HNW taxpayers: Get ready for ‘refreshed’ alternative minimum tax for 2024

Expected changes to Canada’s AMT would affect about 26,000 people, especially those selling a property or with big deductions or extra income

Lorne Shillinger and Brian Ernewein for Canadian Family Offices

Published Sep 13, 2023 • 5 minute read

If you are subject to the AMT, you are required to calculate your tax liability in two ways: under the regular income tax rules and the AMT method. You would then pay the higher of the two amounts.PHOTO BY GETTY IMAGES

If you have a high income, or are considering selling a business, you and your tax professional should start thinking about 2024. That’s when proposed changes to the personal alternative minimum tax (AMT) are expected to go into effect.

First, some background: The federal government’s 2021 election platform committed to creating a minimum tax rule so that Canadians in the top tax bracket “pay at least 15 per cent each year … removing their ability to artificially pay no tax through excessive use of deductions and credits.”It must be said that most higher income individuals who pay reduced federal tax do not do so “artificially.” They apply standard, well-established income tax provisions under Canadian tax law. Under the regular tax calculation, these include business or capital loss deductions, tax relief for charitable donations and RRSP contributions, and a 50-per-cent inclusion rate for capital gains.Nevertheless, the 2023 federal budget followed through on this election promise, announcing major reforms to the personal alternative minimum tax (AMT) that are set to apply Jan. 1, 2024.

The AMT explained

The AMT is a parallel income-tax calculation, first introduced in 1986, that limits certain deductions, exemptions and credits that would otherwise apply under the regular tax rules. If you are subject to the AMT, you are required to calculate your tax liability in two ways: under the regular income tax rules and the AMT method. You would then pay the higher of the two amounts.

This revamp of the AMT is the government’s response to concerns that some of Canada’s top earners still pay relatively little tax as a percentage of their income.Are you subject to the alternative minimum tax?While most Canadians are not affected, you should be prepared for this tax if you are a high-income earner and benefit from tax deductions or credits, or if you are planning to realize a significant capital gain on the sale of a property or business.

More than 99 per cent of the AMT paid by individual taxpayers would be from those who earn more than $300,000 per year, and about 80 per cent would be from those who earn more than $1 million per year.

The government has stated that about 70,000 Canadians paid AMT under the old rules. According to a recent report by the Parliamentary Budget Office, about 26,000 individuals would be subject to the AMT in 2024, and that number will increase gradually. The proposed changes are expected to generate an estimated $2.62-billion in revenue over five years.

More than 99 per cent of the AMT paid by individual taxpayers would be from those who earn more than $300,000 per year, and about 80 per cent would be from those who earn more than $1 million per year, according to the federal budget.

The good news is that the basic AMT exemption, which is currently $40,000 of annual income, will rise to around $173,000 in 2024. This change will take a relatively large number of taxpayers out of scope, and will be especially helpful to lower-income taxpayers who sometimes run into AMT trouble because of one-time events, such as selling their small business or farm.

In revenue terms, the revised AMT is anticipated to raise about $750 million annually in additional federal monies. To put that in perspective, that’s about a third of the revenue the government estimated it would raise when it increased the top personal income tax bracket to 33 per cent (from 29 per cent) in 2015.

What’s changing in 2024?Taxpayers who will be affected may see some notable changes, including:

A higher tax rate: The current AMT rules apply a flat 15-per-cent tax rate. For 2024, the AMT rate will increase to 20.5 per cent.
Changes to capital gains: One of the most significant changes to the revised AMT concerns capital gains. One hundred per cent of capital gains will generally be included in the AMT base, effectively increasing the top rate of federal tax applying to capital gains from 16.5 per cent to 20.5 per cent. Depending on the circumstances, that could be the equivalent of increasing the capital gains inclusion rate to 62 per cent – but without protecting previously accrued gains from the higher effective tax rate as a result of these changes.
Changes to charitable giving: The tax benefit of charitable giving may be negatively impacted by the revised AMT regime. Only half of the tax credit for charitable donations will be allowed for AMT purposes. Furthermore, the cost of donating publicly listed securities could increase significantly. Thirty per cent of otherwise exempt capital gains under the regular tax rules will be added to the AMT base.
Employee stock options: 100 per cent of benefits from employee stock options will now generally be included in income under the AMT.
Limiting some deductions to 50 per cent: Only 50 per cent of interest expenses and loss carryovers may be deducted under the revised AMT. Allowing only half of loss carryovers to be applied against 100 per cent of current-year income or gains can create a tax liability on “phantom income.” In other words, tax may be paid on a financial gain that hasn’t actually been realized.

The actual impact of the AMT depends on the taxpayer’s specific situation. For example, Jane, a resident of Ontario with income of $1 million annually, wishes to make a large donation of her publicly listed shares to a registered charity. The most she would be allowed to donate – and claim under the charitable donations tax credit in that year – is $750,000 (or 75 per cent of her income).In Jane’s case, she could face an AMT bill of more than $50,000 if the capital gain on the publicly listed shares represents most or all of the total value of the shares being donated. The AMT may or may not be recoverable in later years.However, if the capital gain on those shares is modest, then even the combined impact of adding back 30 per cent of the capital gain to income and allowing only half of the charitable donations credit wouldn’t result in a major AMT liabilityDraft AMT legislation was released for comment in early August, and a formal bill is expected to be introduced in Parliament this fall. Certain features of the proposed reforms could change between now and then; however, it’s important to prepare carefully for 2024.

Speak to a tax advisor about the potential impact of the AMT on your personal tax situation, especially if you are a high-income earner or if you are a business owner and plan to sell in the near future.

The changes could also be a factor when making a large charitable donation, or if you have significant deductions or expenses. If you are subject to the AMT, a qualified tax professional can make the necessary calculations and discuss the planning strategies that are available to you.

Lorne Shillinger is Partner, National Tax Leader, KPMG Family Office, and Brian Ernewein is Senior Advisor, National Tax Centre, KPMG in Canada.