the definition of excluded interest in subsection 18.2(1). For additional guidance on the meaning of the term “borrowing or other financing,” see guidance in Determining IFE, IFR and exempt interest and financing expenses.

Columns 4, 5 and 6: The CRA will accept when reporting for tax years ending in 2023 and 2024, an estimated breakdown of the information required.

Part 1D — Information on loans and other financings and related derivatives

Column 2: Report the greatest total amount of loans or other financings owing to or provided by the corporation at any time in the tax year.

Column 3: Report the greatest total of the notional amount of derivatives entered in respect of loans or other financings owing to or provided by the corporation at any time in the tax year.

Columns 2 and 3: For additional clarification, the term “loans or other financings” refers to any loan or other financing owing to or provided by the corporation, including loans or other financings that are non-interest bearing and ones that are the subject of an election under the definition of excluded interest in subsection 18.2(1). For additional guidance on the meaning of the term “loan or other financing,” see guidance in Determining IFE, IFR and exempt interest and financing expenses above.

Columns 4 and 5: The CRA will accept when reporting for tax years ending in 2023 and 2024, an estimated breakdown of the information required.

Part 2B — Capitalized IFE in the cost of depreciable assets

Column 3: Report the net adjustment to the IFE in the undepreciated capital cost of the class of assets as a result of the following:

This amount can be positive or negative, depending on whether the net adjustment results in an increase in the IFE in the capital cost of the class of assets (positive amount) or a decrease in the IFE in capital cost of the class of assets (negative amount).

Column 4: For additional clarification, adjust column 2 “IFE in undepreciated capital cost (UCC) at the beginning of the year” by the amount reported in column 3 and report the result in column 4. Add a positive amount in column 3 to the amount reported in column 2. A negative amount in column 3 will reduce the amount reported in column 2.

Part 2C — IFE included in resource deductions

Column 4: For additional clarification, adjust column 2 “IFE in the opening balance” by the amount reported in column 3 and report the result in column 4. Add a positive amount in column 3 to the amount reported in column 2. A negative amount in column 3 will reduce the amount reported in column 2.

Part 2I — Cumulative Unused Excess Capacity (CUEC)

Amalgamations: When there has been an amalgamation of two or more corporations (referred to as a “new corporation” and the “predecessor corporations”) under subsection 87(1), report on lines 122, 123, and 124, the total of the amounts of the predecessor corporations for each of the preceding years pursuant to paragraph 87(2.1)(a.1).

Wind-ups: If a subsidiary has been wound up in circumstances described in subsection 88(1.1), report on lines 122, 123, and 124, the aggregate of the amounts of both the parent and the subsidiary corporation for each of the preceding years pursuant to subsection 88(1.11).

If there is an amalgamation, windup, or loss restriction event, the amounts reported on lines 122, 123, and 124 in the current tax year might not match what was reported in previous years. In such cases, the CRA will not automatically make adjustments but may contact the corporation to confirm that the amounts are correct. Known errors in CUEC calculations from prior years should be corrected by submitting an amended Form T2SCH130 for the affected years.

Amounts allocated on Form T2224 Transitional Election Under the Excessive Interest and Financing Expenses Limitation Rules:

If the corporation or any of its eligible pre-regime group entities (as defined in subsection 7(2) of Bill C-59) have a ratio of permissible expenses of 40% in the first tax year in which the rules apply, report the amount of group net excess capacity allocated in part 2, section 4 of Form T2224 in Part 2I as follows:

The amounts allocated in part 2, section 5 of Form T2224 are used when completing Part 2I in the two tax years following the first tax year in which the rules apply.

If the corporation and all of its eligible pre-regime group entities have a ratio of permissible expenses of 30% in the first tax year in which the rules apply, report the amount of group net excess capacity allocated in part 3, section 4 of Form T2224 as follows:

Part 2M — Amounts determined under clause 95(2)(f.11)(ii)(D)

Part 2M of Form T2SCH130 must be completed when a controlled foreign affiliate is held directly or indirectly by a corporation. If the affiliate is held through a partnership, then paragraph 12(1)(l.2) applies and Part 2N of Form T2SCH130 should be completed instead.

