This content was first published by the Canadian Tax Foundation in (2025) 15:3 Canadian Tax Focus / Focus sur la fiscalité canadienne. Republished with permission.
The excessive interest and financing expenses limitation (EIFEL) regime does not apply to corporations and trusts that are excluded entities. This raises the question: should an excluded entity track and file balances that are relevant to the EIFEL regime—incurring the associated compliance costs—or simply defer all of that until the EIFEL regime applies, if it ever does?
The rules
Consider the cumulative unused excess capacity (CUEC) balance. If the maximum amount that the EIFEL regime permits the taxpayer to deduct for a taxation year is not fully utilized, that amount is added to the corporation’s CUEC balance.
In general terms, the increase in this balance increases the corporation’s capacity to make interest and financing expense (IFE) deductions in any of the three subsequent taxation years.
CUEC, as defined in subsection 18.2(1), appears to be a cumulative balance that exists without filing a tax return. This aligns with the Canada Revenue Agency’s (CRA) treatment of other cumulative balances, such as the capital dividend account and eligible and non-eligible refundable dividend tax on hand, which are considered determinable in later years without a reassessment of prior returns.
Schedule 130 (form T2SCH130 or T3SCH130), which contains the CUEC and other EIFEL calculations, computes CUEC separately for the first, second, and third preceding years. This contrasts with the computation of UCC, which starts with the past year’s amount and makes additions and subtractions. Thus, both the definition of CUEC and its calculation on the form allow catch-up calculations without refiling for past years.
Subsection 18.2(18) states that “each taxpayer” shall file a prescribed form containing prescribed information with respect to the deductibility of its IFE. No exceptions are listed. Thus, for example, excluded entities appear to be required to file schedule 130.
On the other hand, CRA guidelines state that an excluded entity is not required to file unless it is a party to an election under the rules. The wider reach of the legislative rule appears to create an optional situation, where any excluded entity could file a prescribed form even where the CRA does not require it.
Filing considerations
To file in this optional way using corporate tax preparation software, it might be necessary to answer “yes” to the question on line 278 on the T2 income tax return, which asks if the corporation is subject to the EIFEL rules. However, if this is insufficient to make schedule 130 appear, it could be attached as a PDF when the T2 is submitted.
Whether the CUEC balance for a year will ever matter depends in part on whether the corporation or trust ceases to be an excluded entity during that period. This is not just a matter of forecasting, for instance, when a corporation’s taxable capital employed in Canada will reach the $50 million threshold; excluded entity status can cease unexpectedly. (See, for example, the Katlai and Wen article in the May 2025 issue of International Tax Highlights.)
Realistically, cost considerations may lead many excluded entities to not file schedule 130 and, indeed, perhaps to not even complete the calculations for their internal records. The risk, of course, is that calculating CUEC amounts in a single catch-up calculation for the year in which EIFEL first applies may be challenging.
With the passage of time, gaps in record keeping may appear. To avoid this risk, corporations might consider filing schedule 130 annually on an optional basis.
Some excluded entities might also be concerned that the CRA guidance that excluded entities do not need to file is inconsistent with the law: it appears that if the excluded entity did not file, a paragraph 162(7)(b) penalty could be applied and the reassessment period could be extended indefinitely under paragraph 152(4)(b.8).
If a corporation chooses to file, completing parts 1B to 2I of T2SCH130 could help determine a CUEC balance for a subsequent year to which EIFEL applies. This would also track absorbed capacity, which reduces CUEC even for excluded entities.
