What you need to know about the alternative minimum tax
What you need to know about the alternative minimum tax
Are you subject to the alternative minimum tax? Find out what to do about it here.
The federal government announced changes to Canada's alternative minimum tax as part of its 2023 budget. Following stakeholder consultations, further changes were announced in the 2024 budget and the changes were enacted to law on June 20, 2024. These changes became effective January 1, 2024.
Many are unaware of what the tax is and are curious about how this could impact them. Read on to learn more about this tax and who is affected by it.
The alternative minimum tax, explained
The alternative minimum tax (AMT) is exactly as it sounds: it is an alternative method to calculate the income tax you owe in Canada. This tax is often applicable when you have claimed a preferential tax deduction like the capital gains deduction or have preferential tax rates due to credits, such as donation or dividend tax credits.
Each year, your tax owing is determined under the normal method, which considers the preferential tax credits and deductions and is calculated on marginal tax rates based on income. This number is then compared to a second calculation where you don't receive these same credits and deductions, and your tax is calculated at a fixed tax rate. There is also an AMT exemption that reduces the amount of income that is subject to AMT as part of the second calculation. When the second calculation results in a higher amount owing, you will pay this higher amount.
The difference between the regular tax owing and the second calculation is the AMT. In most instances, the normal calculation will result in more tax owing and AMT would not apply.
When you are subject to the AMT, this should be viewed as a prepayment of future tax. Over the next seven years, you can recover this amount paid against your regular income tax, so long as you are not also subject to AMT in that future year. In order to recover this AMT in the future, you would have to be taxable in future years, thus if you do not have taxable income in these years, this AMT will be lost.
Who is subject to the alternative minimum tax?
AMT can apply to most individual taxpayers (including certain trusts) but will not apply to individuals in the year of their death. Normally, most Canadians are not subject to the AMT. However, those who utilize significant tax deductions or credits should be prepared to pay this tax.
For example, if you used your capital gains deduction (to shelter capital gains on qualified farm or fishing property and qualified small business corporation shares), bought flow-through shares, have limited partnership losses, made significant donations, or received significant dividend income, you may have been subject to the AMT. AMT could also apply in situations where there are significant capital gains (including, notably, capital gains from donated property).
If not previously considered, the AMT can be a surprise when your tax return is being prepared. For instance, if you utilize your full 2024 lifetime capital gains exemption while having little other income, you have AMT of $55,000 - $79,000 (based on the $1,250,000 exemption as announced in the 2024 federal budget), depending on your province of residence. Although this could be fully recovered over time with proper planning, the tax payment could impact your cash flow.
What’s included in the amended legislation?
For the year 2024 and beyond, the AMT tax rate is 20.5 percent (previously 15 percent) and the AMT exemption for individuals (previously $40,000) is now indexed to the fourth tax bracket, which is $173,205 for 2024.
The amendments broaden the AMT base (taxable income for AMT purposes) by including more types of income and limiting certain deductions, exemptions, and credits when calculating the AMT as follows:
| Regular tax calculation | AMT calculation pre-2024 | AMT calculation 2024 & onward | |
|---|---|---|---|
| Capital gains | Included at 50% | Included at 80% | Included at 100% |
| Capital gains on donated property |
Not included in income | Not included in income for donated publicly listed securities; included at 50% for all other donated property | Included at 30% for donated publicly listed securities; included at 100% for all other donated property |
| Capital losses and ABILs* | Allowed at 50% |
Allowed at 80% | Allowed at 50% |
| Employee stock option deduction |
Allowed at 50% |
Allowed at 20% |
No deduction allowed. If options are from listed public securities and are donated, allowed at 30%. |
| Capital gains deduction |
Allowed at 50% |
Allowed at 70% (effective rate) |
Allowed at 70% (effective rate) |
| Non-capital and limited partnership losses from other years |
Allowed at 100% |
Allowed at 100% |
Allowed at 50% |
| Select expenses, including interest**, moving expenses, childcare expenses, among others | Allowed at 100% |
Allowed at 100% |
Allowed at 50% |
| Select non-refundable tax credits (excluding donations) |
Allowed at 100% |
Allowed at 100% |
Allowed at 50% |
| Charitable donation tax credit |
Allowed at 100% |
Allowed at 100% |
Allowed at 80% |
** Interest paid on amounts borrowed to earn income from property.
The AMT carryforward period remains unchanged at seven years.
The recent changes to AMT could have a significant impact on an individual’s tax liability. These new rules can also make it more difficult to recover AMT paid going forward. Taxpayers will also have to consider the impact of the announced capital gains inclusion rate change in determining whether AMT applies to them for 2024 and later years.
Learn more
There is planning that can be done to recover or minimize the effects of the AMT. At MNP, we can help you navigate through the complexities when using your capital gains deduction or other preferential tax deductions and credits. Proper planning can help ensure there are no tax surprises and maximize the AMT that can be recovered.
To learn more about AMT and how it could affect you, contact your MNP business advisor.
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