13- Alternative minimum tax

The AMT was designed to ensure that all individuals¹⁸ pay their fair share of taxes and to prevent an undue reduction of taxes through devices such as the purchase of tax shelters with significant deductions or the realization of large capital gains.

In preparing their income tax returns, individuals must calculate taxable income twice – once to calculate their regular tax and a second time (referred to as adjusted taxable income) to determine whether they are subject to AMT.

The adjusted taxable income allows fewer deductions, exemptions and tax credits than under the ordinary taxable income calculation rules. For example, if only a part of the capital gain is taxable for the purposes of regular tax (see point 2 of this section), it is included in a larger proportion for the purposes of calculating the adjusted taxable income.

Once the adjusted taxable income has been calculated, the basic exemption amount is subtracted.¹⁹ The AMT is determined by multiplying the result of this calculation by the applicable fixed rate (rather than progressive rates as is the case for regular tax). The applicable rate for AMT and the basic exemption amount are indicated in your province’s Individuals Taxation tables. The calculation can be summarized as follows:

If the calculated AMT is higher than regular tax, the taxpayer must pay the difference in additional taxes. Where applicable, the additional taxes that the taxpayer must pay as a result of the AMT may be applied against regular tax payable in the next seven years provided he/she is not subject to AMT again.

Among the amounts that are likely to give rise to AMT are capital gains, the stock options deduction, tax credits for charitable donations, deductions related to a number of tax shelters, losses deducted by members of a limited partnership and non-active partners of a partnership, losses related to tax shelters, carrying charges related to these investments and interest charges which increase a loss on a rental property.

¹⁸ The AMT does not apply in the year of death.

¹⁹ For federal purposes, the basic exemption applies to the lower threshold of the fourth tax bracket. In Quebec, the amount is essentially equal. In Ontario and New Brunswick, the AMT corresponds to a percentage of the federal AMT.