Overview

The alternative minimum tax (AMT) is, as the name suggests, an alternative tax that is calculated based on fewer deductions, exemptions and tax credits than under the normal income tax calculation rules. It currently applies at a flat 15% rate, with a standard $40,000 exemption.  The AMT was designed to ensure high-income individuals pay a minimum amount of tax even when they receive income from sources subject to tax incentives and preferential treatment, or where they benefit from certain credits and deductions.  A taxpayer must pay the higher of the AMT calculated on “adjusted taxable income” and income tax calculated under the ordinary rules.  Budget 2023 proposes significant changes to the existing AMT regime.

Who will this affect?

The proposed AMT rules will affect Canadian and non-resident individuals who receive a significant portion of their income from tax-preferential sources (such as capital gains) or who have significant deductions or expenses that reduce tax payable under the ordinary rules (such as certain interest charges or non-capital loss carryovers).

Key changes

The following are some of the important proposed changes to calculating adjusted taxable income for AMT purposes:

Capital gains 100% included
Employee stock option benefits  100% included 
Capital loss carry-forwards and allowable business investment losses  50% deductible 
Capital gains on donations of publicly listed securities  30% included 
Interest and carrying charges incurred to earn income from property  50% deductible 
Limited partnership losses of other years  50% deductible 
Non-capital loss carryovers  50% deductible 
Most non-refundable tax credits  50% deductible 
Dividends  Cash amount received included; dividend tax credit disallowed 

 

The exemption is increased from $40,000 to an expected $173,000 for the 2024 taxation year, and will be indexed to inflation.  The AMT rate will be increased from 15% of adjusted taxable income to 20.5% of adjusted taxable income.  Where AMT is payable, the excess over the amount of ordinary income tax otherwise payable will continue to be carried forward for seven years and can be credited against ordinary income tax payable to the extent such ordinary income tax exceeds AMT in those years.  

These rules will apply to taxation years that begin after 2023.

How we can help

Taxpayers who receive income that is taxed at preferential rates, or who benefit from significant credits or deductions in computing their income under the ordinary rules, will need to consider the impact of the proposed AMT in determining the tax consequences of transactions such as the sale of capital properties or the exercise of stock options.  Our team of tax lawyers can assist taxpayers in understanding, and planning for, the impact of these new rules.

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