Alternative Minimum Tax

Background

The alternative minimum tax (AMT) is an additional income tax imposed under the Income Tax Act (Canada) (the Act) on individuals and certain trusts who would otherwise be able to reduce their ordinary Canadian federal income tax through the use of certain deductions, exemptions or credits. The AMT generally applies to those individuals and certain trusts who receive income from tax-preferential sources, such as capital gains, stock options and dividends, or who are able to reduce their tax otherwise paid through the use of loss-carryforwards and tax credits (among other things).

The AMT is determined by first calculating a notional amount of taxable income, referred to as "adjusted taxable income." The adjusted taxable income is effectively an amount of taxable income computed under an "alternative" set of rules, without the benefit of certain deductions and exemptions that would otherwise be available for calculating tax payable in the year. An individual's "minimum tax" for a year is then calculated by applying a flat rate of tax against the amount by which individual's adjusted taxable income exceeds a fixed safe-harbour amount, less certain tax credits allowed under the AMT rules.

Those trusts subject to AMT generally compute AMT in the same way, but do not benefit from a safe-harbour amount. If the "minimum tax" calculated for a year exceeds the income tax otherwise payable under the ordinary rules in the Act, an individual or certain trusts would be required to pay the difference as an additional tax for the year. The amount of additional tax paid in a year under the AMT rules is generally available to be deducted from tax payable in the following seven taxation years, to the extent the tax otherwise payable in those years exceeds what would be the applicable "minimum tax" in those years. 

It's worth noting that a provincial equivalent to AMT may also apply to taxpayers subject to income tax in a province of Canada, which is very generally computed as a percentage of the AMT (if any) computed under the Act, subject to the legislation applicable in each province.

Budget 2023 and subsequent draft legislation released in August 2023 (the 2023 Proposals) proposed significant changes to the AMT rules in the Act, including:

• an increase in the flat rate of tax used for computing AMT from 15% to 20.5%,
• an expansion of the various credits, deductions and exemptions that are excluded when computing "adjusted taxable income" and the "minimum tax" under the alternative rules, and
• an increase to the "safe harbour amount" of adjusted taxable income that is generally exempt from AMT for individuals, from the current $40,000 to approximately $173,000 in 2024, indexed to inflation.

The general result of the proposed amendments set out in the 2023 Proposals would be increased exposure to AMT for individuals that have income for the year (as adjusted) in excess of the safe harbour threshold of $173,000 (as indexed). In contrast, the 2023 Proposals would also allow a greater amount of shelter from AMT for those individuals with income (as adjusted) less than $173,000 (as adjusted) in a year. The safe harbour amounts do not apply in the case of trusts, meaning that trusts with taxable income would generally have greater exposure to AMT under the 2023 Proposals.

For a full explanation of the changes in the 2023 Budget, see our summary of Budget 2023.

The proposals contained in Budget 2024 concerning AMT largely incorporate the 2023 Proposals (which have not yet been enacted) with certain further amendments.

Who will this affect?

The proposed amendments to the AMT Rules as set out in Budget 2024 will generally affect Canadian and certain non-resident individuals and certain trusts that receive income in a year from tax-preferential sources (such as capital gains or dividends) or who have deductions, expenses or credits that reduce tax payable under the ordinary income tax rules (such as certain interest expense charges, non-capital loss carryovers, and charitable donation tax credits). The proposed amendments have also been noted as having potential knock-on effects on Canadian charities as they can reduce the tax advantages associated with large gifts to such charities.

Key changes

The following are some of the important changes proposed in Budget 2024 concerning AMT:

• the amount of a charitable donation tax credit that may be recognized when computing an individual's or a certain trust's minimum tax is increased from 50% proposed under the 2023 Proposals to 80% (though this is still a reduction from the ability to recognize 100% of a charitable donation tax credit under the rules as currently enacted);
• allowing full deductions for certain social assistance and welfare payments when computing adjusted taxable income, as well as full recognition of the federal logging tax credit (which were previously proposed to be recognized at only 50% under the 2023 Proposals);
• exempting Employee Ownership Trusts from the AMT (for a full explanation of the Employee Ownership Trust rules as proposed under Budget 2024, see Employee Ownership Trusts); and
• exempting certain Indigenous settlement or community trusts, as well as trusts, the beneficiaries of whom are Indigenous groups or other bodies incorporated or operating for the benefit of Indigenous groups from the application of the AMT rules.

Budget 2024 also includes a number of additional technical amendments to the AMT rules that will need to be carefully considered by those who may be subject to AMT.

Notably, no change was made to the amendments contained in the 2023 Proposals that will require a 30% inclusion of the amount of a gain realized on a gift of publicly listed securities to a Canadian charity.

Also of note, the increases to the capital gains inclusion rates proposed in Budget 2024 would also generally affect the application of AMT, and should have the effect of reducing the instances where AMT is required to be paid on the basis that the higher inclusion rates proposed under the "ordinary rules" for computing taxable income will be closer to the full inclusion rates required for capital gains under the "alternative" rules for computing AMT.

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 or gifting of capital properties or the exercise of stock options. Owing to the increasing complexity and scope of the AMT rules, it will often be difficult to determine where or when AMT may apply without a detailed calculation of what an individual's or a trust's anticipated "adjusted taxable income" may be for a year. We would be pleased to help those who may be impacted by these rules with understanding their application.