This month’s blog post was written by Chantal Copithorn, Partner at PwC.

AMT was first introduced in the 1980’s as a way to ensure a minimum amount of tax was paid on income that benefited from certain preferential deductions or incentives.   Since then, there have been minimal changes to the AMT rules. That is, until now.  The 2023 federal budget and recent draft legislation proposed a number of changes to the AMT calculation that could apply in 2024 with the intention of increasing the AMT tax rate, broadening the AMT base and better targeting the AMT to higher income earners.      

For background, the AMT applies to individuals (including certain trusts) and is currently calculated as (a) the adjusted taxable income (“ATI”) less an exemption of $40,000, times (b) the lowest federal marginal tax rate (currently 15%) and reduced by (c) certain tax credits.  A taxpayer will pay the higher of their regular tax liability or the AMT tax liability.  To the extent the AMT exceeds the regular tax liability, the excess can be carried forward for seven years and can be credited against the regular taxes payable in those years, provided the regular taxes exceed the AMT in the subsequent year. Each of the provinces also have an AMT.        

Proposed Changes

The draft legislation that was issued in August of 2023 proposed a number of changes to the ATI calculation including the following:

• Including 100% of a capital gain
• Including 30% of capital gains arising on the donation of publicly traded securities
• Limiting the deduction for certain interest and financing charges to 50%
• Limiting the deduction for capital loss carryforwards and capital loss carry backs to 50%
• Limiting the deduction for allowable business investment losses to 50%
• Limiting non-capital loss carryovers to 50%
• Eliminate the employee stock option deduction

The proposed changes also include disallowing 50% of non-refundable tax credits including the donation tax credit.

Additionally, the legislation increased the exemption to the second highest tax bracket (approximately $173,000 for 2024, indexed annually for inflation) and the AMT rate to 20.5%.

Certain trusts will now be excluded from the AMT, including graduated rate estates, and the basic exemption will be denied for other inter-vivos trusts (other than qualified disability trusts). 

Examples

Let’s look at an example to show the impact of the proposed changes to a taxpayer who earns $100,000 of investment income and has a large one-time capital gain of $1,500,000.

	Regular Federal Tax	Current AMT (federal only)	Proposed AMT (federal only)
Capital Gain on Sale	1,500,000	1,500,000	1,500,000
Investment Income	100,000	100,000	100,000
Taxable Income	850,000	1,300,000	1,600,000
AMT Exemption		(40,000)	(173,000)
Net taxable income	850,000	1,260,000	1,427,000
Tax Payable	280,500	189,000	292,535

Under the current rules, the taxpayer would pay the regular tax and not be subject to the AMT since the regular tax is higher.  Under the proposed rules, the individual would be required to pay the higher amount of AMT being $292,535, of which $12,035 represents excess AMT that will carryforward and can be applied against federal taxes payable in the next seven years.  This situation could arise where, for example, someone sells a vacation property, and does not claim their principal residence exemption.  Depending on whether the individual has significant income in a future year, they may not be able to recover this punitive tax. 

Looking at another example, an individual has a capital gain of $5,000,000 in a year and makes a donation of $4,000,000 to a qualified charity.  The result is:

	Regular Federal Tax	Current AMT (federal only)	Proposed AMT (federal only)
Capital Gain on Sale	$5,000,000	$5,000,000	$5,000,000
Taxable Income	$2,500,000	$4,000,000	$5,000,000
AMT Exemption		(40,000)	(173,000)
Net taxable income	$2,500,000	$3,960,000	$4,827,000
Tax Liability	$825,000	$594,000	$989,535
Impact of Donation	($618,750)	($618,750)	($309,375)
Tax Payable	$206,250	Nil	$680,160

Under the current rules, the taxpayer will pay the regular tax and will not be subject to the AMT.  The proposed rules will subject the taxpayer to the AMT at a much higher amount.  The taxpayer may consider not making such a substantial donation as a result of the additional cost. 

Taxpayers considering transformational donations will also be impacted (e.g., a taxpayer making a significant donation in the year of a sale of a business).  The impact of the proposed AMT and whether they can use the AMT carryforward could be compelling and certainly will influence how much they give.  This could cause a negative impact to the charitable sector resulting in less donations. 

Since the rules are proposed to apply in 2024, taxpayers could consider triggering capital gains before the end of the year; and/or making certain donations before the end of the year so that the resulting tax impact can be determined under the current AMT rules.

The Department of Finance requested submissions on various tax proposals including the AMT with a deadline of September 8, 2023.  A number of submissions were made but only time will tell whether any adjustments or relief to the draft proposals will be implemented. 

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