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The federal government has followed through on its promise in last year’s budget to update the alternative minimum tax (AMT), which is a parallel tax calculation that allows fewer deductions, exemptions and tax credits than under the ordinary income tax rules.
The current AMT system applies a flat 15-per-cent tax rate with a standard $40,000 exemption amount instead of the usual progressive tax rates. An individual pays the AMT or regular tax, whichever is higher. Additional tax paid as a result of the AMT can be carried forward for seven years and used to offset regular tax to the extent that regular tax exceeds AMT in those years.
In the 2022 federal budget, the government bumped up the top federal bracket to 33 per cent (from 29 per cent) in 2016, but expressed concern that “some high-income Canadians still pay relatively little in personal income tax as a share of their income.” For example, according to the 2022 budget materials, 28 per cent of filers with gross income of more than $400,000 pay an average federal tax rate of 15 per cent or less by using a variety of tax deductions and tax credits.
The government announced a formal review of the AMT, the results of which were originally supposed to come out in last fall’s economic update, but were delayed until the 2023 budget. The government on March 28 announced that “to better target the AMT to high-income individuals,” several changes would be made to the calculation of AMT beginning in 2024. The changes include broadening the AMT base by further limiting tax preferences (exemptions, deductions, and credits), increasing the AMT rate and raising the AMT exemption.
Capital gains and stock options
Under the regular tax system, only 50 per cent of capital gains are taxable. No widespread changes to the capital gains inclusion rate were proposed, but the government is upping the inclusion rate for AMT purposes to 100 per cent, from 80 per cent. The budget also proposed that 100 per cent of the benefit associated with the exercise of employee stock options will be included in the AMT base.
Donations of publicly listed securities
Under the regular tax system, in-kind donations of publicly traded shares, mutual funds or segregated fund trusts to a registered charity give donors a tax receipt equal to the fair market value of the securities or funds being donated, and allow donors to avoid paying capital gains tax on any accrued gain. A similar rule applies to the donation of securities obtained through the exercise of employee stock options.
Under the AMT system, the budget proposed to include 30 per cent of capital gains on donations of publicly listed securities in the AMT base. This 30-per-cent inclusion rate would also apply to employee stock option benefits when the underlying publicly listed securities are donated to charity.
Deductions and expenses
Under the updated rules, the AMT base will be broadened by disallowing 50 per cent of various deductions, including employment expenses (other than those incurred to earn commission income), moving expenses, child-care expenses, interest and carrying charges incurred to earn income from property, deduction for limited partnership losses of other years and non-capital loss carryovers.
Currently, most non-refundable federal tax credits can be credited against the AMT. The budget proposed that only 50 per cent of non-refundable tax credits would be allowed to reduce the AMT, subject to a few exceptions. Most notably, the proposed AMT would continue to use the cash (that is, not grossed-up) value of Canadian dividends and fully disallow the dividend tax credit.
The AMT exemption
The exemption amount is a deduction available to all individuals and is intended to protect lower- and middle-income individuals from being subject to the AMT. The budget proposed to increase the exemption from $40,000 to the start of the fourth federal tax bracket. That bracket is $165,430 for 2023, but based on expected indexation for the 2024 taxation year, that bracket, and thus the new AMT exemption amount, would be approximately $173,000 for 2024, indexed annually to inflation thereafter.
The AMT rate
The budget proposed to increase the AMT rate to 20.5 per cent, up from 15 per cent, corresponding to the rate applicable to the second federal income tax bracket.
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All told, the amendments to the AMT are expected to generate an estimated $3 billion in revenues over five years, beginning in 2024. With these changes, more than 99 per cent of the AMT paid by individuals will be paid by those who earn more than $300,000 per year, with 80 per cent of the AMT being paid by those earning over $1 million annually.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.
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