The first table in Part 2M is used to calculate how much of a controlled foreign affiliate’s relevant affiliate interest and financing expenses (RAIFE) are denied under subclause 95(2)(f.11)(ii)(D)(I).

RAIFE is defined in subsection 18.2(1) and generally includes the affiliate’s interest and other financing-related expenses described in variable A of the definition of IFE, excluding amounts in paragraph (j), less the amounts described in variable B of that definition.

However, subclause 95(2)(f.11)(ii)(D)(I) only applies to amounts that are deductible when determining the income or loss of a controlled foreign affiliate from property, non-active business, and non-qualifying business under subparagraph 95(2)(f)(ii). The amounts described in variable B of the definition of IFE are not deductible under subparagraph 95(2)(f)(ii). Therefore, subclause 95(2)(f.11)(ii)(D)(I) does not apply to these amounts.

To determine the amount of RAIFE that is subject to denial under subclause 95(2)(f.11)(ii)(D)(I):

  1. Total the affiliate’s IFE described in variable A of the definition of IFE, excluding paragraph (j) amounts.
  2. Adjust to remove amounts described under paragraph (h) of variable A of the definition of IFE. Paragraph (h) amounts are instead subject to an income inclusion under subclause 95(2)(f.11)(ii)(D)(II), which is determined separately in the second table in Part 2M.
  3. Report the result on line 145 in Part 2M and complete the rest of the table.

The narrative for line 145 of Form T2SCH130 will be updated to clarify that paragraphs (h) and (j) should be excluded when reporting this amount.

Instructions for Form T3SCH130, Excessive Interest and Financing Expenses Limitation

Part 1 — General Information

Information on borrowing and other financing and related derivatives:

Second column from the left: In the case of a public offering or a syndicated financing (other than a private placement), report an estimated breakdown of the amounts between Canadian arm’s length and non-resident arm’s length parties.

Second and third columns from the left: For additional clarification, the term “borrowing or other financing” used in the second and third columns refers to any borrowing or other financing of the trust, including a borrowing or other financing that is non-interest bearing. For additional guidance on the meaning of the term “borrowing or other financing,” see guidance in Determining IFE, IFR and exempt interest and financing expenses.

Fourth, fifth and sixth columns from the left: The CRA will accept when reporting for tax years ending in 2023 and 2024, an estimated breakdown of the information required.

Information on loans and other financing and related derivatives:

Second and third columns from the left: For additional clarification, the term “loans or other financing” used in the second and third columns refers to any loans or other financing owing to or provided by the trust, including loans or other financing that are non-interest bearing. For additional guidance on the meaning of the term “loan or other financing,” see guidance in Determining IFE, IFR and exempt interest and financing expenses.

Fourth and fifth columns from the left: The CRA will accept when reporting for tax years ending in 2023 and 2024, an estimated breakdown of the information required.

Part 2H — Cumulative unused excess capacity (CUEC)

Loss restriction events

If there is a loss restriction event, the amounts reported on lines A, B, and C of Part 2H of Form T3SCH130 in the current tax year might not match what had been reported in previous years. In such cases, the CRA will not automatically make adjustments but may contact the trust to confirm the amounts are correct. Known errors in CUEC calculations from prior years should be corrected by submitting an amended Form T3SCH130 for the affected years.

Amounts allocated on Form T2224, Transitional Election Under the Excessive Interest and Financing Expenses Limitation Rules:

If the trust or any of its eligible pre-regime group entities (as defined in subsection 7(2) of Bill C-59) have a ratio of permissible expenses of 40% in the first tax year in which the rules apply, report the amount of group net excess capacity the trust was allocated in part 2, section 4 of Form T2224 in Part 2H as follows:

The amounts allocated in part 2, section 5 of Form T2224 are used when completing Part 2H in the two tax years following the first tax year in which the rules apply.

