Alternative Minimum Tax Changes – What You Need to Know
Did you know that Canada’s Federal Budget proposed changes to the Alternative Minimum Tax (AMT) rules with draft legislation that comes into effect on January 1, 2024? So, what is AMT and how does it affect your tax planning?
Under the existing AMT rules, the most common situations where AMT could apply is where you have large capital gains and especially if the lifetime capital gains exemption was used on a sale of qualified small business corporation shares or qualified farm and fishing property.
What is AMT?
The AMT was introduced in 1986 as a parallel tax to the regular tax system and applies to individuals, but not to corporations. In general, individuals are required to pay the higher of AMT or regular tax. To calculate the difference, first regular tax is calculated (at progressive tax rates). The next step is to calculate taxable income for AMT which is determined by adding back certain “preference” items into your regular taxable income. There is an exemption amount that is deducted from the AMT taxable income of $40,000* and any excess income is taxed at a flat tax rate of 15%* and certain non-refundable tax credits are allowed to reduce the amount of tax owing. So if your taxable AMT income is under $40,000, AMT will not apply and just the regular tax will be payable. Any additional tax paid under the AMT can be carried forward as a credit to offset regular tax for seven years. (AMT does not apply in the year of death of a taxpayer.)
What are the changes?
The 2023 Federal Budget has proposed changes to broaden the tax base subject to AMT, increasing the tax rate but also increasing the exemption amount. The following table highlights some of the proposed changes, but please reach out to us if you require more details.
| Existing AMT | Proposed AMT | |
|---|---|---|
| Tax rate | 15% | 20.5% |
| Exemption amount | $40,000 | $173,000 |
| Capital gains | Include 80% | Include 100% |
| Capital gains using QSBC/QFFP | Include 30% | Include 30% |
| Capital gains on donation of public securities | Include 0% | Include 30% |
| Capital gains on donated property | Include 50% | Include 100% |
| Interest and carrying charges to earn property income | Deduct 100% | Deduct 50% |
| Many non-refundable tax credits (including the donation tax credit) | Full credit | 50% of credit |
What do you need to do?
These proposed changes could result in AMT applying if your taxable income (calculated for AMT purposes) is in excess of $173,000. In addition to being aware of the implications of AMT when there are large capital gains in a year (as well as planning for it), starting in 2024 you will also need to consider the implications of significant interest deductions (for example, if using a leveraging strategy) or large donations (especially gifts of capital property as these donations not only have the 50% limitation on the donation tax credit, but also 100% or 30% of the gain, depending on the type of property, could be included in taxable income for AMT).
If you think AMT may apply to you, contact us to discuss planning options.
*$40,000 is the exemption amount as of the date of this article and the rate of tax is 15%.