The Liberals and NDP both introduced a policy in the 2019 election campaign to restrict the deductibility of interest expenses. This was not a new idea, as the United States already enacted legislation to restrict interest expenses on December 22, 2017, under the US Tax Cuts and Jobs Act. As outlined by the Parliamentary Budget Officer (PBO), the Liberal policy was as follows:
Corporations with net interest expenses of more than $250,000 would be limited in the amount of interest that could be deducted. This limitation would restrict the current deductibility of interest expenses in excess of 30 per cent of the corporation’s income before interest, taxes, depreciation and amortization (EBITA). In determining the cost estimate for the Liberal election campaign, the PBO assumed that this policy would not apply to:
- Canadian Controlled Private Corporations (CCPCs) with less than $10 million in assets or less than $500,000 in active business income; and
- Those with less than $250,000 in net interest payments (interest payments minus interest revenues).
The NDP’s election platform contained a very similar policy with two main differences: the policy would only apply to net interest payments in excess of $150,000 and there would be a limitation of 20 per cent (instead of 30 per cent).
If the governing party wishes to introduce tax law changes in a majority government situation, this is difficult to stop. In a minority government situation, the governing party needs to have some level of cooperation with another party to provide sufficient votes to pass the legislation in the House of Commons. Given that both the NDP and the Liberals support this proposed tax policy, it seems likely it will move forward.
The next question is when will it be introduced? Will it be introduced in the 2020 federal budget or at a later date? After the budget is announced, tune into our commentary to find out if steps have been taken to introduce the interest deductibility restriction.
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