If the trust and all of its eligible pre-regime group entities have a ratio of permissible expenses of 30% in the first tax year in which the rules apply, report the amount of group net excess capacity the trust was allocated in part 3, section 4 of Form T2224 as follows:

Part 2L — Amounts determined under clause 95(2)(f.11)(ii)(D)

Part 2L of Form T3SCH130 must be completed when a controlled foreign affiliate is held directly or indirectly by a trust. If the affiliate is held through a partnership, then paragraph 12(1)(l.2) applies and Part 2M of Form T3SCH130 should be completed instead.

Table A in Part 2L is used to calculate how much of a controlled foreign affiliate’s relevant affiliate interest and financing expenses (RAIFE) are denied under subclause 95(2)(f.11)(ii)(D)(I).

RAIFE is defined in subsection 18.2(1) and generally includes the affiliate’s interest and other financing-related expenses described in variable A of the definition of IFE, excluding amounts in paragraph (j), less the amounts described in variable B of that definition.

However, subclause 95(2)(f.11)(ii)(D)(I) only applies to amounts that are deductible when determining the income or loss of a controlled foreign affiliate from property, non-active business, and non-qualifying business under subparagraph 95(2)(f)(ii). The amounts described in variable B of the definition of IFE are not deductible under subparagraph 95(2)(f)(ii). Therefore, subclause 95(2)(f.11)(ii)(D)(I) does not apply to these amounts.

To determine the amount of RAIFE that is subject to denial under subclause 95(2)(f.11)(ii)(D)(I):

  1. Total the affiliate’s IFE described in variable A of the definition of IFE, excluding paragraph (j) amounts.
  2. Adjust to remove amounts described under paragraph (h) of variable A in the definition of IFE. Paragraph (h) amounts are instead subject to an income inclusion under subclause 95(2)(f.11)(ii)(D)(II), which is determined separately in Table B in Part 2L.
  3. Report the result in column A of Table A and complete the rest of the table.

Instructions for Form T5013SCH130, Partnership Interest and Financing Expenses and Interest and Financing Revenues

Part 1B — Information on borrowings, loans and other financings

Table for a partnership that has a borrowing or other financing:

Column 2:

Column 3: Report the greatest total of the notional amount of derivatives entered into in respect of a borrowing or other financing outstanding at any time in the fiscal period.

Columns 2 and 3: For additional clarification, the terms “amounts borrowed or other financing” in the second column and “borrowing or other financing” in the third column refer to any borrowing or other financing of the partnership, including a borrowing or other financing that is non-interest bearing as well as one that is the subject of an election under the definition of excluded interest in subsection 18.2(1). For additional guidance on the meaning of the term “borrowing or other financing,” see guidance in Determining IFE, IFR and exempt interest and financing expenses.

Columns 4, 5 and 6: The CRA will accept when reporting for fiscal periods ending in 2023 and 2024, an estimated breakdown of the information required.

Table for a partnership that has a loan or other financing:

Column 2: Report the greatest total amount of loans or other financings owing to or provided by the partnership at any time in the fiscal period.

Column 3: Report the greatest total of the notional amount of derivatives entered into in respect of loans or other financings owing to or provided by the partnership at any time in the fiscal period.

Columns 2 and 3: For additional clarification, the term “loans or other financings” used in these two columns refers to any loans or other financings owing to or provided by the partnership, including loans or other financings that are non-interest bearing as well as ones that are the subject of an election under the definition of excluded interest in subsection 18.2(1). For additional guidance on the meaning of the term “loan or other financing,” see guidance in Determining IFE, IFR and exempt interest and financing expenses.

Columns 4 and 5: The CRA will accept when reporting for fiscal periods ending in 2023 and 2024, an estimated breakdown of the information required.

Part 3 — Capitalized IFE in the cost of depreciable assets

Column 3: Report the net adjustment to the IFE in the undepreciated capital cost of the class of assets as a result of the following:

This amount can be positive or negative, depending on whether the net adjustment results in an increase in the IFE in the capital cost of the class of assets (positive amount) or a decrease in the IFE in capital cost of the class of assets (negative amount).

Column 4: For additional clarification, adjust column 2 “IFE in undepreciated capital cost (UCC) at the beginning of the fiscal period” by the amount reported in column 3 and report the result in column 4. Add a positive amount in column 3 to the amount reported in column 2. A negative amount in column 3 will reduce the amount reported in column 2.

