Updated: August 27, 2024
The alternative minimum tax (AMT) rules are intended to 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. Changes to these rules, which were enacted on June 20, 2024 as part of Bill C-69 result in certain high-income taxpayers paying more taxes, but fewer middle-income taxpayers being subject to the regime. These changes are effective for taxation years that begin after 2023. Taxpayers that could be subject to the AMT should prepare for the new rules and talk to their advisors about potential steps to reduce AMT or use expiring AMT credits.
Proposed amendments
New changes to these rules were proposed on August 12, 2024 to adjust the scope of the AMT to:
- Reduce deductions for investment counsel and management fees to 50% (from 100%).
- Allow taxpayers to generally deduct 100% of resource expenses (currently these deductions may be limited).
The existing AMT rules
Who pays AMT and how does it work?
The AMT rules generally apply to certain individuals, estates, and trusts that receive a significant portion of their income as dividends or from capital gains or use deductions or tax credits to significantly reduce their regular tax payable. These taxpayers are required to calculate their federal tax owing under the regular method and under the AMT method and must then pay the higher of the two amounts. The AMT method requires taxpayers to calculate their “AMT base” (i.e., adjusted taxable income less the basic exemption amount, where eligible) before applying the AMT tax rate. For example, AMT could apply where a taxpayer claims the capital gains exemption on the sale/transfer of their small business shares or claims significant deductions from investments such as flow-through shares.
However, if a taxpayer pays the AMT for a specific year, they can carry forward the difference between the AMT they paid and their regular tax as a credit for up to seven years. As such, AMT paid can offset future taxes owing under the regular system, but any unused amount after that seven-year period is permanently lost.
Provincial AMT may also apply and is generally calculated as a percentage of the federal AMT amount.
How has the AMT changed?
Under the new rules, the AMT rate increases to 20.5% (from 15%) so that taxpayers subject to AMT pay more taxes. In addition, the basic exemption amount available to individuals and certain trusts increases to $173,206 (from $40,000) so less middle-income taxpayers will be subject to the tax. The new exemption amount is based on the start of the fourth federal tax bracket in the 2024 tax year and is indexed annually to inflation.
Other changes
The new AMT rules also broaden the scope of the AMT to:
- Include 100% (from 80%) of capital gains in the AMT base;
- Reduce deductions for capital losses and allowable business investment losses to 50% deductible (from 80%);
- Include 100% (from 80%) employee stock option benefits in the AMT base;
- Include 30% (from 0%) of capital gains on donations of shares or employee stock options of publicly listed securities;
- Reduce certain deductions to 50% deductible (from 100%) (e.g., interest to earn property income, certain employment expenses, non-capital loss carryovers);
- Reduce deductions for certain non-refundable tax credits to 50% deductible (from 100%) (e.g., basic personal amount, medical expense credit, disability credit, tuition credit).
- Allow a taxpayer to claim 80% of charitable donation tax credits when calculating AMT (from 100%).
- Allow deductions for the guaranteed income supplement, social assistance, and workers’ compensation payments when calculating AMT.
- Allow taxpayers to claim the federal logging tax credit under AMT.
- Allow certain denied credits under the AMT to be eligible for the AMT carry-forward (e.g., political donations, investment tax credits).
Considerations for trusts
The new rules exempt certain types of trusts from AMT. Most notably, graduated rate estates and qualifying employee ownership trusts are no longer be subject to AMT for tax years beginning after 2023.
Employee life and health trusts, mutual fund trusts, and prescribed master trusts would still be exempt from AMT under the new rules. However, other trusts are more likely to pay AMT under the new rules, even if they don’t have significant income. This is because the basic exemption isn’t available to trusts (except for qualified disability trusts under the new rules). Therefore, many trusts won’t have this exemption amount to offset the broader AMT base.
Examples
Let’s consider how changes to the AMT could affect two different taxpayers. In these examples, we make certain assumptions for illustrative purposes. For example, we assume that the tax deductions and credits for 2024 are equal to the 2023 amounts (i.e., not adjusted for indexation) and the AMT basic exemption amount is approximately $173,000.
Click below to read about two different scenarios
Scenario 1: An individual with significantly higher AMT under new rules
Ms. Y is a BC resident whose only income in 2024 is a capital gain of $2M on the sale of marketable securities on March 15, 2024. Ms. Y applies unused capital losses of $1.8 million from prior years against the gain.
Under the new AMT rules, Ms. Y would pay about $252,000 in total taxes for 2024 (instead of approximately $22,000 under the previous rules). The taxes owing under the new rules includes about $172,000 in federal AMT and $58,000 in BC AMT (up from about $450 and $150 respectively) that would be available for carry forward to reduce any regular taxes owing for up to seven years.
Ms. Y would owe significantly more taxes under the new AMT rules because her AMT base would be higher. When calculating the AMT base under the new rules, Ms. Y would have to include 100% of the capital gain (up from 80%) and would only be able to deduct 50% of the capital losses applied (down from 80%). Additionally, Ms. Y would apply an AMT rate of 20.5% (instead of 15%). BC AMT would also increase significantly, as it’s based on a percentage of federal AMT.
Scenario 2: An individual who will no longer pay AMT under new rules
Mr. X is a BC resident and realized a capital gain of $300,000 on January 31, 2024 on the disposition of shares in a holding corporation. The disposition doesn’t qualify for the lifetime capital gains exemption and Mr. X has no unused capital losses from prior years. Other than an RRSP deduction of $50,000, Mr. X has no other income or deductions in 2024.
Under the new AMT rules, Mr. X would pay about $21,000 in total taxes for 2024 (instead of approximately $28,000 under the previous rules, which includes $7,000 in federal and BC AMT in excess of regular taxes). Mr. X would pay no AMT under the new rules because the higher exemption amount (i.e., $173,000 instead of $40,000) would offset the impact of having to include 100% of the capital gain (up from 80%) in the AMT base.
Takeaway
The new rules are complex and there may be steps you can take to reduce AMT or utilize expiring AMT credits. Contact your local advisor or reach out to us here to learn more about the changes to AMT and how you can plan accordingly.
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 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.
