Last updated: Nov. 29, 2024 

Alternative Minimum Tax (AMT) Changes: Everything You Need to Know 

While most Canadians are never subject to Alternative Minimum Tax (AMT), business owners and farmers who generate high income – such when they go to sell property, like land or buildings – may find themselves surprised when they are suddenly subject to this alternative tax regime.

Recent changes to the AMT have broadened its tax base, potentially making the tax apply to more Canadians.  

The goal of this article is to help you walk away with a basic understanding of how the tax works, what has changed, and how it may affect you. As always, there are complex rules that govern AMT, so it is best to seek tax advice from a qualified provider. 

What is the Alternative Minimum Tax (AMT)? 

AMT was introduced in 1986 to address concerns that some individuals and trusts with high gross incomes paid little or no income tax. As per above, business owners and farmers selling farm property and incurring significant capital gains are the ones most likely to be affected 

For example, in an agriculture tax situations when farm property such as land is sold, and the calculation of specified expenses and income exceeds $173,000. This amount is subject to a flat tax currently set at 20.5%.  

AMT is carried forward seven years and may be used to offset any tax payable in those years.  Please note that AMT is not assessed on a Date of Death return. 

Who Pays AMT In Canada? 

AMT applies to: 

• High-income individuals: Those with substantial income from capital gains, dividends, or stock options and who claim significant tax deductions. 
• Trusts: Many trusts, especially those without significant income, can be subject to AMT. 
• Not Corporations: Corporations are not subject to AMT.  

While there is no set minimum for AMT, anyone with taxable income, including capital gains, greater than the highest marginal tax bracket (over $246,752 for 2024) could be subject to the AMT. 

Furthermore, when the AMT changes were initially introduced as part of Budget 2023, the government said the changes would mean: 

• 99% or more of the AMT will be paid by individuals earning more than $300,000 annually. 
• 80% of the AMT would be paid by those earning more than $1 million per year. 

How Does AMT Work? 

To figure out your tax liability as a high-income earner, you must calculate your tax using the income tax rate for individuals and AMT.  

• Marginal Tax Rate: This is calculated using standard tax brackets, deductions, and credits through personal income tax. This is your normal tax return. 
• AMT: This uses a separate calculation based on “adjusted taxable income,” also called the base AMT. This income includes your net taxable income plus specific “tax preference items” like: 
  • Tax shelter deductions 
  • Interest on tax shelter loans 
  • Employee stock option deductions 
  • Capital gains (including the Lifetime Capital Gains Exemption) 
  • Canadian dividends 

The two tax calculations are compared, and you will always pay the higher tax. 

Calculating AMT: Exemptions and Carryovers 

Under the AMT, your adjusted taxable income is reduced by a base exemption amount ($173,000 under the new rules) and multiplied by the AMT tax rate. Certain non-refundable tax credits are then deducted to determine your AMT amount. 

You pay the AMT plus any provincial AMT if your AMT calculation exceeds your regular tax calculation. 

There are also some other factors to consider: 

• Exemptions: While rare, certain situations, such as the year of death or personal bankruptcy, exempt you from AMT. 
• Carryovers: If you pay AMT, you can carry forward the difference between your AMT and regular tax for up to seven years. This is a tax credit that can be used to offset non-AMT tax payable in future years. However, any unused amount is lost after this period. 

What are the AMT Changes? 

The new AMT tax rules will broaden the tax base and generate more tax revenue for the government. Here is a run-down of the changes: 

• Higher AMT rate: Increased to 20.5%, resulting in higher taxes for those subject to AMT (up from 15%). 
• Increased exemption: The basic exemption rose to $173,206, reducing the number of middle-income taxpayers affected (up from $40,000). 
• Expanded tax base: More income types and deductions are now included in AMT calculations: 
  • Capital gains inclusion increased to 100% (up from 80%). 
  • Deductions for capital losses and business investment losses were reduced to 50%. 
  • Employee stock option benefits are now fully included. 
  • 30% of capital gains on donated shares or stock options are included. 
  • Certain deductions (e.g., interest or carrying charges to earn property income, certain employment expenses, etc.) and non-refundable tax credits (e.g., basic personal amount, medical expenses, etc.) are reduced to 50%. 
• Changes to credits and deductions: 
  • Charitable donation tax credits were reduced to 80% (down from 100%). 
  • Deductions for guaranteed income supplement, social assistance, and workers’ compensation are now allowed. 
  • Federal logging tax credit can now be claimed. 
  • Certain denied credits, like investment tax credits, can now be carried forward. 
• Trusts: Graduated rate estates and qualifying employee ownership trusts are exempt, but other trusts are more likely to pay AMT due to removing the basic exemption.  

AMT & Capital Gains: A Double Whammy 

It’s all too easy to dismiss the AMT as a rich person’s tax – but remember, it applies to ALL taxable income, including the proceeds generated from the sale of property assets.

This brings us to another separate but related tax mechanism called capital gains (or losses). Under capital gains rules, the sale or disposition of any non-primary residence property asset (cabin, cottage, business building, investments, farmland, etc.) generates a capital gain (or loss). Capital gains also include gifting or any other “deemed disposition” – an event where ownership of an asset changes. 

The government has changed the capital gains inclusion rates for both tax regimes – the personal or marginal tax rate and AMT. 