Part 4 — Interest and financing revenues (IFR)

Line 141: For additional clarification, line 141 should be read as: Amounts included in amount A of Part 4 that are exempt from tax under part I of the Act.

Part 5 — Allocation to members of the partnership

When completing part 5 and filling out T5013 slips, do not allocate amounts to persons or partnerships that have been deemed to be members under subsection 18.2(12).

Instructions for election forms

Tax reporting currency and EIFEL elections

Updated

Several elections available under the EIFEL rules are required to be jointly filed with other taxpayers. In some circumstances, it may be required that certain amounts reported on the elections forms be converted to amounts expressed in a taxpayer’s tax reporting currency, as defined in subsection 261(1). For guidance  on how amounts should be reported in these circumstances, refer to:

Form T2224, Transitional Election Under the Excessive Interest and Financing Expenses Limitation Rules

Filing due date

An election under the EIFEL transitional rules should be filed by the filing due date of the group member with the earliest filing due date for the first regime year. However, the CRA will generally accept a late-filed election if reasonable efforts were made to determine all amounts relevant in making the election and the election is filed as soon as circumstances permit. For example, in a situation where each member of a pre-regime group of entities would otherwise have tax years ending on December 31, 2024, but the dissolution of a group member results in that member having a short first regime year, the CRA will generally accept an election filed by the due date for those tax years (for example, June 30, 2025, for corporate members). In all cases, the determination of eligible pre-regime group entity status must still be made at the time of the earliest filing due date of the group members for the first regime year.

A late-filed election will not be accepted in circumstances where:

Completing Form T2224

For the transitional rules to the legislation, refer to: subsection 7(2) of Bill C-59.

If the result of a calculation required in one of the columns is negative, the amount entered into the column should be “0”.

Although the transitional rules specify that the election is a joint election made by a taxpayer and its eligible pre-regime entities, the CRA will also accept this election when it is made by a taxpayer that is a standalone entity with no eligible pre-regime group entities. When making this election as a standalone entity, answer “No” to the question on line 020: Is the filer an eligible pre-regime group entity filing this election on behalf of one or more other taxpayers? 

If an election is made under the transitional rules, the corporation or trust may also, for any of the three pre-regime years, file:

For information on how to file these elections, go to: Form T2225, Group Ratio Rules Election Under Subsection 18.21(2) and Fair Value Adjustments Election Under Subsection 18.21(4) and Form T2228 , Specified Pre-regime Loss Election under Subsection 18.2(1).

For instructions on how to include the allocated group net excess capacity, determined in Form T2224, on the Schedule 130, refer to Part 2I of Instructions for Form T2SCH130 or Part 2H of Instructions for Form T3SCH130.

Determining group net excess capacity when a 40% ratio of permissible expenses applies in the first regime year

A 40% ratio of permissible expenses applies to tax years starting on or after October 1, 2023, and before January 1, 2024. If this ratio applies to the first tax year in which section 18.2 applies (the “first regime year”) to the taxpayer or any eligible pre-regime group entityFootnote 1 in respect of the taxpayer, two allocations of group net excess capacity (GNEC) are required when completing Form T2224.

Step 1: First allocation of GNEC

To complete the first allocation, the taxpayer will need to calculate and report the amounts on lines 212, 213, 232, 233, 252, and 253. These amounts are used to determine the GNEC for the purpose of determining CUEC for the first regime year of the taxpayer and each of its eligible pre-regime group entities (together the “pre-regime group”).

One key variable in these calculations is the ratio of permissible expenses in the first regime year, reported on lines 206, 226, and 246:

The GNEC calculation for the first regime year is completed on line 266.

Step 2: Second allocation of GNEC

To complete the second allocation, calculate and report the amounts on lines 214, 215, 234, 235, 254, and 255. These amounts are used to determine GNEC for the purpose of determining CUEC for the second and third regime tax years, which are the two years immediately following the first regime year.

Since a 30% ratio of permissible expenses applies to all members of the pre-regime group for these two years, use 30% when calculating the amounts for these lines.

