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The 2021 Canadian Federal Budget, released on April 19, 2021, proposes new rules that would fundamentally alter the interest deductibility landscape for Canadian businesses. The thrust of the new rules (referred to herein as the EBITDA Limit), which are proposed to take effect in 2023, is to directly link an entity's interest deductions to its level of economic activity, based on taxable income before interest, tax, depreciation and amortization.
The EBITDA Limit is targeted at cross-border interest deductions and is aligned with the common approach recommended by the OECD in BEPS Action 4, which focuses on eliminating the use of third-party, related-party, and intragroup debt by taxpayers to achieve excessive interest deductions or to finance the production of exempt or deferred income.