Changes in Alternative Minimum Tax

Changes in Alternative Minimum Tax

High income earners who take advantage of certain “tax preference” arrangements often find they cannot eliminate all of their taxes as a result of the Alternative Minimum Tax (AMT). The AMT calculation method is designed to ensure everybody applies at least a minimum tax rate to income that is less affected by tax breaks such as capital gains.

In Budget 2023, the Government of Canada introduced some changes to the AMT formula that may impact decisions concerning personal charitable donations, particularly large gifts. AMT is currently calculated as follows:

Flat tax rate (15%) x [taxable income for AMT purposes ⁠–⁠ flat tax exemption of $40,000] ⁠–⁠ allowable refundable tax credits

From 2024, the minimum tax rate will be increased from 15 to 20.5%.

The $40,000 exemption will be increased to the top of the third tax bracket. This is currently $165,430, but it will increase in 2024 to an estimated $173,000.

InOnly 50% of the refundable tax credits, including the donation tax credits, will reduce the amount of AMT.

Although the above changes apply to all capital gains, the impact is felt more acutely with respect to donations of publicly listed securities.

Under the current rules, capital gains resulting from donations of listed public securities are not added to taxable income for AMT purposes. Under the proposed rules, there will be an add back of 30% of the capital gain derived from donations of publicly listed securities. The table below highlights one example:

 

Current rules

Proposed rules

Regular taxable income

$2,000,000

$2,000,000

Add back of capital gain resulting from donation of publicly listed securities with FMV $2,000,000

0

$600,0001

Taxable income for AMT purposes

$2,000,000

$2,600,000

Exemption

($40,000)

($173,000)2

Charitable tax credit

($494,964)3

($247,482)4

AMT tax rate

15%

20.5%

AMT

0

$243,986

Basic federal tax

$141,842

$141,842

Applicable tax

Basic federal tax

AMT

Increase in taxes payable

N/A

$102,144

  1. 1 30% of capital gain from donation of publicly listed securities.
  2. 2 The 2024 exemption is subject to inflation adjustment, which is estimated to be approximately $173,000.
  3. 3 Tax credit claimed based on 75% of net income.
  4. 4 2024 donation tax credit will be reduced by 50%.

Interestingly, no comparable changes have been proposed with respect to corporate donations. Under some circumstances, corporate donations would appear the more attractive way to go. A donation of publicly traded securities through a corporation eliminates the capital gain on the disposition of the securities, allowing a deduction of the value of the securities and increasing the capital dividend account balance, which allows a tax‑free distribution from the corporation to the shareholder. Individuals should consult their tax advisors to determine whether it is advisable to switch to a corporate donation strategy.

Planning strategy

Based on the current proposed rules, those who are planning to make a donation of assets with capital gains should make those donations in 2023, rather than 2024. The donation can be carried forward to 2024 if there is insufficient income in 2023 to fully utilize the donation credit in 2023. This would avoid the application of the new AMT rules.

Minimum tax, maximum insight

For more information:

Segal GCSE Tax Team

taxquestions@segalgcse.com

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