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Alternative Minimum Tax – When Does It Apply, How, And For Whom?

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A Registered Disability Savings Plan (RDSP) is a tax-sheltered savings vehicle designed to help families ensure the long-term financial security of a loved one affected by disability.

While Alternative Minimum Tax (AMT) might not be a common discussion point amongst all taxpayers, it’s a concept that’s very worthwhile to understand.

If you reduce a large part of your income by deductions, you might be subject to the AMT. Examples of common deductions for Sweeney Bride clients would be RRSP contributions or flow-through share purchases.

Read what our colleagues at Wellington-Altus have to say about the applications of AMT.

 

BACKGROUND

The Alternative Minimum Tax (AMT)1 is a second, alternate tax liability calculation that Canadian individuals and trusts must consider annually in parallel with their normal tax liability. First introduced in 1986, AMT was implemented to promote and maintain fairness within Canada’s income tax regime.

Simply, if a taxpayer’s AMT liability exceeds their normal tax liability otherwise calculated, the AMT represents their federal tax liability for the year. There are a few exceptions to AMT, such as in the year of death or bankruptcy for individuals, or for certain types of trusts including alter ego or joint spousal, mutual fund, or employee life and health trusts.

[1] This communication addresses Federal AMT only, not provincial or territorial AMT.

How does it work?

The AMT was designed to ensure that high income earning Canadians do not disproportionately reduce their tax liability by applying various tax advantages, such as reporting considerable exempt income or claiming significant tax deductions or credits. Most taxpayers are unaware of AMT’s existence as they don’t trigger its application. Rather, their normal tax liability calculated exceeds AMT thresholds.

AMT is calculated on Form T691 Alternative Minimum Tax for individuals, or T3, Schedule 12 Minimum Tax for trusts, by:

  • Reporting normal taxable income (“Taxable Income” on Line 26000 on a T1 Income Tax and Benefit Return and Line 56 for a T3 Trust Income Tax and Information Return).
  • Adjusting for a variety of tax advantages such as increasing taxable income inclusion rates, reducing the deductibility rates for deductions, or limiting tax credits and carry-overs being claimed to determine an “Adjusted Taxable Income” (ATI), commonly known as the AMT Base.
  • Applying the AMT Exemption. For 2023 the federal AMT Exemption is $40,000.
  • Applying the AMT Rate to the net ATI (i.e., ATI less the AMT Exemption). For 2023 the AMT Rate is 15%, which represents the lowest federal marginal tax rate.
  • Deducting allowable non-refundable tax credits from the AMT tax calculated.

When is AMT most often triggered?

Canadian individual taxpayers claiming significant tax-advantaged gains or deductions relative to their income are most likely to trigger AMT. These may include the Lifetime Capital Gains Exemption on qualified capital property, tax shelters such as flow-through shares and/or limited partnerships that reported losses, significant interest and/or carrying charges, or substantial employee stock option deductions, dividend income or share donations.

AMT is not generally an additional tax liability. Rather, it should be viewed as a prepayment of tax given the associated carryforward and credit provisions. If a taxpayer is subject to AMT in a particular year, the difference between their AMT liability and normal tax liability can then be applied as a credit to reduce any normal tax liability to the extent that it exceeds a calculated AMT tax liability over the next seven years, or until the credit is used up, whichever comes first.

AMT changes announced in the 2023 Federal Budget (Budget 2023)

Budget 2023 announced three key proposed changes to the AMT for taxation years that begin after 2023, namely:

  1. Additions and adjustments to broaden the ATI or AMT Base calculation.
    Budget 2023 proposals added to and adjusted the current tax advantages included in the ATI or AMT Base calculation. Table A outlines all proposed additions and adjustments to ATI or AMT Base.
  2. Raising the AMT Exemption from $40,000 to an estimated $173,000 for 2024, which is the fourth federal marginal tax bracket.
  3. Increasing the AMT Rate from 15% to 20.5%, which is the second lowest marginal tax rate.

With these proposed changes, it’s expected that more than 99% of AMT collected would be paid by taxpayers earning over $300,000 annually, and 80% of the AMT would be paid by those earning over $1 million annually. Clients contemplating 2024 tax events and who may be concerned about AMT being triggered should consult their tax advisor.

Table A – Budget 2023 Proposed Changes to the Alternative Minimum Tax Base Calculation

The table below summarizes the changes to the calculation of the AMT Base proposed in Budget 2023. The rates in the “Taxable Income” column reflect the percentage included in or deducted from income and the tax credits available when calculating the normal tax liability, assuming all criteria for the deductions and credits are otherwise met and limits are not exceeded.

