ALTERNATIVE MINIMUM TAX (AMT) – WHAT IS IT AND HOW DOES IT IMPACT ME?
- by Andrew Hawryluk
- October 25, 2023
AMT is a second, alternate tax liability calculation which Canadian individual and trusts have to consider annually as a parallel with their normal tax liability. This method was introduced for Canada’s tax system back in 1986. Under this parallel tax calculation method, it allows for fewer deductions, exemptions and credits than under the regular income tax calculation. If the amount of tax to be calculated under the AMT system is more than the amount tax owing under the regular tax system, the difference owing is payable as AMT for the year.
The 2023 Federal budget announced plans to target the AMT to high-income individuals. The changes will include rules for calculating AMT. The proposed changes will come into effect January 1, 2024. The changes are the governments concerns that some of Canada’s top earners pay relatively little tax as a percentage of their income.
Does this impact me?
It could, although most Canadians are not affected you should be prepared for the changes. If you are a high-income earner and benefit from tax deductions or credits, or if you are planning to trigger significant capital gains on the sale of a property or business. Basic AMT exemption is currently $40,000 of annual income will rise to approximately $173,000 in 2024. The change will take a larger number of taxpayers out of scope and will be helpful to lower-income earners who may sometimes run into AMT issues because of one-time events.
What is changing in 2024?
- A higher tax rate: The Current AMT rules apply a flat 15 percent tax rate. For 2024, the AMT rate will increase to 20.5%
- Changes to capital gains: One of the biggest changes to the AMT calculation is the impact on capital gains. 100% of capital gains will generally be included in the AMT base, which effectively increases the top rate of federal tax applying capital gains from 16.5% to 20.5% This could be the equivalent of increasing the gains inclusion rate to 62% but without protecting previously accrued gains from the higher effective tax rate as a result of these changes.
- Changes to Charitable giving: The tax benefit of charitable giving may be negatively impacted by the revision to the AMT calculation. Only half of the tax credit for charitable donations will be allowed for AMT purposes. The cost of donating publicly listed securities could increase significantly. 30% of otherwise tax-exempt capital gains under the regular tax rules will be added to the AMT base.
- Employee stock options: 100% of benefits from employee stock options will now be generally included under the AMT.
- Limits on some deductions: Only 50% of interest expenses and loss carryovers may be deducted under the revised AMT method. Allowing half of loss carryovers to be applied against 100% of current year income or gains can create a tax liability on ‘phantom income’. This could be tax to be paid on a financial gain that hasn’t actually been realized.
All may not be lost – If you pay AMT, it can be used to offset tax arising under the regular tax systems for the following 7 calendar years. Therefore, although AMT may be paid, it can be seen as a pre-payment of that future tax, rather than an additional tax. The exception may be where a large sale of the business occurs, and minimal tax on a go-forward basis.
Although these changes are likely to affect very few taxpayers starting in 2024, there are several options to be considered during the last bit of 2023 to preplan. If you are considering a larger capital gain to be triggered, exercising employee stock options, claiming the Lifetime Capital Gains Exemption (LCGE) or making significant Charitable donations, you may wisht to seek out options now and consult with us or your tax advisor on a strategy.
Be well, stay connected, and remember, there’s more than one way to wealth!
By Andrew Hawryluk
Assante Financial Management Ltd.
The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. This material is provided for general information and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances.