Alternative Minimum Tax Changes – What You Need to Know

Did you know that Canada’s Federal Budget has proposed changes to the Alternative Minimum Tax (AMT) rules, with draft legislation coming into effect on January 1, 2024? Understanding what AMT is and how it affects your tax planning is crucial, especially with these upcoming changes. 

What is AMT? 

Introduced in 1986, the AMT is a parallel tax system to the regular tax system that applies to individuals, but not to corporations. Essentially, individuals must pay the higher of the AMT or regular tax. To determine this, regular tax is first calculated using progressive tax rates. Then, taxable income for AMT is calculated by adding back certain “preference” items into your regular taxable income. 

There is an exemption amount of $40,000* that is deducted from the AMT taxable income. Any excess income is taxed at a flat rate of 15%*, with certain non-refundable tax credits allowed to reduce the amount of tax owing. If your AMT taxable income is under $40,000, AMT will not apply, and only the regular tax will be payable. Additional tax paid under the AMT can be carried forward as a credit to offset regular tax for up to seven years. It's important to note that AMT does not apply in the year of a taxpayer’s death. 

What are the Changes? 

The 2023 Federal Budget proposes to broaden the tax base subject to AMT, increasing the tax rate while also increasing the exemption amount. Here are some key highlights of the proposed changes: 

• Increased Exemption Amount: The new rules propose to raise the exemption amount from the current $40,000*. 

• Higher Tax Rate: The flat tax rate applied to AMT taxable income above the exemption amount will be increased. 

These changes could result in AMT applying if your taxable income (calculated for AMT purposes) exceeds $173,000. This includes situations with large capital gains, significant interest deductions (such as from leveraging strategies), or large donations (especially gifts of capital property). 

What Do You Need to Do? 

To navigate these changes, it's important to be aware of the implications of AMT when there are large capital gains in a year and plan accordingly. Starting in 2024, you will also need to consider the impact of significant interest deductions and large donations, particularly gifts of capital property, as these may affect your taxable income for AMT purposes. 

If you think AMT may apply to you, contact WealthCo to discuss your planning options. Our team is here to help you understand these changes and develop strategies to optimize your tax situation. 

At WealthCo, we are committed to providing you with the information and support you need to make informed financial decisions. Contact us today to ensure you are prepared for the upcoming changes to AMT. 

*The $40,000 exemption amount and the 15% tax rate are accurate as of the date of this article. 

November 8, 2023 | Author: The Link Between