Changes to the AMT: An example

The following example illustrates how the proposed Budget 2023 changes would affect the AMT Base calculation when applied.

Mr. March reported taxable income of $2,150,000 on line 26000 of his T1. Reflected in his taxable income are the following amounts:

  • Disposition of his qualified farm corporation shares (proceeds $5,000,000, ACB/PUC $1).
  • The lifetime capital gains exemption (LCGE) of $1,000,000 was applied to his qualified farm corporation shares.
  • Charitable donation of $250,000. Recognizing his good fortune he donated shares from his Wellington-Altus non-registered account worth $250,000 (ACB $150,000).
  • Interest and carrying charges related to his non-registered account of $10,000.

Given his taxable income and tax credits claimed, would Mr. March trigger AMT in 2023 under the existing rules, or in 2024 given the proposed changes outlined in the 2023 Budget?

For 2023, Mr. March does not trigger AMT since only a portion ($1M/$5M = 20%) of his capital gain relating to his qualified farm corporation shares are shielded from income tax using his LCGE. His federal tax rate was close to 28% – almost double the AMT rate of 15%. If his proceeds on the qualified farm corporation shares had been significantly lower, say $1,500,000, AMT would have been triggered as only a sixth of the capital gain would be subject to tax ($1,500,000 CG – $1,000,000 LCGE = $500,000 * 50% inclusion rate = $250,000) at an average federal tax rate close to the AMT rate.

For 2024, the changes to AMT announced in the 2023 Budget mean that Mr. March’s ATI/AMT Base calculation more than doubles to $4,485,000 – by increasing regular capital gains to 100%, adding back 30% of capital gains related to donated shares, and reducing the deduction relating to interest and carrying charges by 50%. The increased ATI/AMT Base, even netted with the higher exemption of $173,000, being subject to the announced AMT rate of 20.5% triggers AMT for Mr. March in 2024.

A detailed breakdown of his normal and AMT tax liability calculations for 2023 and 2024 is shown in the below Table B.

Table B – Mr. March’s anticipated Normal Federal Tax Liability and AMT Tax Liability

* 2023 and 2024 Federal Tax Rates and Tax Brackets anticipated to be the same.
** Charitable donation of $250,000 reported. Donation was funded by shares from his non-registered account which had a FMV of $250,000 and an ACB of $150,000, thus capital gain of $100,000.
*** Interest and carrying charges of $10,000 relating to non-registered account.

The opinions contained herein are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Wellington-Altus Private Wealth. Assumptions, opinions and information constitute the author’s judgement as of the date this material and subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. All third party products and services referred to or advertised in this presentation are sold by the company or organization named. While these products or services may serve as valuable aids to the independent investor, WAPW does not specifically endorse any of these products or services. The third party products and services referred to, or advertised in this presentation, are available as a convenience to its customers only, and WAPW is not liable for any claims, losses or damages however arising out of any purchase or use of third party products or services. All insurance products and services are offered by life licensed advisors of Wellington-Altus. Wellington-Altus Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. All trademarks are the property of their respective owners.

Amy Sweeney

AMY SWEENEY

Associate

Amy was born and raised in Squamish, is David’s oldest daughter and now the newest member of the Sweeney Bride team. Many may recognize her as she has worked periodically for the team for over 20 years. For the past five years, she has gained administrative experience and more running her own business as a Kinesiologist after completing a bachelor’s degree in Kinesiology at the University of British Columbia in 2016. Now, Amy is officially ready to join the finance industry. Currently residing in North Vancouver, Amy spends all her “free” time raising Dave’s two wonderful grandchildren.
Liam Hill

LIAM HILL

Associate Investment Advisor

Originally from Sydney, Australia, Liam moved to the Sea to Sky region in 2013, leaving the beaches behind to embrace the mountains. He hasn’t looked back since and enjoys exploring the wilderness by both land and sea.

Liam’s unique strength lies in his capacity to adapt and fine-tune strategies to match the ever-changing financial world. He’s a passionate advocate for adaptability and flexibility, believing these traits are crucial for securing financial well-being.

Liam holds the Canadian Securities Course qualification and is currently pursuing the Chartered Investment Manager (CIM) designation.

He shares his industry knowledge and business skills to empower individuals, families, and businesses on their path to financial success.

Liam is committed to educating our clients about the financial services industry and helping them make the most of available resources to achieve prosperity.

