Two people discussing the alternative minimum tax

What is the alternative minimum tax in Canada?

What is the alternative minimum tax in Canada?

2 Minute Read

Are you subject to the alternative minimum tax? Find out what to do about it here.

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.

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What is being proposed in the 2023 Federal Budget?

Budget 2023 includes proposed changes to the current AMT regime which, if enacted into law, will apply to taxation years that begin after 2023. While no draft legislation was included with the budget announcement, the measures described broaden the application of the AMT by limiting tax preferences (i.e., exemptions, deductions, and credits) in the AMT calculation as follows:

  • Capital gains would be fully included in income (compared to the inclusion of 50 percent in the normal method or the existing inclusion for AMT purposes of 80 percent). Capital losses and allowable business investment losses would apply at a 50 percent rate.
  • The inclusion rate for benefits associated with employee stock options will be changed to 100 percent.
  • The inclusion rate for capital gains resulting from the donation of publicly listed securities will be changed to 30 percent from 0 percent, to align with the existing AMT rules for capital gains that are sheltered by the capital gain deduction.
  • The 30 percent inclusion rate would also apply to the employee stock option benefit to the extent any deduction is available because underlying shares are also publicly listed securities that were donated.
  • Certain deductions and expenses will now be limited to 50 percent.
  • Only 50 percent of non-refundable credits (except a special foreign tax credit) will be allowed to reduce the AMT. Non-refundable credits include items such as basic personal credits, disability and medical credits, home buyers’ amounts, home accessibility credits, and donation credits, in addition to many others.

Budget 2023 proposes the following additional changes:

  • The AMT tax rate will increase from 15 percent to 20.5 percent.
  • The AMT exemption will increase from the current allowable deduction of $40,000 for individuals to an amount indexed to the fourth tax bracket, estimated to be $173,000 in 2024.

The AMT carry-forward period will remain unchanged at seven years.

The AMT changes will have a broader impact on taxpayers — particularly individuals for whom a significant component of their income is represented by taxable capital gains and those claiming significant tax credits such as donations which reduce their taxes payable.

2023 Federal Budget Highlights

Deputy Prime Minister and Minister of Finance the Honourable Chrystia Freeland tabled the Federal Government’s 2023 Budget on March 28, 2023.

Learn more

There is planning that can be done to recover or minimize the effects of the AMT. At MNP, we can help you navigate through the complexities when using your capital gains deduction or other preferential tax deductions and credits. With proper planning, this will not be a surprise and it can be fully recovered.

To learn more about AMT and how it could affect you, contact Kim Drever, FCPA, FCA, ICD.D, Regional Tax Leader, at [email protected].


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