Federal Government’s Proposed Limitation on Interest Deductions

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The Liberal Party’s federal election platform contained a promise to “crack down on corporate tax loopholes that allow companies to excessively deduct debt to artificially reduce the tax they pay”, but no further details were provided. However, the Office of the Parliamentary Budget Officer (“PBO”) costing estimate provides some additional insight into what this proposed policy might look like. Essentially, during the election, the Liberal party submitted the details of certain proposed measures so that the PBO can estimate the fiscal impact of those policies. Since they only have a minority government, the Liberals may not necessarily enact their tax policies without the influence of the other parties. Therefore, the proposal may differ substantially when implemented, or may even never be enacted at all.

The PBO provided a cost estimate for a tax measure that would limit the excessive use of interest deductibility. While interest deductibility already has its own rules and restrictions, the government’s proposal would further limit the amount of interest that a corporation may deduct to no more than 30% of its income before interest, taxes, depreciation, and amortization (“EBITDA”). The limit would only apply where net interest expense of a corporation exceeds $250,000. Moreover, if the corporation is a member of a corporate group, the limit would be computed using a worldwide group ratio of interest expense to EBITDA. According to the PBO’s estimates, this measure would generate well over $1 billion per year in tax revenue.

It will be interesting to see how this change might affect large businesses and whether they respond by changing their capital structures. Also, will the proposed rules include a statutory exemption for loss consolidation transactions within a corporate group? The 2020 Federal Budget may provide some clarity on what is to come.

The PBO’s costing estimate on this measure is available here: https://www.pbo-dpb.gc.ca/web/default/files/Documents/ElectionProposalCosting/Results/33063981_EN.pdf

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