The 2023 Federal Budget proposed changes to the existing Alternative Minimum Tax (AMT) rules with draft legislation released on August 4, 2023. These revised rules will apply beginning January 1, 2024.
What is AMT?
The AMT was introduced in 1986 as a parallel tax to the regular tax system and applies to individuals, but not corporations. The AMT requires certain “preference” items to be added back into income to determine the alternative tax. There is an exemption amount that is currently $40,000 so if the taxable income for the year calculated under AMT does not exceed this amount, AMT will not apply. A taxpayer client pays the higher of AMT or regular tax and the additional tax paid under the AMT can be carried forward as a credit to offset regular tax for seven years. AMT does not apply in the year of death of a taxpayer.
Under the existing AMT rules, the most common situations where AMT could apply is where a taxpayer has large capital gains and especially if the lifetime capital gains exemption was used on a sale of qualified small business corporation shares or qualified farm and fishing property.
What are the changes?
The 2023 Federal Budget has proposed changes to broaden the tax base subject to AMT, increasing the tax rate but also increasing the exemption amount. The following table highlights some of the proposed changes. To review all the changes, be sure to contact your local PPI Collaboration Centre.
| Existing AMT | Proposed AMT | |
|---|---|---|
| Tax rate | 15% | 20.5% |
| Exemption amount | $40,000 | $173,000 |
| Capital gains | Include 80% | Include 100% |
| Capital gains using QSBC/QFFP | Include 30% | Include 30% |
| Capital gains on donation of public securities | Include 0% | Include 30% |
| Capital gains on donated property | Include 50% | Include 100% |
| Interest and carrying charges to earn property income | Deduct 100% | Deduct 50% |
| Many non-refundable tax credits (including the donation tax credit) | Full credit | 50% of credit |
What does your client need to do?
These proposed changes could result in AMT applying if your client’s taxable income (calculated for AMT purposes) is in excess of $173,000. In addition to being aware of the implications of AMT when there are large capital gains in a year (and planning for it), starting in 2024 your client will need to consider the implications of significant interest deductions (for example, if using a leveraging strategy) or large donations (especially gifts of capital property, as these donations not only have the 50% limitation on the donation tax credit, but also 100% or 30% of the gain, depending on the type of property, could be included in your client’s taxable income for AMT). It is essential that you work with your client and their professional advisors to help them prepare the calculations to determine if AMT will apply, and determine their planning options.