Taxing Generosity: How Changes to the Alternative Minimum Tax (AMT) May Impact Your Donations

April 17, 2024 - UPDATE

The 2024 Federal Budget introduced several significant changes to the Alternative Minimum Tax (AMT) system, aimed primarily at high-income individuals and certain trusts. The tax treatment of charitable donations will be revised to allow individuals to claim 80% of the donation tax credit, up from the previously proposed 50%. Following feedback from the charitable sector regarding the 2023 draft, the 2024 budget introduces several proposed amendments:

• The capital gains inclusion rate for donations of shares or employee stock options of publicly-listed securities is raised from 0% to 30%.
• The capital gains inclusion rate for donations of property (excluding publicly-listed securities) is increased to 100%.
• Employee Ownership Trusts are exempt from the AMT.
• Deductions for the Guaranteed Income Supplement, social assistance, and workers' compensation payments are fully permissible.
• Individuals are permitted to fully claim the federal logging tax credit under the AMT.

December 1, 2023 - UPDATE

Good news! After facing significant pushback against their proposed changes to the Alternative Minimum Tax (AMT), the federal government has seemingly left off the new measures from the 2023 budget. The legislation was due to take effect on January 1st, 2024, but after Finance Minister Chrystia Freeland's economic update on November 30, the implementation bill's notable absence has left many scratching their heads as to when the AMT would commence. 

While these changes were projected to generate approximately $3 billion in revenue over the next five years and affect around 32,000 Canadians, it appears that the government has reconsidered its approach. And although there is still a possibility that the Department of Finance could proceed with the AMT, or a revised version thereof, there seems to be a growing awareness of the potential impact of taxing generosity.

We will continue to monitor the situation closely and keep you updated on any further developments. If you have any specific concerns or questions regarding your financial planning in light of these updates, please do not hesitate to reach out to us. 

Do you make large donations of cash or qualifying securities as part of a tax strategy? If so, due to changes in the Alternative Minimum Tax (AMT), 2023 could be the last year you receive full deductions and tax credits for these charitable contributions.

The AMT system is a parallel tax calculation in Canada and the United States that allows fewer deductions, exemptions, and credits than under the ordinary income tax calculation. An individual either pays the AMT or regular tax, whichever is higher.

The AMT excludes or reduces various preferential tax items that an individual may receive, such as the non-taxable portion of capital gains, stock options benefits, Canadian dividends, losses, and deductions related to limited partnership interests, tax shelters, etc.

In Canada, the current AMT basic exemption stands at $40,000 — available to all individuals. The budget proposes a significant increase, setting the exemption amount at the start of the fourth federal tax bracket, which is $165,430 for 2023 (and estimated to remain at $165,430 for 2024). In the United States, the AMT exemption amount is $74,450 for single filers and $114,600 for married couples in 2023. These amounts are annually adjusted for inflation in both Canada and the United States.

AMT can be triggered by many factors, including claiming large deductions or credits, receiving significant dividend income, or using your capital gains deduction.

Donations under the current rules

When you donate public company shares to a registered charity at fair market value, which have a capital gain, the capital gain is deemed tax-free. This option is advantageous for many high-net-worth individuals compared to donating cash because the tax-free capital gain complements your eligibility to claim the full donation tax credit, further reducing both federal and provincial taxes.

Proposed Changes – The Department of Finance draft legislation August 4, 2023

Under the proposed rules, a taxpayer can only use 50% of the donation tax credit on eligible charitable donations (including cash donations) and 30% of capital gains on donated shares will be included in income for AMT.

How will these changes impact the way your donations are taxed?

The four examples below are from PearTree’s AMT – Taxing the Rich’s Generosity.

Example 1 – The Techie

• A portion of his shares of a public company will be monetized in a takeover.
• Gains $10M and wishes to donate $3M of the securities before the sale.
• Additional facts: $400,000 salary, $20,000 carrying charges, and $25,000 of other donations.

• The full value of the marketable security gift of $3M is realized.
• No AMT in 2023

• An AMT of $906,485 will be liable, which is federal.
• Add a provincial element.

Example 2 – Sale of a Real Estate Company

• Mrs. A sells the shares of her private company to a REIT.
• Capital gain of $40M
• Gifts $10M to university 
• Annual income of $400,000

• No AMT effect

• $3,128,085 (about half re-gain and rest re-charity)
• This is federal – add provincial AMT of $4M-$5M.
• Recoverable?

Example 3 – Gift of Apartment

• Mrs. B, age 88, will donate an apartment building to a low-cost housing charity.
• Value $5M, ACB $1M, UCC $400,000
• Other income: pension, investments of $400,000
• Other donations: $50,000
  

• No AMT effect

• AMT of $500,585, which is federal.
• Add a provincial element.
• Due to the utilization of donation carry-forward, the recovery of the AMT is expected to be slow.

Example 4 – Estate Planning

• Mr. C owns preferred shares of Co. C (children own common)
• Donate shares to the hospital. After, shares are redeemed for cash.
• Value $4M, ACB of 0
• Other income: $300,000

• No AMT in 2023

• AMT of $476,335, which is federal.
• Add a provincial component.

Bottom line

There are strategies to reduce or avoid AMT, including, but not limited to, deferring preferred tax-treated income or discretionary deductions, having your investment portfolio earn more income at full rates, and increasing your employment income instead of dividends.

To prepare for these potential changes to AMT, you should plan ahead.

• Contact your accountant to understand how the AMT changes will affect your personal situation.
• Understand how the AMT changes will impact your philanthropic goals.
• Consider accelerating your philanthropic plan and make donations before January 1, 2024.
• It may be beneficial to donate through your will – AMT does not apply in the year of death.