SHARON FIELDS

Administrative Assistant

Sharon worked for Sweeney Bride from 2014 to 2016 and recently rejoined the team as an Administrative Assistant in 2021. She has years of administrative experience in a variety of industries including working in legal and accounting firms. She enjoys being detailed, organized and efficient. When not hard at work, she enjoys exploring the great outdoors with her dogs, playing co-operative strategy board games and relaxing while sipping a nice Craft beer.

Carrie Freitag

CARRIE FREITAG

Administrative Assistant

Carrie is the newest member of our team and is our Administrative Assistant. She has previous industry and administrative experience and her fascination with the finance industry is rapidly growing. Carrie moved to BC in 1994 from Ontario and never looked back. While not working she loves hanging out with her two kids, awesome cat Leo, and enjoys a competitive game of 21, and her gardens.

Katie Norton

KATIE NORTON

Associate

Katie is a Business Administration graduate who joined the Sweeney Bride team in 2016. She takes care of on-boarding as well as managing account administration for our existing clients. She works hard to ensure the clients feel supported throughout the on-boarding process and is always available to answer questions.

A BC resident since 1997, Katie and her husband moved to Squamish to raise their two girls. They enjoy all of the outdoor activities and natural beauty that Squamish has to offer.

Liz Woodsworth

LIZ WOODSWORTH

Office Manager

Liz joined the Sweeney Bride team in 2015 as office manager. She is the gatekeeper in the office and is the face that greets you as you come through the door. If she can’t help you, she will ensure you speak with someone who can. Liz is a long-time Squamish local; when not in the office she spends her days soaking up all that this town has to offer while chasing her two active boys. Liz brings her valuable organizational skills and enthusiastic attitude to the team. 

Janet Bride

JANET BRIDE

CFP®, CIM® | Senior Wealth Advisor

Janet Bride is a Senior Wealth Advisor at Wellington-Altus Private Wealth and co-founder of the Sweeney Bride Strategic Wealth Advisory team.

With over 15 years’ experience in the Industry Janet holds the Chartered Investment Manager (CIM®), CERTIFIED FINANCIAL PLANNER®, and Elder Planning Counselor (EPC) designations and is also Insurance licensed.

Janet grew up in Ontario and moved out to beautiful British Columbia in 1995 with her husband, Paul, who is an adventure travel photographer. Her passion is to travel the world. Always interested in exploring different cultures and landscapes, she is grateful to have traveled to over 50 countries across 6 continents. She also enjoys continuous learning, spontaneous adventures with family and friends, and an active lifestyle in the Sea to Sky. Janet is proud to be a Big Brothers Big Sisters Alumni member since 2004.

She is highly motivated by helping people reach their financial dreams by creating comprehensive financial plans for individuals & families. While using a holistic approach to wealth management, she specializes in tax strategies and her goal is to encourage savings and help build our client’s wealth for a healthy and prosperous future.

David-Sweeney

DAVID SWEENEY

CFP®, CIM® | Senior Wealth Advisor

Dave Sweeney is a Senior Wealth Advisor at Wellington-Altus Private Wealth and co-founder of the Sweeney Bride Strategic Wealth Advisory team.

With over 31 years’ experience in the Industry Dave holds the Chartered Investment Manager (CIM®), CERTIFIED FINANCIAL PLANNER®, and Elder Planning Counselor (EPC) designations and is also Insurance licensed.

Dave has lived in Squamish for most of his life. Married to his wife Donna, since 1987, they proudly have 3 lovely daughters, Amy, Danielle and Jamie. With his time in Squamish, it has allowed him an opportunity to become involved in many valuable groups.

Dave is a retired Captain of Squamish Fire Rescue after 35 years of service. Another passion was sports and he has been a coach for Squamish Youth Soccer Association where he dedicated 10 years to coaching girls Rep teams. Additionally, he is a former member and Treasurer of the Sea to Sky Community Services Board. Dave is a frequent contributor to Mountain FM’s Mountain Monitor, providing general advice and financial commentary.

Dave continues his volunteer work as Treasurer for both the Squamish Hospital Foundation and the Squamish Downtown Business Improvement Association. He is also a sitting Board member of the Squamish Community Foundation.

Professionally, Dave started his Financial Planning practice in 1994. After living through both his parents’ demise and witnessing what a lack of understanding they had, he realized what sound planning techniques could do to ensure that an untimely death did not destroy one’s lifetime work. For over 20 years, he has made it his passion to assist others in not facing the same plight.