The final GNEC calculation for these years is reported on line 286.

Example: Completing Part 2 of Form T2224

This example illustrates how to complete Part 2 of Form T2224, excluding the parts of sections 4 and 5 related to the allocation of GNEC. It has been simplified to include only the relevant lines.

Facts

The pre-regime group is made up of two corporations:

  • Corp A’s first regime year is October 1, 2023, to September 30, 2024. The ratio of permissible expenses for the year is 40%.
  • Corp B’s first regime year is January 1, 2024, to December 31, 2024. The ratio of permissible expenses for the year is 30%.

Steps

1) Determine excess capacity otherwise determined and excess interest for the first pre-regime year in Part 2, Section 1 of Form T2224.

Excess capacities
- Amount required for the tax year when a 40% ratio of permissible expenses applies to at least one group member
(1st regime year) 		Amount required for the tax years when a 30% ratio of permissible expenses applies
(2nd and 3rd regime year)
Name ATI Ratio of permissible expenses
 IFR IFE Excess capacity otherwise determined Excess interest Excess capacity otherwise determined Excess interest
201 205 206 207 208 212 213 214 215
Corp A $1,000 40% $150 $1,000 - $450Footnote 2 - $550Footnote 3
Corp B $5,000 30% $500 $75 $1,925Footnote 4 - $1,925Footnote 5 -

2) Determine excess capacity otherwise determined and excess interest for the second pre-regime year in Part 2, Section 2 of Form T2224.

Excess capacities 2
- Amount required for the tax year when a 40% ratio of permissible expenses applies to at least one group member
(1st regime year) 		Amount required for the tax years when a 30% ratio of permissible expenses applies
(2nd and 3rd regime year)
Name ATI Ratio of permissible expenses IFR IFE Excess capacity otherwise determined Excess interest Excess capacity otherwise determined Excess interest
221 225 226 227 228 232 233 234 235
Corp A $950 40% $200 - $580Footnote 6 - $485Footnote 7 -
Corp B $3,000 30% $350 $125 $1,125Footnote 8 - $1,125Footnote 9 -

3) Determine excess capacity otherwise determined and excess interest for the third pre-regime year in Part 2, Section 3 of Form T2224.

Excess capacities 3
- Amount required for the tax year when a 40% ratio of permissible expenses applies to at least one group member
(1st regime year) 		Amount required for the tax years when a 30% ratio of permissible expenses applies
(2nd and 3rd regime year)
Name ATI Ratio of permissible expenses IFR IFE Excess capacity otherwise
determined		 Excess interest Excess capacity otherwise determined Excess interest
241 245 246 247 248 252 253 254 255
Corp A $150 40% $300 $250 $110Footnote 10 - $95Footnote 11 -
Corp B $500 30% $150 $25 $275Footnote 12 - $275Footnote 13 -

4) Determine the group net excess capacity to report on line 266.

The GNEC reported on line 266 is for the purpose of determining the CUEC for the first regime year of the pre-regime group.

To calculate GNEC on line 266:

  1. Total the amounts from lines 212, 232, and 252 (line 263 amounts).
  2. Subtract the amounts from lines 213, 233, and 253 (line 264 amounts).

Group net excess capacity on line 266 would be ($1,925 + $580 + $1,125 + $110 + $275) − $450 or $3,565.

5) Determine the group net excess capacity to report on line 286.

The GNEC reported on line 286 will be used for the purpose of determining the CUEC for the second and third regime years of the pre-regime group.

To calculate GNEC on line 286:

  1. Total the amounts from lines 214, 234, and 254 (line 283 amounts).
  2. Subtract the amounts from lines 215, 235, and 255 (line 284 amounts).

Group net excess capacity on line 286 would be ($1,925 + $485 + $1,125 + $95 + $275) – $550 or $3,355.

