Jared Pilon
Overview
The Alternative Minimum Tax (AMT) regime is a Canadian tax policy that ensures Canadians pay ‘their fair share’ of taxes by disallowing certain individuals and trusts from claiming tax credits, exemptions and deductions that would otherwise be available.
Changes outlined in Budget 2023 should result in some high-income Canadians paying more tax, and fewer middle-income Canadians being subject to AMT.
If you could potentially be subject to AMT or have expiring AMT credits, it is important to have an understanding of the changes being implemented which will be effective for tax years after 2023.
How does AMT work?
AMT typically applies to individuals, and trusts who receive a significant portion of their income through sources such as dividends and capital gains. Also, if these entities use specific credits or deductions to significantly reduce their tax owing, AMT can apply.
Taxpayers are required to calculate federal tax owing based on both regular and AMT methods. The higher calculated amount of tax is then the individual’s tax liability. AMT (prior to Budget 2023 amendments) is calculated as an individual’s ‘adjusted taxable income’. This is determined by adjusting net taxable income by certain preferential tax items including tax shelter deductions, interest, lifetime capital gains deductions and others. Adjusted taxable income is then reduced by the current exemption amount of $40,000. Tax is calculated at 15% prior to various non-refundable tax credits being applied. The most notable circumstance in which AMT typically applies is via the sale/transfer of small business shares during one’s lifetime.
If a taxpayer pays AMT in a particular year, the difference between the calculated AMT tax and tax through the regular method is then carried forward to future years. This credit can then be applied in the next seven years to offset future taxes. The credit must be used within that seven timeframe, or it will be lost forever.
What to expect in 2024
The AMT rate will increase to 20.5% (currently 15%) resulting individuals who are subject to AMT to pay more tax as a result. Also, the basic exemption of $40,000 will increase to $173,000. This will result in fewer middle-income Canadians being subject to the AMT regime.
The following income and deduction/credit amounts will also change for tax years after 2023:
| Income/Deduction/Credit | Change | Current AMT Rule | Amended AMT Rule |
|---|---|---|---|
| Capital gains | Increase | 80% | 100% |
| Capital losses | Reduce | 80% | 50% |
| ABIL | Reduce | 80% | 50% |
| Stock option benefits | Increase | 80% | 100% |
| Gain on donation of shares | Increase | 0% | 30% |
| Certain deductions | Reduce | 100% | 50% |
| Certain credits | Reduce | 100% | 50% |
Impact on trusts
Trusts will pay more tax under the new AMT regime as they are not able to claim the basic exemption (aside from graduated rate estates). As this exemption is not available, the changes to the AMT base (as noted above) will broadly impact trusts.
Some trusts (employee life/health trusts, mutual fund trusts, etc.) are currently excluded from AMT. Finance Canada has indicated that additional trusts may be added to the exempt list in the future.
Conclusion
Alternative Minimum Tax rules are a complex aspect of the Income Tax Act. The rule changes outlined in Budget 2023 will complicate matters further.
Reach out to Legacy Accounting LLP LLP at to discuss how the changes to the AMT regime might impact you (or your trust) and the steps you can take to reduce AMT or use existing AMT credits.
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Posted: 8/8/23
