How will changes to Alternative Minimum Tax impact your charitable giving?

Jared Pilon

How does AMT work?

AMT typically applies to individuals who receive a significant portion of their income through sources such as dividends and capital gains. Also, if a taxpayer uses specific credits or deductions to significantly reduce their tax owing, AMT can apply.

Taxpayers are required to calculate federal tax owing based on both regular and AMT methods. The higher calculated amount of tax is then the individual’s tax liability. AMT (prior to Budget 2023 amendments) is calculated as an individual’s ‘adjusted taxable income’. This is determined by adjusting net taxable income by certain preferential tax items including tax shelter deductions, interest, lifetime capital gains deductions and others. Adjusted taxable income is then reduced by the current exemption amount of $40,000. Tax is calculated at 15% prior to various non-refundable tax credits being applied. The most notable circumstance in which AMT typically applies is via the sale/transfer of small business shares during one’s lifetime.

If a taxpayer pays AMT in a particular year, the difference between the calculated AMT tax and tax through the regular method is then carried forward to future years. This credit can then be applied in the next seven years to offset future taxes. The credit must be used within that seven timeframe, or it will be lost forever.

What to expect in 2024

The AMT rate will increase to 20.5% (currently 15%) resulting in individuals who are subject to AMT having to pay more tax as a result. Also, the basic exemption of $40,000 will increase to $173,000. This will result in fewer middle-income Canadians being subject to the AMT regime.

The following income and deduction/credit amounts will also change for tax years after 2023:

Income/Deduction/Credit Change Current AMT Rule Amended AMT Rule
Capital gains Increase 80% 100%
Capital losses Reduce 80% 50%
ABIL Reduce 80% 50%
Stock option benefits Increase 80% 100%
Gain on donation of shares Increase 0% 30%
Certain deductions Reduce 100% 50%
Certain credits Reduce 100% 50%

 

How will this impact charitable giving?

Depending on the donor’s personal tax situation, AMT could be triggered if a charitable gift is made in 2024 when it otherwise would not have been triggered in 2023. This would typically be the result of a taxpayer earning tax preferred income (dividend income, capitals gains or employee stock options) while also making a charitable gift.

Donation tax credit

Under 2023 rules, the donation tax credit can be fully applied against any AMT. In 2024, only 50% of the donation tax credit with respect to AMT will be allowed. This should not be the case if the high-income earner receives their income via wages or rental income as these sources of income are fully taxable.

Capital gains

Currently, only 50% of capital gains are included in adjusted taxable income for AMT purposes. The revised rules will include 100% in the calculation. If a capital gain is seen in conjunction with a significant donation, this could increase AMT. This can be seen via the sale of a business or real estate.

Dividend income

Dividends alone will generally not trigger AMT. When coupled with a cash donation however, AMT could arise in 2024.

Publicly listed securities

Current rules allow for donors to make in-kind donations to a registered charity of publicly listed shares or units of a mutual fund (or segregated fund) and in turn receive a tax receipt equal to the fair market of the securities. Additionally, the donor does not pay capital gains tax on the appreciated value of the donated shares. This current rule applies for AMT purposes as well.

Beginning in 2024, 30% of the capital gain on the donated shares will be included in adjusted taxable income under the new AMT rules. As AMT does not apply to corporations or estates, in kind donations from a private corporation or an estate will not be impacted by the AMT changes.

Employee stock options

Starting in 2024, 100% of employee stock options will be included in adjusted taxable income for AMT purposes, up from 50% in 2023. Where a donation is made of a qualified employee stock option of publicly traded shares, no benefit is included in income in 2023. In 2024, 30% of the benefit will be included in income for AMT.

AMT carryover

If you are required to pay AMT, you have 7 calendar years in which to recover amounts paid under the AMT system. This can be difficult if you are subject to AMT to due to a business sale, thus resulting in less income in subsequent years. While situations vary, a taxpayer will likely need in excess of $75,000 annual income to recover AMT in a subsequent year. This presumes this income is not comprised of further preferential sources.

Planning options

As noted above, the new AMT rules could potentially result in tax owing due to making large donations after 2023. Consider the following options when making donations in the future to avoid being negatively impacted by the new AMT rules:

  • Consider making a lump sum donation in 2023.
  • AMT does not apply in the year of death. Consider large donations through your will.
  • Consider AMT implications prior to donating to ensure you plan accordingly for the tax.
  • Ensure you have taxable income in years after a large donation to ensure you can recover any AMT paid.

Conclusion

Alternative Minimum Tax rules are a complex aspect of the Income Tax Act. The rule changes outlined in Budget 2023 will complicate matters further.

Reach out to Legacy Tax & Accounting LLP at reception(at)legacytax.ca to discuss how the changes to the AMT regime might impact you and the steps you can take to reduce AMT or use existing AMT credits.

Posted: 11/20/23