New AMT Rules must be considered by high income individuals with low tax bills

MONDAY, OCTOBER 30, 2023 

New Alternative Minimum Tax (“AMT”) rules have been designed to increase tax paid by high income Canadians who currently shelter their taxable income through deductions. Although AMT has been around for many years, these new rules will be significantly more expensive for a small portion of high income earners.

AMT makes adjustments that have the impact of increasing taxable income but then applying a lower tax rate then the normal high marginal tax rates.  These adjustments to taxable income relate to a higher inclusion rates for capital gains and lower levels of deductions and credits for a variety of items including interest and donation credits.  A flat tax rate is then applied to the AMT taxable income and the result is compared to the regular taxes payable.  Generally, the regular tax is higher for the vast majority of Canadians.  However, if you have a very high proportion of total income in the form of capital gains or if you have very large donations or expenses in relation to your other income then AMT may kick in.

The key changes to the rules:

  1. The combined minimum tax rate has been increased to 20.5% federally from 15%. If the Ontario government mirrors the federal changes this means the AMT combined rate will increase to approximately 32% combined federal and provincial from the current rate of 22%.

  2. AMT rules have always provided a basic deduction that provides some relief.  That basic deduction has been increased from $40,000  to $173,000 providing that low and middle income earners will not be impacted.

  3. A variety of rules have been put in place to increase the calculation of the AMT taxable income.  The primary items increasing AMT taxable income under the new regime include:

-       Including 100% of the taxable stock option benefit with employee stock options while in 2023 only 80% was included.

-       Including 30% of the capital gains on donations of publicly-listed securities  - while in 2023 none was included.

-       Disallowing 50% of various deductions including charitable donations and investment interest expense.

-        Inclusion rate for capital loss carried forwards and carrybacks will now be 50% which is reduced from 80% currently. This will lead to a difference in the inclusion rate between capital gains at 100% compared to capital loss carryback or forward that is applied to it at 50%. Historically, the carrying back or forward of losses has not generated AMT - but this will change in the future.

 A couple of examples of where AMT can kick in are illustrated here:

 Illustration #1:

 Julie makes $750,000 a year in salary. She has a stock portfolio that is doing very well . She decides to donate public company securities with an accrued gain and a fair market value of $500,000. Under the old rules Julie’s tax bill is $107,000. Under the new rules Julie’s tax bill increases to $149,000, because $42,000 of AMT now applies to her donation of public company securities.   

 Illustration #2:

Tom usually has employment income of  $200,00 a year. In 2024 he sells shares he acquired under his employers share plan for $2 million.  He exercised the private company options 5 years for $1.  All the shares are eligible for the stock option benefit. Under the current AMT rules there is no additional tax. Under the new 2024 AMT rules there is approximately $47,000 of additional tax.

Illustration #3:

Ainsley has a great win on a public company stock and realizes a capital gain of $2 million. She also has a full time job making $200,000 a year. Under the current AMT rules there is no additional tax. Under the new 2024 AMT rules there is approximately $47,000 of additional tax.

Illustration #4:

Alexandra sells her company for $1 million and is very excited because she can shelter $971,190 of her capital gain using the tax free capital gains exemption for private companies. She has no other income for the year. Under the old rules she would pay approximate $50,000 in AMT. Under the new rules she will pay approximately $46,000.

Illustration #5:

Peter has a leveraged portfolio. Due to higher interest rates he is now paying $400,000 in interest and earns $500,000 of public company dividends. He pays no regular personal tax but will pay approximately $11,000 in AMT under the old rules. Under the new rules his AMT increases to approximately $40,000.

 If you have any questions or would like assistance in determining if the new AMT rules impact you please reach out to a member of the RMR team.