As of January 1, 2024, significant changes are set to be introduced to Canada’s Alternative Minimum Tax (AMT) system. These changes could have far-reaching implications for various groups of taxpayers, including high-income earners and individuals who experience substantial gains from property or business sales. These changes could also reshape the landscape of large charitable donations made through appreciated securities.
Understanding the Alternative Minimum Tax
The AMT system operates as an alternative way of calculating income tax, aiming to prevent taxpayers from utilizing preferential tax deductions, exemptions, or credits to reduce their tax obligations significantly. This parallel tax calculation uses fewer allowances than the regular income tax computation. If the AMT calculation results in a higher tax liability than the regular tax calculation, the difference becomes payable as AMT for the tax year.
Any AMT paid in a tax year can be carried forward to reduce your ordinary tax liability over the next 7 years if certain conditions are met. AMT not utilized in the subsequent 7 years will expire.
While the AMT system has existed since its introduction in 1986, it has remained relatively obscure due to its limited impact on a small portion of taxpayers. However, recent changes can potentially affect a broader range of individuals and trusts are potentially subject to AMT.
Changes to the Alternative Minimum Tax
In the 2023 Federal Budget, the Canadian government proposed changes to the AMT system to better target high-income individuals. These changes are set to start in 2024.
The key changes include:
- Adjustment of Taxable Income: Under the AMT system, taxable income is recalculated using deductions, exemptions, and credits permitted for AMT purposes, known as “adjusted taxable income.” Starting in 2024, certain deductions will be restricted by 50%, including employment expenses, loss carry forwards, interest charges and more.
- AMT Tax Rate Increase: The AMT rate, which currently stands at 15%, will be raised to 20.5% in 2024.
- AMT Exemption Increase: The AMT exemption will rise significantly, from $40,000 to approximately $173,000 in 2024. This change aims to protect lower-income taxpayers from being subject to the AMT.
- Capital Gains Impact: One of the most substantial changes pertains to capital gains. Under the existing system, 80% of capital gains are included in adjusted taxable income. Starting in 2024, 100% of capital gains will be included. This change can particularly affect individuals with high capital gains, potentially leading to an AMT payment, especially if taxed at the top federal rate.
To grasp the impact of these changes, consider the scenarios of Jane and individuals who donate appreciated publicly traded shares:
- Jane’s Vacation Property Sale: Jane sells a vacation property with a significant capital gain. Under the revised 2024 AMT calculation, 100% of the capital gains must be included in her adjusted taxable income. This could result in a higher tax payment compared to the regular tax system, particularly if her gains are substantial.
- Donation of Appreciated Shares: For individuals donating appreciated publicly traded shares to charity, changes in the AMT system mean that a portion of the capital gains from the donation will be taxable. Additionally, the donation tax credit will be limited to 50%, affecting the benefits of large charitable donations.
Preparing for the Changes
The changes to Canada’s Alternative Minimum Tax system have the potential to significantly increase the tax liability. The changes require careful tax planning to reduce the potential impact on individuals’ financial situations.
As the revised AMT rules take effect on January 1, 2024, taxpayers are advised to work closely with tax professionals to understand their specific situations and develop strategies to navigate these changes effectively. Whether you’re a high-income earner, a property seller, or a charitable donor, staying informed and proactive can help you plan for the evolving tax environment.
Clients that may have these types of transactions may want to consult with SBLR in advance, as in some cases, the anticipated transactions may be able to be completed in 2023 versus in 2024 to minimize any potential impact of the changes.