November 20, 2023
Changes to Alternative Minimum Tax Rules
Legislative changes to the alternative minimum tax (“AMT”) were announced in the 2023 Federal Budget with changes to be in effect for taxation years starting after December 31, 2023.
The intention behind the AMT regime is to ensure individual taxpayers do not utilize credits, deductions, or exemptions to reduce their tax bill to an amount that is below a minimum threshold set by tax policy. AMT reduces the credits, deductions, and exemptions to ensure taxpayers pay a certain minimum amount on the income earned.
A taxpayer will be liable to pay AMT in a taxation year if their computed AMT is higher than the tax liability calculated under the “Ordinary Rules”. The amount by which AMT exceeds tax paid under the Ordinary Rules can be carried forward for 7 years. The AMT carry-forward can be used to reduce future taxes but only if the tax computed under the Ordinary Rules is higher than the AMT for those future 7 years.
Currently, individuals pay AMT in limited circumstances but the AMT changes introduced in the 2023 Federal Budget will start to impact individuals who make significant donations or receive stock options as compensation in 2024. The changes will also impact trusts.
AMT does not apply to corporations and certain trusts including graduated rate estates or in the taxation year in which an individual passes away.
Currently, federal AMT calculates a notional 15% tax rate on the Alternative Taxable Income (“ATI”) less a $40,000 basic minimum tax exemption from AMT. If the AMT is lower than the tax computed under the Ordinary Rules, then the individual is not subject to AMT.
Provincial AMT will also apply when federal AMT applies and is typically calculated as a percentage of federal AMT.
Proposed AMT Changes
Budget 2023 proposed the following changes to the alternative minimum tax:
- An increase to the federal AMT rate from 15% to 20.5%. In most provinces including British Columbia, the provincial AMT rate is a percentage of the federal rate.
- Changes to the calculation of ATI for AMT purposes.
- An increase to the basic minimum tax exemption from AMT from $40,000 to approximately $173,000 in 2024 . This means that AMT will only apply to ATI if it is higher than $173,000 which may carve out situations where AMT would have applied previously.
The chart below summarizes some of the differences in the computation of taxable income under the Ordinary Rules and the ATI as currently computed along with ATI under the proposed changes for taxation years starting after December 31, 2023.
Examples of the impact of the proposed AMT changes
These examples do not include provincial AMT which may also apply.
Example 1 – Capital Gains Eligible for The Lifetime Capital Gains Exemption
Daniel realizes a capital gain of $3,000,000 in 2024 on the disposition of shares that qualify for the lifetime capital gains exemption(“LCGE”). Under Ordinary Rules, the taxable capital gain is $1,500,000 and after Daniel claims a deduction of $500,000 his taxable capital gain is $1,000,000. For Federal AMT purposes (current and proposed) the gain that would otherwise be sheltered by Daniel’s LCGE is included in ATI at a rate of 30%. However, the $2,000,000 capital gain not sheltered by Daniel’s LCGE will be included in his ATI at a rate of 100% after 2024 as opposed to 80% if the gain occurs in 2023.
Daniel will be subject to AMT if this sale occurs in 2024. The numbers above do not include the provincial AMT, which will also apply.
Example 2 – Taxation of Stock Options and Impact of Donation of Securities vii
Caroline exercises an employee stock option and acquires shares of a publicly listed company with a value of $1,000,000 (strike price was nominal). She then disposes of these shares to a registered charity (a qualified donee). Under the ordinary rules, she will have a taxable employment benefit of $1,000,000 and can claim the stock option deduction along with the deduction for donated securities to offset the income. For AMT purposes if the transaction occurs in 2023 Caroline will include 40% of the stock option deduction in her income (i.e., $200,000 = $500,000 * 40%) and claim the deduction for the donation of the securities bringing her ATI in 2023 to nil. If the stock option is received and donated in 2024 then Carline’s ATI will be equal to the value of the stock option less 70% so that the stock option inclusion is 30% or $300,000 and will not receive a deduction for the donation of the securities.
As a result of the changes to the alternative minimum tax, Caroline will owe taxes after she has donated stock options even though she will not receive any cash to pay for these taxes. The numbers above do not include the provincial AMT, which will also apply.
Example 3 – Trusts with borrowings used to earn property income
An intervivos trust borrows funds and invests these funds. The Trust earns $100,000 of investment income and deducts $30,000 of interest paid incurred to earn the investment income. All remaining income of the Trust will be paid out to its beneficiaries as an income distribution and the Trust will receive a deduction for the distribution of this income. Under the Ordinary Rules and AMT for years prior to 2024, the Trust would not be subject to taxes. However, if the Trust cannot claim the AMT exemption, the Trust will be subject to tax as the interest deduction is reduced to 50% under the proposed AMT rules.
Example 4 – Donations of public company shares
Sarah earns $400,000 of employment income and also donates shares of a public company shares with a value of $1,000,000 and a cost of $100,000 resulting in a capital gain of $900,000. The capital gain realized on the donation of shares is not taxable in computing income under the Ordinary Rules and computing ATI for 2023 and prior years and Sarah can claim the full donation tax credit and carry-forward any unused amount. However, if the donation is made after the 2023 taxation year Sarah’s ATI for AMT purposes will include 30% of the capital gain and the donation tax credit will be reduced by 50%.
Before implementing any of the recommendations below you should speak to your business advisors as there are many factors (income tax and non-income tax factors) which should be considered prior to undergoing any transactions.
- If an individual is going to make significant donations, see if these can be made and claimed in the 2023 year.
- If an individual is planning on disposing of assets that will create a significant capital gain including dispositions which can be sheltered by the LCGE, see if the disposition can be completed in 2023.
- Exercise and donate stock options before the end of 2023.
- Have donations made by a corporation rather than an individual as a corporation is not subject to AMT.
- Keep the proposed increase of the basic minimum tax exemption from $40,000 to $173,000 in mind before implementing any significant planning.
Still Have Questions About Changes to Alternative Minimum Tax?
Manning Elliott can help clarify the implications of the AMT changes. Please get in touch with our tax experts or contact us through one of our Manning Elliott team members.
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NOTE: Tax laws are complex and are subject to frequent change. The contents of this article are not intended to represent legal or tax advice. Please consult your tax adviser before employing any strategies discussed within this article.
iFor example, an individual who claimed their lifetime capital gains exemption to shelter the capital gain on a disposition of a Qualified Small Business Corporation or Qualified Farm or Fishing Property.
iiOther than trusts included in paragraph 127.55(f)
iiiTrusts may not be eligible to claim the basic minimum tax exemption.
ivThis is equal to the lower limit for the fourth federal income tax bracket indexed for inflation.
vAssuming the deduction under paragraphs 110(1)(d) or 110(1)(d.1) applies.
viOther than expenses incurred to earn commission income
viiFrom the Explanatory Notes to Legislative Proposals for Budget 2023