The impact of proposed Alternative Minimum Tax changes
Introduced in 1986, the Alternative Minimum Tax (AMT) is intended to prevent high‑income earners and trusts from paying little or no tax as a result of claiming certain tax incentives and deductions, and from earning certain income substantially in the form of dividends and capital gains.
Currently, the AMT applies at a flat 15% rate, with a standard $40,000 exemption. A taxpayer must pay the higher of the AMT calculated on an adjusted taxable income figure and income tax calculated under ordinary tax rules. If the AMT is applicable in a particular year, the taxpayer can recover this amount paid against their regular income tax for a carry‑forward period of seven years. Any unutilized AMT not applied after seven years from when it was incurred is lost.
Budget 2023 announced significant changes to the AMT regime, including increasing the AMT base used in arriving at the adjusted taxable income figure, raising the AMT exemption and increasing the AMT rate. The current carry‑forward period of seven years is unchanged. The new rules take effect Jan. 1, 2024.
The chart below outlines proposed key changes in determining the adjusted taxable income figure.
Proposed changes |
Current rules |
|
Capital gains |
100% included |
80% included |
Employee stock option benefits |
100% included |
80% included |
Capital loss carry‑forward |
50% deductible |
80% deductible |
Allowable business investment loss |
50% deductible |
80% deductible |
Capital gains on donation of publicly traded securities |
30% included |
0% included |
Interest expense and carrying charges |
50% deductible |
100% deductible |
Non‑capital loss carry‑forward |
50% deductible |
100% deductible |
Limited partnership losses of other years |
50% deductible |
100% deductible |
Most non‑refundable tax credits, including donations |
50% deductible |
100% deductible |
For the 2024 tax year, the AMT exemption is anticipated to be $173,000 (indexed each year) and the AMT rate will increase to 20.5%.
Certain inter vivos trusts not excluded from the AMT rules or that do not qualify for the basic exemption may be impacted by the proposed changes. For example, if an inter vivos trust has a prescribed rate loan in place and the trustees allocate all taxable income to the beneficiaries each year, as the new AMT rules only deduct 50% of interest expenses, the trust will now have adjusted taxable income under the new rules, exposing it to the AMT – unless the trustees do not distribute all taxable income to the beneficiaries, ensuring sufficient regular income tax is paid in excess of or equal to the AMT. As such, these trusts may now face increased taxes.
The Department of Finance held a consultation period on the draft AMT legislation, ending Sept. 8, 2023. At the time of this writing, no further public comments were provided as to what changes, if any, may be made to the legislation before Jan. 1, 2024.
Should you have any questions about the new AMT regime and its impact on your tax situation, please contact us.