What is Alternative Minimum Tax and how does it affect your tax planning? Read
this article to find out more.
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%.
