Effective 30% capacity generated by interest and financing revenues (IFR) from NAL non-resident – even if paid by its Cdn. branch (p. 3)
[I]nterest received from any non-arm’s length nonresident appears to be excluded from IFR. If excluded from IFR, these amounts would be included in adjusted taxable income and would result in a 30% capacity per dollar of income rather than 100% capacity if included in IFR. As worded, this would include denying IFR treatment in respect of interest paid by a nonresident that arose in relation to a taxable branch in Canada where the interest paid is itself tested under the EIFEL rules, resulting in potential double denial. So too could this apply if a Canadian parent, acting as the market-facing entity for a group of companies, borrows from the market (thus incurring IFE) and then on-lends to its foreign affiliates.
Exclusion of excluded interest from interest and financing revenues/expenses (IFR/IFE) accommodates loss consolidations (p .4)
Excluded interest is not to be included as IFR to the recipient, nor as IFE to the payor (and would thus remain within the computation of ATI). This ensures that a particular amount of interest is not denied to the taxpayer (and would create no additional capacity to the recipient), which may be useful in the context of implementing traditional intra-group loss planning arrangements, by effectively allowing a transfer of ATI between group members.
Interest that is expressly permitted to be capitalized to resource pools is not added back (p. 4)
Variable B adds back a number of amounts so as to reverse [their] impact on the taxpayer’s ATI … . This is an area in which there may be several technical and other issues.
For example, although amounts for interest capitalized to certain resource pools may be expressly denied under these rules, any such amounts that were permitted to be capitalized and deducted are not added back for these purposes. Problems may also arise with respect to the manner in which the add-backs address components of other-year losses deducted in the current year — in particular, in that they may not properly address losses attributable to CCA.
Circularity issue arising from the FTCs being affected by deductible interest and financing expenses (IFE), which cannot be determined until the FTCs are determined (p. 5)
Variable C effectively reverses income inclusions for several amounts that are included in computing the taxpayer’s taxable income. Examples … are IFR [and] foreign income covered by tax credits claimed under subsection 126(1) and (2) … . [T]here appears to be a circularity problem with respect to foreign income, in that the amount of tax credits to which the taxpayer may be entitled under subsections 126(1) or (2) could be affected by its deductible IFE, which cannot be determined without first taking into account the tax credits.
Effect of carrying forward cumulative unused excess capacity for 3 years is similar to a 3-year carryback (p. 6)
IFE that is denied under new subsection 18.2(2) (and amounts included under new paragraph 12(1)(l.2) in respect of a member’s share of denied partnership IFE …) may be carried forward up to 20 years. Such “restricted IFE” may not be carried back, although the effect of carrying forward cumulative unused excess capacity for 3 years permits a substantively similar result.
The carryforward of restricted IFE is provided for under new paragraph 111(1)(a.1). This deduction is permitted in two scenarios and in the following order. First, a taxpayer may deduct its own restricted IFE to the extent of its excess capacity for the year. Second, a taxpayer may deduct amounts to the extent that another eligible group corporation transferred cumulative unused excess capacity to the taxpayer. The taxpayer’s unused capacity must be used up before it may receive transferred capacity.
Effective transfer of excess capacity to or from group trusts (p.10)
Unlike the s. 18.2 rules, under which there is no ability for trusts within a group to transfer or receive excess capacity, the mechanics of the s. 18.21 rules effectively permit the transfer of excess capacity to or from trusts within the Canadian group (although the s. 18.21 rules are unavailable where a group member is a mutual fund trust).
No requirement to determine “excess capacity” (p. 9)
Unlike [under s. 18.2], there is no requirement to determine the “excess capacity” for any particular group member and then separately transfer excess capacity of one particular group member to another. Rather, the total amount of IFE that may be deducted for the group (i.e., the [allocated group ratio amount] AGRA) is determined and as part of the joint election is merely allocated out to each member in that election itself. No group member should have restricted IFE to the extent that the AGRA allocated to that member is less than that member’s net IFE. Part of the reason for this rather streamlined approach is that if an election under subsection 18.21(3) is made for a year, unused excess capacity for each member is deemed to be nil for the year. However, restricted IFE, if any, may be carried forward. Further, if the total AGRA otherwise exceeds the net IFE of the group for the year, any restricted IFE from a prior year may be applied in the year (up to the amount of that excess).
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