Will the new Alternative Minimum Tax Rules Apply to You?

The 2023 federal budget made important changes to the Alternative Minimum Tax (AMT) system, rules that have only had minor adjustments since they were put into place in 1986. This article will discuss the changes and their effects on high-income individuals, especially those with substantial capital gains, tax deductions, or charitable donations. It's worth noting that these changes can also affect trusts.

What is Alternative Minimum Tax (AMT)?

The Alternative Minimum Tax (AMT) system is like a second tax calculation, designed to ensure that taxpayers who claim various deductions, exemptions, or credits still pay a minimum level of tax. It prevents individuals from reducing their tax liability to exceptionally low levels. If the AMT calculation exceeds the regular income tax owed, the difference becomes payable as AMT for the year.

Recent Changes to AMT

In the 2023 Federal Budget, the Canadian government decided to make several changes to the AMT rules, starting in 2024. The goal was to better target AMT at high-income individuals by raising the AMT rate, increasing the AMT exemption, and broadening the AMT base. While these changes are expected to affect only a limited number of taxpayers, some situations may trigger AMT.

The main proposed changes:

• Increasing the federal AMT rate from 15% to 20.5% and the basic exemption amount from $40,000 to the start of the second from the top federal bracket (expected to be approximately $173,000 in 2024).

• Adjust the calculation of taxable income to expand the limits on certain tax benefits, such as exemptions or deductions (simply reducing deductions and credits that can be used)

• Limit deductibility of certain eligible non-refundable tax credits to 50% (e.g. the charitable donations tax credit is affected by this change)

High-Income Earners Beware

If you're a high-income earner and you find yourself in one of the following situations, you might owe get caught under the new AMT rules:

Selling Capital Property for a Large Gain: Consider the example from PwC, where the disposal of capital property resulted in a potential AMT of $17,493 under the new changes (PWC link)

Claiming the Lifetime Capital Gains Exemption (LCGE): If you're selling qualifying shares or property and plan to claim the LCGE, be prepared for potential AMT consequences.

Making Significant Charitable Gifts: Donating publicly traded securities or private shares in-kind after 2023 might lead to unexpected AMT bills. In the example in this PWC paper, the clients' taxes increased by an additional $79,640 of AMT. (PWC link)

Navigating the AMT Maze

The complexity of the new AMT system adds a layer of uncertainty regarding its effectiveness in targeting high-income taxpayers. Both individuals and trusts may encounter difficulties in discerning the situations where AMT is applicable without seeking expert tax counsel. Advisers may face challenges in offering straightforward advice due to the intricate tax calculations needed to determine AMT liability.

However, here's the silver lining:

The good news is that if you find yourself having to pay AMT (either under the current or new rules), you can usually recover it within seven years. In most cases, it's best to view AMT as a prepayment of future tax rather than an additional tax burden. The exception may be when a significant one-time capital gain occurs. In such cases, careful planning, like creating taxable income within those seven years, may be necessary.

Conclusion Seek Professional Advice:

In the ever-changing world of taxes, it's crucial for high-income earners to stay informed and adapt to new regulations. AMT may seem daunting, but it's manageable with careful planning and a professional team. It's advisable to seek guidance from specialized tax accountants and financial professionals. Remember, AMT is complicated, but with the right plan and the right team, you can ensure at the very least, the additional taxes you pay are 100% recoverable.

- Brandt Butt, Associate Portfolio Manager/Investment Advisor, CIM®

Brandt is a Portfolio Manager/Investment Advisor and part of an award-winning team at Endeavour Wealth Management with iA Private Wealth. Brandt’s focus is working with incorporated physicians and dentists between the ages of 35-45 who are looking to set themselves up on the right financial path in hopes of reaching a point where they are choosing to work, instead of having to.

This information has been prepared by Brandt Butt who is a Investment Advisor/Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained here in may not apply to all types of investors. The Investment Advisor/Portfolio Manager can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

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