These changes impact high-income taxpayers, particularly individuals (and trusts) who realize a significant capital gain, especially one that is not eligible for the capital gains deduction (CGD).
Example: In 2023, before the changes, an individual earning a salary of $150,000 and receiving dividends of $100,000 could realise a capital gain of $3 million and claim their full capital gains tax credit without having to pay any AMT. That same individual would have to pay just over $100,000 in AMT under the new parameters, as of 2024.
AMT: beware of the amounts due
An entrepreneur who sells his shares at the end of his career could end up paying a large AMT, with no possibility of recovering it if he has no other source of income after retirement, such as salary or RRSP withdrawals.
Since only 50% of non-refundable tax credits (including the charitable donation tax credit) will now reduce the AMT, these changes will affect taxpayers who make large donations. Individuals who receive a significant taxable benefit in connection with the exercise of stock options may also be affected, as such a benefit will now be considered 100% for AMT purposes (with no deduction).
Finally, individuals and trusts that deduct significant financial expenses (interest, broker’s fees, etc.) often find themselves facing an AMT bill, which may recur if the composition of their income remains stable from one year to the next.
AMT in brief
The AMT aims to ensure that all individuals (including trusts) pay their fair share of tax. It is a parallel calculation to regular tax that allows fewer deductions, exemptions and tax credits than the ordinary rules.
When filing their tax return, individuals must pay either the AMT or regular tax, whichever is higher. The additional tax thus payable in one year can be recovered over the following seven years, to the extent that the regular tax exceeds the AMT in those years.
Estimate the impact and plan ahead!
The AMT may have a significant impact on the taxpayers concerned. Careful planning can mitigate this impact and ensure that the amounts paid are recovered.
Consult your tax advisor to discuss these measures and assess their impact.