CRA indicates that interest capitalized to building inventory is not IFE under the EIFEL rules

CRA referred to Oryx, Shofar and Easter Law Trust for the proposition that “the cost of inventory is not considered to be a deductible expense in computing a taxpayer’s income in the year in which the inventory is sold”. On this basis, it concluded that where interest expense was capitalized to the cost of inventory under s. 18(3.1)(b), it would not be included under A(a) of the "interest and financing expenses" (IFE) definition in s. 18.2(1), even though it would effectively be deducted as part of the cost of goods sold on the sale of the inventory.

A(a)(ii) requires that the interest be deductible in the year in which it was incurred. Thus, the same result would be achieved on a plain reading to the extent the interest was capitalized in a year prior to the sale. However, the above CRA approach indicates that the interest also would not be included in IFE even to the extent that it was capitalized in the year of the sale.

Neal Armstrong. Summary of 5 November 2025 External T.I. 2025-1066661E5 under s. 18.2(1) – IFE – A(a).