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