In the 2023 Federal Budget, the Canadian government proposed changes to the country’s alternative minimum tax (AMT) regime. Many people are unaware of what this tax is and how it could impact them. In this article, we will explain the AMT and outline the proposed changes in the 2023 budget.
The alternative minimum tax, explained
The alternative minimum tax is a way for the Canadian government to ensure that all taxpayers, including those who have benefited from preferential tax deductions and credits, pay a minimum amount of tax. Each year, your tax owing is calculated under the normal method, which takes into account 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. If the second calculation results in a higher amount owing, you will pay this higher amount, which is the AMT.
Normally, most Canadians are not subject to the AMT. However, if you have claimed a preferential tax deduction like the capital gains deduction or have preferential tax rates due to credits, such as dividend tax credits, you may be subject to 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. If you do not have taxable income in these years, this AMT will be lost.
What is being proposed in the 2023 Federal Budget?
The 2023 Federal Budget includes proposed changes to the current AMT regime which, if enacted into law, will apply to taxation years that begin after 2023. The proposed measures 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.
- 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 proposed 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.
This article is a general discussion of certain tax and accounting matters and should not be relied upon as tax or accounting advice. If you require tax or accounting advice, we would be pleased to discuss the issues in this article with you.
