What is the alternative minimum tax in Canada?

In the 2023 Budget, the federal government proposed changes to Canada's alternative minimum tax. Many are unaware of what the tax is and are curious about how this could impact them. Read on to learn more about this tax and who is affected by it.

The alternative minimum tax, explained

The alternative minimum tax (or AMT) is exactly as it sounds: it is an alternative method to calculate the income tax you owe in Canada. This tax is often applicable when you have claimed a preferential tax deduction like the capital gains deduction/capital gains exemption or have preferential tax rates due to credits, such as dividend tax credits.

Each year, your tax owing is calculated under the normal method, which considers the preferential tax credits and deductions. This number is then compared to a second calculation where you don't receive these same credits and deductions, but your tax is calculated at a lower tax rate. For most instances, the normal calculation will result in more tax owing. When the second calculation results in a higher amount owing, you will pay this higher amount. The difference between the regular tax owing and the second calculation is the AMT.

When you are subject to the AMT, this should be viewed as a prepayment of future tax. Over the next seven years, you can recover this amount paid against your regular income tax. In order to recover this AMT in the future, you would have to be taxable in future years, thus if you do not have taxable income in these years, this AMT will be lost.

Who is subject to the alternative minimum tax?

Normally, most Canadians are not subject to the AMT. However, you should be prepared for this tax if you are benefiting from tax deductions or credits.

For example, if you used your capital gains deduction (to shelter capital gains on qualified farm property, qualified fishing property, and qualified small business corporation shares), bought flow-through shares, have limited partnership losses, or received significant dividend income, you may be subject to the AMT.

If not previously considered, the AMT can be a surprise when your tax return is being prepared. For instance, if you utilize your full 2023 capital gains exemption of $971,190 while having little other income, you would have AMT of approximately $48,000 - $56,000, depending on your province of residence. Although this can be fully recovered over time with proper planning, the tax payment can impact your cash flow.