Form T2225, Group Ratio Rules Election under subsection 18.21(2) and Fair Value Adjustments Election under subsection 18.21(4)

Filing due date

The group ratio rules election is due by the latest filing due date of a Canadian group member for a relevant tax year. If consolidated financial statements (CFS) are not available by this due date, the amounts relevant to making the group ratio rules election cannot be determined. In these circumstances, each Canadian group member should use the applicable ratio of permissible expenses in applying subsection 18.2(2). The Canadian group members may file the group ratio rules election late and submit amended tax returns for the relevant tax years if they later determine the group ratio rules are beneficial.

Filing Form T2225 when Canadian group members have different tax reporting currencies or tax reporting currencies that are different from the presentation currency of the CFS Updated

Completing Part 3, sections 1 to 5 of Form T2225

Part 3, sections 1 to 5 of Form T2225 are used to determine the group net interest expense (GNIE) on line 249 and the group ratio on line 250, using amounts reported in the group’s CFS. These sections should be completed in the presentation currency of the CFS.

Completing Part 3, section 6 of Form T2225

Part 3, section 6 of Form T2225 is used to allocate the allocated group ratio amount (AGRA) to the Canadian group members. For the purpose of determining the AGRA, amounts may be converted using the “relevant spot rate” method or the “average exchange rate” method, as described below.

The same conversion method must be used by all Canadian group members that have the same tax reporting currency. That method must also be applied consistently from year to year in converting the GNIE and the ATI of Canadian group members with different tax reporting currencies.

For more information, taxpayers should consult existing resources, including section 261, Income Tax Folio S5-F4-C1, Income Tax Reporting Currency, and relevant technical interpretations.

Part 2 — Fair Value adjustments election

Subsection 18.21(4) allows Canadian group members to make a joint election to include the net fair value amount in calculating group adjusted net book income (GANBI). GANBI, in essence, is the accounting earnings before interest, taxes, depreciation and amortization (EBITDA) of the consolidated group, adjusted for certain amounts in the CFS.

Although paragraph 18.21(4)(a) specifies that the election is a joint election made by all Canadian group members, we will accept this election when it is filed by a Canadian resident taxpayer who is a standalone entity.

The fair value adjustments election must be made for the first relevant tax year in respect of which a group ratio rules election under subsection 18.21(2) is made. Once a fair value adjustments election is made, it applies to that relevant tax year and all subsequent tax years of each Canadian group member. If the election is not made in the first relevant tax year, it is deemed not to have been made for the first relevant tax year and all subsequent tax years.

A fair value amount is the amount reflected in the net income or net loss from the CFS representing the change in the carrying value of an asset or liability where the carrying value is measured using the fair value method of accounting.

The net fair value amount is the positive or negative amount that is the result of totaling all of the fair value amounts, each of which could itself be a positive or negative amount in the CFS.

In the absence of the fair value adjustments election, changes in the carrying value of fair valued assets or liabilities are included in GANBI because the computations of GANBI begins with the net income or net loss from the CFS which already reflects all fair value amounts.

When the fair value adjustments election is made, the net fair value amount is included in computing GANBI:

The inclusion of the net fair value amount in GANBI results in the fair value amounts reflected in the net income or loss reported in the CFS being excluded from GANBI.

The terms "consolidated financial statements", "consolidated group", and "ultimate parent" are defined in subsection 18.21(1).

Part 3, Section 1 – GANBI

Meaning of “consolidated financial statements”, “consolidated group”, and “ultimate parent”

The terms “consolidated financial statements”, “consolidated group”, and “ultimate parent” are defined in subsection 18.21(1) and are used in the determination of GANBI for purposes of the group ratio rules election. The example below illustrates the application of these terms in a particular fact situation.

Example – Consolidated financial statements, consolidated group, and ultimate parent

Facts

  • Family Trust owns 100% of the shares of Canco which owns 100% of the shares of Subco.
  • Canco decides not to include Family Trust in the audited CFS prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP) for January 1, 2024, to December 31, 2024.
  • Family Trust is identified as the ultimate parent, because it is the top entity in the group’s organizational structure, and it would be required to prepare CFS if it were subject to International Financial Reporting Standards (IFRS).

Question

Are Canco and Subco able to file a group ratio rules election using the audited CFS prepared for January 1, 2024, to December 31, 2024?

