Tax Hike Alert:  The New Alternative Minimum Tax (AMT) is Now Law

It’s not just the newly increased capital gains inclusion rate that is now law, but another significant tax change which has received less fanfare – the AMT or Alternative Minimum Tax – has now been passed into law under Bill C-59, passed on June 20, 2024.  The provision in effective, however, on January 1, 2024.  The big issue is that the AMT can affect the very people grappling with the capital gains inclusion rate increases.  The result is more retroactivity and more complexity.   Here’s what you need to know:

The Backdrop.  The AMT is an alternate tax calculation to the regular tax calculations on the personal tax return. It does not apply to  trusts including GREs (Graduated Rate Estates) and it does not apply to terminal T1 returns.  You will pay AMT when the tax resulting from its calculation is higher than the regular taxes payable.  So, two tax calculations are required by taxpayers who fall into an AMT profile, described below, and that increases both planning and compliance costs. 

In addition, if the AMT is payable, it may be fully or partially recovered as a minimum tax credit against regular taxes payable over the next 7 years.  Therefore, it’s a prepayment of high taxes on specific sources in one particular year; then an averaging down of those taxes against future regular income.   

But, aside from occasional high income earners, this tax also targets people with higher incomes who claim certain tax deductions or have high non-refundable tax credits – generous donors, for example.  It is intended to impute at least a minimum level of tax in situations where taxpayers significantly reduced their taxable income by claiming otherwise legitimate provisions. 

The AMT computation used prior to 2024 was made on Form T691 Alternative Minimum Tax for individuals. 

The New Rules.  The rules for the new AMT were first introduced in the  2023 federal budget, with  further changes occurring in the April 16, 2024 budget, which reacted to the significant outcry that occurred with the clawback of donation credit benefits.   Here are the primary components of the new AMT calculation

1. The previous $40,000 exemption available prior to 2024 will be increased to the lower limit of the fourth tax bracket ($173,205 for 2024).
2. 100% of capital  gains will be added to income for AMT purposes, an increase from the previous 80%(while there was no change to this AMT provision in the April Budget, it is noted that the capital gains inclusion rate for regular tax calculation purposes has since gone up to 66 2/3% on or after June 25, 2024 for capital gains over $250,000.) The 66 2/3% inclusion rate increases the taxable capital gains added to taxable income on line 26000 of the T1 and line 19700 of the AMT Calculation Form T691. 
3. Allowable business investment losses will now be included at a rate of 50% (similar to the regular tax calculation rules).
4. The rate applied to capital and non-capital losses being applied backward or forwards will be 50%.
5. The availability of the stock option deduction is removed.
6. The minimum tax net inclusion rate for capital gains that are subject to the lifetime capital gains exemption and income from donated stock options will be 30%
7. Donations:The exception for donation to qualified donees is removed: capital gains on gifts to qualified donees will be included at the 100% rate; other donations at 80%. An exception is provided for gifts of publicly listed securities, which will included at a 30% rate.
8. 50% of the following deductions will be added back to income for minimum tax purposes:
   • Employment expenses ( with an except for commission employees)
   • Deduction for CPP, QPP and PIPP contributions on self-employment income
   • Moving expenses
   • Child care expenses
   • Disability supports deduction
   • Interest and financing costs for earning investment income
   • Canadian arms forces and personnel deduction
   • Carrying charges
   • Non-capital loss carryovers
   • Northern residents deduction
   • Most non-refundable credits with these exceptions:
     •  donations, which will be included, as explained above, at 80%.
     • Full claims for federal logging tax credits
     • Fully exempt Employee Ownership Trusts
     • Include previously disallowed tax credits:
       1. Federal Political Contribution Tax Credit
       2. Investment Tax Credits
       3. Labour-sponsored Funds Tax Credit

Remember:  If taxable income is under the new threshold of $173,205 in 2024, alternative minimum taxes payable at 20.5% can be reduced or avoided in some cases.  Also note that with a few exceptions (including Graduated Rate Estates and Qualified Disability Trusts) most intervivos trusts will be subject to the new AMT but without the benefit of the $173,205 exemption).

Make a Difference.  Do the new complex tax math to help high income earners, investors and business owners understand the net effects of the new AMT and capital gains inclusion rules.  Remember, for AMT purposes, the taxable gain is the “non-taxable part of the capital gain” added to the T691 adjusted income calculation.  This will have to be adjusted to include the 33.33% tax free capital gains over $250,000 that occurred on or after June 25 in 2024.  That number is then reduced by mortgage foreclosures and conditional sales repossessions, gifts to qualified donees and capital gains from GREs, as well as income exempt by treaty on Line 25600.