Updated: June 21, 2024
Donating to charitable causes is rewarding for many Canadians—but there are important tax implications that need to be considered. One of these considerations is how recent changes to the federal alternative minimum tax (AMT) could impact the donation decisions of certain taxpayers. High-income taxpayers that make large donations of cash or qualifying securities (e.g., public company shares) may have unintended tax consequences, under recent changes to the AMT rules.
Specifically, a taxpayer can only deduct 80% of the donation tax credit to reduce any AMT payable. Furthermore, taxpayers would have to include 30% of capital gains on donated shares to registered charities in income for AMT purposes (increased from nil under the previous rules).
The changes to the AMT rules are included in Bill C-69, which received Royal Assent on June 20, 2024, and are effective for tax years that begin after 2023.
Taxpayers that plan to make significant donations should strategize early to limit the impact of these rules.
How are donations of shares ordinarily treated for tax?
The AMT rules are intended to help ensure that Canadians pay their fair share in tax by preventing certain individuals and trusts from claiming exemptions, deductions, and tax credits that would generally be available under ordinary income tax rules. The new rules would result in certain high-income taxpayers paying more taxes, but fewer middle-income taxpayers being subject to the regime.
The current federal rules prevent high-income taxpayers from significantly reducing their regular tax payable by calculating an adjusted taxable income which limits certain deductions and credits that can be claimed. Taxpayers would then pay the higher of the AMT or the regular tax, and any additional amount paid between AMT and regular tax can be carried forward and credited against regular tax for up to seven years. Provincial AMT may also apply and is generally calculated as a percentage of the federal AMT amount.
Under the current rules, you’re deemed to have disposed of the donated public company shares at fair market value which leads to a capital gain for tax purposes for the amount exceeding the original purchase price. When the shares are donated directly to a registered charity, the capital gain is deemed tax-free. This is the favourable option over donating cash for many high-net-worth individuals who have large investment portfolios with accrued gains. Additionally, taxpayers would be entitled to claim the donation tax credit which further reduces their federal and provincial tax. For purposes of calculating AMT, the tax treatment of donating public company shares follows the regular tax method. For purposes of calculating AMT under the previous AMT rules, the tax treatment of donating public company shares followed the regular tax method. The disposition was therefore fully exempt from AMT.
What are the changes?
Bill C-69 includes several changes to the AMT which will impact high-income taxpayers, and could significantly impact large donations. Some notable changes are:
- 100% (up from 80%) of capital gains included in the AMT base
- 30% (up from 0%) of capital gains on donation of qualifying securities included in the AMT base
- 80% (down from 100%) deduction for the donation tax credit
- An increase in the AMT rate to 20.5% (from 15%)
- An increase in the AMT exemption to $173,000 (from $40,000)
For more details on the changes to the AMT regime, see our tax alert.
How do these changes impact the way your donations are taxed?
Some high-income taxpayers include charitable giving in their year-end tax planning; however, unintended AMT consequences may arise under the new rules. As a result, donors need to carefully consider the amount and timing of their donations.
Let’s consider a couple of scenarios to illustrate how these changes will impact the way your donations are taxed starting in 2024.
Click below to read about two different scenarios.
Scenario 1: Capital gain and donation of shares
Mr. A is an Ontario resident whose only income in 2024 is a capital gain of $2M on the sale of marketable securities on June 1, 2024. He also donated public
company shares to a registered charity with a fair market value of $1M and an adjusted cost base of $500,000 in 2024. His taxable income for 2024 is $1M (which includes 50% of the $2M capital gain on the sale of shares and doesn’t include a capital gain on the donation of public company shares).
Under the new rules, Mr. A would pay about $343,000 in total taxes for 2024 (instead of approximately $116,000 under the previous rules). The taxes owing under the new rules includes about $150,000 in federal AMT and $79,000 in Ontario AMT (instead of no AMT under the previous rules) that would be available for carry forward to reduce any regular taxes owing for up to seven years.
Mr. A would owe significantly more taxes under the new rules because his AMT base would be higher and only 80% (down from 100%) of the donation tax
credit would reduce his AMT payable. When calculating the AMT base under the new rules, Mr. A would have to include 100% of the $2M capital gain on the
sale of investments (up from 80%) and 30% of the gain on the donated public company shares (up from nil). Additionally, an AMT rate of 20.5% (up from 15%)
would apply. Ontario AMT also results, as it’s based on a percentage of federal AMT.
Scenario 2: Capital gain and cash donation
Ms. B is an Ontario resident whose only income in 2024 is a capital gain of $2M on the sale of investments on May 31, 2024. She also made a $1M cash donation to a Canadian registered charity in 2024.
Under the new rules, Ms. B would pay about $296,000 in total taxes for 2024 (instead of approximately $116,000 under the previous rules). The taxes owing under the new rules includes about $119,000 in federal AMT and $63,000 in Ontario AMT (instead of no AMT under the new rules) that would be available for carry forward to reduce any regular taxes owing for up to seven years.
Ms. B would owe significantly more taxes under the new rules because her AMT base would be higher and only 80% (down from 100%) of the donation tax credit would reduce her AMT payable. When calculating the AMT base under the new rules, Ms. B would have to include 100% of the $2M capital gain on the sale of investments (up from 80%). Additionally, an AMT rate of 20.5% (up from 15%) would apply. Ontario AMT also results, as it’s based on a percentage of federal AMT.
Planning opportunities
The new rules can create a tax cost of making large donations after 2023, as shown in the scenarios above. However, there are ways you can plan ahead to minimize the potential impact of the new rules. For example:
- AMT doesn’t apply in the year of death—it may be beneficial to plan to donate through your will
- Work backwards when determining how much to donate so you can prepare and plan for any AMT payable.
- Manage your taxable income for future years to ensure you get a credit from any additional tax paid under AMT which can be credited against regular tax for up to seven years.
- Consider the impact of the proposed increase to the capital gains inclusion rate to 66.7% (from 50%) for capital gains realized on or after June 25, 2024 if you're planning to sell capital assets with accrued gains to fund charitable donations.
Takeaway
The new rules are complex but there are ways you can continue to donate while mitigating the consequences. Contact your local advisor or reach out to us here before making any sizeable donations.
Disclaimer
The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Doane Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.