Analysis

The CFS used to determine the allocated group ratio amount (AGRA) must be audited and prepared in accordance with relevant acceptable accounting standards. Canco and Subco have met these requirements since the CFS have been audited and prepared using one of the accounting standards identified as acceptable in the definition of acceptable accounting standards in subsection 18.21(1).

An additional requirement is that the CFS include all members of the consolidated group.

A consolidated group means two or more entities, other than an equity-accounted entity but including an ultimate parent in respect of which CFS are required to be prepared for financial reporting purposes or would be so required if the entities were subject to IFRS.

An ultimate parent is the top entity in a group's organizational structure. It is the entity that is required to prepare CFS for financial reporting purposes or would be so required if it was subject to IFRS.

Canco’s CFS do not meet this requirement because the financial results of the Family Trust, the entity identified as the ultimate parent, were omitted from the statements.

Conclusion

Canco and Subco would not be able to file a group ratio rules election using the audited CFS prepared for January 1, 2024, to December 31, 2024.

Meaning of “throughout the relevant period” in subsection 18.21(2)

A relevant period is defined in subsection 18.21(1) and means a period in respect of which the CFS of a consolidated group are presented. The term “throughout” is not defined in the Act. In the absence of a definition, the CRA generally applies the ordinary meaning of the word, which is “from the beginning to the end”. In circumstances where there has been an acquisition, incorporation, dissolution, amalgamation or windup in the relevant period, consult the applicable legislative provisions, including subsection 18.2(9) and sections 18.21, 87 and 88.

Part 3, Section 6 - Elected allocated group ratio amount under subsection 18.21(2)

Subsections A and B: Each Canadian group member must be listed in the tables in these subsections, even if that group member has no allocated group ratio amount.

Form T2226, Election to Transfer Cumulative Unused Excess Capacity Under Subsection 18.2(4)

Filing Form T2226 when the transferor and transferee have different tax reporting currencies Updated

A taxpayer (transferor) may jointly elect with another taxpayer that is a corporation or fixed interest commercial trust (transferee) to transfer all or a portion of its CUEC. Form T2226 can be used to make a joint election with a single transferee or with multiple transferees.

Transferor’s reporting requirements:

As Form T2226 is filed by the transferor, it must be completed using the transferor’s tax reporting currency.

Transferee’s reporting requirements:

The transferee must report, on Schedule 130, the amount designated as received capacity on line 205 of Form T2226. If Form T2226 is completed using a tax reporting currency that differs from that of the transferee, each underlying amount relevant in computing the received capacity must generally be converted into the transferee’s tax reporting currency using the relevant spot rate on the day each amount arose.

However, the CRA may accept the use of an average exchange rate to convert the received capacity. As the received capacity is applied as a reduction to the transferor’s excess capacity across particular tax years, the transferee should apply the average exchange rate for each of the transferor’s tax years to which the reduction relates. This position applies where:

The method used to convert received capacity must be applied consistently from year to year.

For more information, taxpayers should consult existing resources, including section 261, Income Tax Folio S5-F4-C1, and relevant technical interpretations.

Form T2227, Excluded Interest Election Under Subsection 18.2(1)

Form T2227 is used by the payer and payee (or, if the payer or payee is a partnership, each member of the payer or payee) to jointly elect to have an amount of interest or a LFA for a tax year or fiscal period excluded from IFE and IFR and thus excluded from the limitation under subsection 18.2(2).

Completing line 100 and line 200 of Form T2227

Line 100 of Form T2227 form requests a “description of debt” for interest paid or payable, and line 200 of Form T2227 requests a “description of the property” for a LFA paid or made payable. We will accept, on these lines, a description that provides sufficient detail to allow us to separately identify the particular debt or property.

Filing Form T2227 when the payer and payee have different tax years or fiscal periods

When filing Form T2227, the payer and payee may have different tax years or fiscal periods. In such cases, and according to the explanatory notes to subsection 18.2(1), “The joint election must be filed in respect of the tax year or fiscal period of the payer and payee in which the amount of interest or the LFA is paid, or in respect of which the amount is payable. It is intended that the election be filed for the year or fiscal period when the amount paid or payable is deductible or is included in income.”

Therefore, it is important to consider the tax years or fiscal periods of both the payee and payer to ensure that the amount elected to be excluded on line 150 or line 280 has been deducted by the payer and included in income by the payee in the tax years or fiscal periods reported on Form T2227.

Example: Filing Form T2227 when the payer and payee have different tax years

The following example demonstrates how to file Form T2227 when the tax years of the payer and payee are not the same. 

Facts

  • The payer’s tax year is January 1, 2025, to December 31, 2025, with a filing due date of June 30, 2026.
  • The payee’s tax year is December 1, 2024, to November 30, 2025, with a filing due date of May 31, 2026.
  • Interest payments of $100 are made each month between January 1, 2025, and December 31, 2025. Therefore, during the relevant period (the period during which the interest accrued), the payer paid a total of $1,200 of interest to the payee ($100 × 12 months). 
  • The payer and payee are taxable Canadian corporations.
  • The payer and payee are eligible group entities with respect to each other.
  • Neither the payer nor the payee are financial institution group entities or a partner in a partnership.
  • Both corporations report in Canadian dollars.
  • The payer and payee want to exclude the entire $1,200 of interest from the limitation under subsection 18.2(2).

Analysis

Since the payer and payee have different tax year ends, their tax years overlap in two distinct periods:

First period: January 1, 2025, to November 30, 2025

Second period: December 1, 2025, and December 31, 2025

A separate Form T2227 election will be required to be filed for each period.

  • Step 1: Completing Form T2227 for the first overlap period

    • The tax year of the payer in Part 1, Section 1 of Form T2227 is January 1, 2025, to December 31, 2025.
    • The tax year of the payee in Part 1, Section 2 is December 1, 2024, to November 30, 2025.
    • Form T2227 will be due on May 31, 2026, the earliest filing due date of the payer or payee for the tax years reported on the election form.
    • The amount reported on line 140 is $1,200, which is the amount of interest that is paid or payable in respect of the relevant period. 
    • The amount reported on line 150 is $1,100 ($100 × 11 months [January 1, 2025, to November 30, 2025, the first overlap period]). This amount represents the portion of the amount reported on line 140 that is elected to be excluded. The elected amount must be:
      • deductible by the payer and excluded from IFE in its tax year reported in Part 1, Section 1
      • included in income by the payee and excluded from IFR in its tax year reported in Part 1, Section 2

  • Step 2: Completing Form T2227 for the second overlap period

    • The tax year of the payer in Part 1, Section 1 of Form T2227 is January 1, 2025, to December 31, 2025.
    • The tax year of the payee in Part 1, Section 2 is December 1, 2025, to November 30, 2026.
    • Form T2227 is due on June 30, 2026, the earliest filing due date of the payer or payee for the tax years reported on the election form.
    • The amount reported on line 140 is $1,200, which is the amount of interest that is paid or payable in respect of the relevant period. 
    • The amount reported on line 150 is $100 ($100 × 1 month [December 1, 2025, to December 31, 2025, the second overlap period]). This amount represents the portion of the amount reported on line 140 that is elected to be excluded. The elected amount must be:
      • deductible by the payer and excluded from IFE in its tax year reported in Part 1, Section 1
      • included in income by the payee and excluded from IFR in its tax year or fiscal period reported in Part 1, Section 2

Filing Form T2227 when the payer and payee have different tax reporting currencies

All amounts on Form T2227, including excluded interest amounts (lines 150 or 280), are to be reported in the payer’s tax reporting currency.

If the payee’s tax reporting currency is different than the payer’s, the payee must convert excluded interest amounts into its own tax reporting currency, using the relevant spot rate for the day on which the amount arose. Generally, these conversions should be done throughout the payee’s tax year or fiscal period. If certain conditions are met, the CRA may also accept the use of an average of exchange rates over a period of time. 

Form T2228, Specified Pre-regime Loss Election under subsection 18.2(1)

The CRA is streamlining reporting requirements for Form T2228. For details, refer to: Excessive interest and financing expenses limitation rules.

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2026-03-16