Interest Deductibility for Purpose-Built Rentals: Budget 2024 Update for Canadian Businesses

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    03 Jun 2024

    Interest Deductibility for Purpose-Built Rentals: Budget 2024 Update for Canadian Businesses

    Is your business dealing with rental housing? If that’s the case, then Canada Budget 2024 has good news for you – There is an expansion to the EIFEL rules (Excessive Interest and Financing Expense Limitation).  What does this mean? It implies that there will be an elective exemption for the interest that is incurred on financing, which is used for building or acquiring eligible rental properties. The team of Real estate Accountants at CJCPA decided to break down the latest changes for its readers who have a rental property business in their province.  Below, you’ll find the details of the new benefit, and how it may or may not benefit your business. Let’s explore the application details, and how it may potentially increase your tax savings.  Let’s get started!

    What are the EIFEL rules?

    Introduced in 2021, EIFEL rules target “earnings stripping”. It aims to prevent the use of this tax avoidance tactic, where companies often use excess debt, and shift profits to low-tax jurisdictions. Here’s how “earnings-stripping” works – Companies can borrow heavily from their subsidiaries in low-tax countries. This, when done, can effectively shift profits out of high tax jurisdictions by paying only the interest expenses.  Due to this, the taxable income of these companies is reduced in high-tax countries. This rule particularly limits the amount of interest and financing expenses businesses deduct from their taxable income. Budget 2024 has made some changes. It recognizes that affordable housing is crucial and, thus, offers an exemption for certain types of financing. Consult with real estate tax services Canada to find out if EIFEL rules impact your business exemptions or not.

    What’s the exemption for purpose-built rentals? 

    With the budget 2024, the exemption range for businesses has expanded. Now, they can elect to exempt some interest and financing expenses that are related to arm’s length financing. Arm’s length financing – it means financing a business gets from a lender who is independent of the business, and there is no preferential treatment, or special relationship between the two. Note that this exemption is applicable for interest incurred before January 1, 2036. It is available only for two financing options:
    • Building new purpose-built rental properties
    • Acquiring existing purpose-built rental properties
    The exemption will help Canadian businesses reduce their tax burden significantly when they deduct a large portion of the incurred financing interest. However, kindly note that it is an “elective” exemption. Businesses must be careful when they use this exemption. You can also seek the help of litigation support services for real estate before making a financial decision.

    What’s the eligibility criteria for rental properties?

    If you are thinking about claiming this exemption, it is better to first review the qualifications for it. Consult your accounting services provider regarding the same.  The rental property of the business must meet the specific criteria that are aligned with both the “temporary GST New Residential Rental Property Rebate” and the “Accelerated Capital Cost Allowance”. Check below:
    1. Minimum Unit Count: The property must have either:
    • At least four private apartment units (with private kitchen, bathroom, and living areas)
    • Or, at least 10 private rooms or suites
    1. Long-Term Rental Focus: At least 90% of the residential units must be held for long-term rentals (excluding short-term stays like vacation rentals).
    For example, a building with 5 private apartments (each with a kitchen, bathroom, and living area) should qualify for the exemption. Otherwise, a building with 12 private rooms (each with a bathroom) and a shared kitchen area may also qualify.

    What are some benefits and considerations related to this exemption?

    With this exemption, businesses investing in purpose-built rentals can save money on taxes. Of course, they can reduce a larger portion of their financing interest, ultimately reducing their taxable income and lowering the tax burden. However, consider the following:
    • Elective Exemption: Given it is an elective exemption, businesses have to choose and use it while thinking of the impact on tax filing strategy.
    • Recordkeeping: The business must also keep proper documents of their financing details and property use. It is an essential requirement for claiming the exemption when tax audits happen.
    Consult a chartered professional accountant to find out more considerations related to your business and EIFEL rule changes. 

    Next Steps: Consulting with a Tax Professional

      The 2024 Canada Budget has introduced many business-friendly measures, including the EIFEL rule changes. A lot of small businesses in the real estate and rental housing market will benefit from the opportunity. However, we suggest you hire an expert to deal with ever-changing tax regulations and make informed financial decisions. For businesses in British Columbia, here at CJCPA, we have team of Chartered professional accountant BC. However, we offer our taxation, accounting, and financial consulting services to other provinces too.  The team will help check your eligibility, find out potential benefits, and assist you with the election process. For more information, book your free consultation at your convenience, and we’ll take care of the rest.  
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