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EIFEL Impact On Inbound Non-Resident Real Estate Structures

Non-Canadian investors that invest in Canadian real estate assets generally structure such investments either through (1) a blocked structure where the investor in the Canadian real estate is a Canadian resident corporation or other Canadian resident entity or (2) a direct investment structure that qualifies under section 216 of the Income Tax Act (Canada) (Tax Act). Section 216 structures will be impacted by Canada’s proposed excess interest and financing expenses limitation (EIFEL) proposals as released on August 4, 2023.

Section 216 Regime – Overview

Absent a section 216 election, a non-resident investor that holds Canadian real estate would be subject to Part XIII withholding tax on certain gross payments made to it, including rent. Such withholding tax is generally computed without regard to various expenses, such as operating expenses, interest expense and depreciation. However, a non-resident may instead elect pursuant to section 216 to be taxed on its net rental income earned from real property.[1] Such an investor that receives a form NR6 approval from the Canada Revenue Agency (CRA) will be subject to withholding tax on its net rental income (i.e., net of expenses (excluding capital cost allowance (CCA))). An electing investor must also timely file a tax return pursuant to subsection 216(4) and such investor is restricted from carrying losses forward to future years (or back to previous years).

Given the extent to which real estate investments are often levered, one of the most significant expenses in a section 216 structure is the interest expense associated with the investment. The deductibility of interest expense is subject to the typical interest deductibility rules under the Tax Act, including the thin-capitalization rules.

EIFEL Proposals

On August 4, 2023, the Canadian government released revised legislative proposals, including revised EIFEL proposals. The implementation date for the EIFEL proposals remains unchanged and generally will apply for taxation years commencing after September 30, 2023.

Very generally, the EIFEL proposals will limit the amount that a taxpayer may deduct in respect of interest and financing expenses (IFE) to a fixed ratio of the taxpayer’s “adjusted taxable income” (ATI). The fixed ratio generally will be 30% of the taxpayer’s ATI (but 40% for taxation years beginning after September 30, 2023 and before January 1, 2024). ATI is effectively “tax EBITDA” earned in Canada, adjusted to add back any deductions claimed in computing taxable income in respect of IFE, certain tax expenses, capital cost allowance and resource pool deductions, and to subtract any income inclusions for interest and financing revenues (IFR), untaxed income (including foreign source income in respect of which a foreign tax credit is claimed in Canada) and certain other amounts.

EIFEL Proposals Impacting Section 216 Structures

Earlier versions of the EIFEL proposals had not addressed the manner in which the EIFEL rules would apply to section 216 structures. The Joint Committee had previously highlighted the desire to specifically address section 216 structures.[2]

The August 4, 2023 EIFEL proposals clarify their application to section 216 structures:

  • generally, taxpayers that elect under section 216 will be subject to the EIFEL rules;
  • such taxpayers cannot be "excluded entities",[3] "eligible group entities",[4] or "fixed-interest commercial trusts" as defined in proposed subsection 18.2(1) and are not eligible to apply the (generally relieving) group ratio rules and will be precluded from transferring excess deductibility capacity among group members;[5]
  • the explanatory notes indicate that such taxpayers continue to be subject to the rules in paragraphs 216(1)(a) to (d) and confirm that such taxpayers would not be entitled to carry-forward or deduct restricted IFE under proposed paragraph 111(1)(a.1).

While the limits on interest deductions under the EIFEL proposals will apply to many real estate investment structures, the inability to carry-forward restricted IFE or access the group ratio rules under a section 216 structure will need to be carefully considered and may push certain taxpayers to consider a blocked structure for purposes of their Canadian real estate investments.


[1] Section 216 is not available in respect of business income earned by a non-resident investor.

[2] Refer to the May 5, 2022 submission of The Joint Committee on Taxation of The Canadian Bar Association and Chartered Professional Accountants of Canada. The submission advocated for an express ability to carry-forward restricted IFE to future periods in order to put a section 216 structure on a level footing in this regard with a blocked structure.

[3] Very generally, “excluded entities” refer to: (1) Canadian-controlled private corporations with taxable capital employed in Canada of less than $50 million; (2) groups of corporations or trusts with net group interest expenses in Canada of $1 million or less; (3) certain groups that carry on “all or substantially all” of their business in Canada, subject to certain conditions.

[4] These entities are generally able to make a group ratio election where certain conditions are met.

[5] Proposed paragraph 216(1)(e)

EIFEL Income Tax Act Canada Revenue Agency EBITDA



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