Capital Gains Inclusion Rate – Personal Tax / Marginal Tax Regime: 

The capital gains inclusion rate after June 24th is 50% on the first $250,000 each tax year and 66.67% of the remaining gain per tax year. The amount as determined by the inclusion calculation is the taxable capital gain. 

Example: Capital Gains Inclusion Rate – Marginal Tax Regime 

You are subject to the marginal tax rate. The capital gain for the sale of your asset is $500,000. Here’s how the new inclusion rate would be calculated:

$125,000 (50% of the first $250,000) 

+ $166,675 (66.67% of the remaining $250,000) 

= $291,675

 $291,675 would be included in your taxable income. 

Capital Gains Inclusion Rate – AMT: 

The capital gains inclusion rate increases to 100% (up from 80%). 

Example: Capital Gains Inclusion Rate – AMT

You are subject to the AMT calculation. The capital gain for the sale of your asset is $500,000. Here’s how the new inclusion rate would be calculated: 

 $500,0000 = 100% of your capital gain  

 $500,000 would be included in your taxable income for AMT calculation purposes. 

 Whatever the tax regimen, the changes in the capital gains inclusion rate mean that a larger amount of capital gains will be included in your taxable income. 

Understanding the Impact of AMT Changes 

The new AMT regime introduces a higher tax burden for high-income earners subject to AMT, with a rate increase from 15% to 20.5%. The one bright spot may be the increased exemption amount of $173,206 (up from $40,000), which should shield more middle-income taxpayers.  

However, a slew of additional changes aims to broaden the tax base to include more income types and deductions – such as full inclusion (100%) of capital gains and employee stock option benefits and limitations on deductions for capital losses, business investments, and certain credits.  

Here are some of the consequences: 

• Higher tax burden: Significantly increased tax liability. 
• Reduced tax planning options: Limitations can restrict your ability to use certain tax deductions and credits. 
• Cash flow challenges: Unexpected AMT payments can strain your finances, especially if you go to sell or gift a substantial asset. 

AMT Scenarios and Potential Tax Implications 

To better understand the AMT, let’s examine specific scenarios to grasp its impact. Here are a few everyday situations where AMT can come into play: 

Scenario 1: Business Owner Selling a Corporation 

• Situation: A business owner sells their qualifying small business corporation (QSBC) and claims the lifetime capital gains exemption (LCGE). 
• AMT Implications: While the LCGE provides a significant tax advantage (having been raised to $1.25 million in Bill C-69), the sale can still trigger AMT. The entire gain from the sale is included in adjusted taxable income for AMT purposes, even though only the inclusion percentage amount is taxed for regular income tax. The taxable amount may be decreased to less than the inclusion amount if there is LCGE available to apply to taxable capital gain. If the gain is substantial and other AMT-inclusive items are present, it could lead to a significant AMT liability. 

Scenario 2: Sale of Qualified Farm Property (Including Shares in a Qualified Family Farm Corporation)  

• Situation: A farm owner sells their Qualified Farm Property (QFP) and claims their LCGE.  
• AMT Implications: As in the case in Scenario 1, the entire gain from the sale is included in adjusted taxable income for AMT purposes, and again only the inclusion percentage amount is taxed for regular income tax. The taxable amount may be decreased to less than the inclusion amount if there is LCGE available to apply to the taxable capital gain. The application of the LGCE reduces your marginal or regular tax payable but this tax reduction may only lead to AMT. If the gain is substantial and other AMT-inclusive items are present, it could lead to a significant AMT liability. 

Scenario 3: High-Income Earner with Investment Losses 

• Situation: A high-income individual with substantial investment income also incurs significant investment losses in a particular year. 
• AMT Implications: While investment losses can offset investment income for regular tax purposes, the AMT rules limit the deductibility of these losses. This can result in a higher AMT liability compared to the regular tax. 

Scenario 4: Tax Shelters and Flow-Through Shares 

• Situation: An individual invests in tax shelters or flow-through shares, offering upfront tax deductions. 
• AMT Implications: These investments often generate large deductions that reduce regular tax liability. However, for AMT purposes, these deductions may be limited or disallowed entirely. This can lead to a substantial AMT payable. 

Scenario 5: Employee Stock Options 

• Situation: An employee exercises stock options that result in a significant taxable benefit. 
• AMT Implications: For AMT purposes, employee stock option benefits are 100% included in adjusted taxable income, potentially triggering a significant tax burden. 

Tax Strategies for the New AMT Tax Regime 

To mitigate the impact of AMT, consider these strategies: 

• Diversify investments: Don’t put all your investment eggs into one basket. Instead, spread them across various asset classes and reduce the concentration of AMT-triggering assets. 
• Tax loss harvesting: Strategically realize investment losses to offset capital gains for regular tax purposes, potentially reducing AMT. 
• Estate planning: Explore estate planning strategies to manage the potential AMT impact on your beneficiaries. For example, 100% of charitable donations are tax deductible in the year you pass, reducing your estate’s tax burden. 
• Seek professional help: Speak to an expert to understand your situation and develop tailored tax-saving strategies. 

AMT Overhaul: Increased Burden for Many 

New rules have significantly broadened AMT’s scope and increased the tax burden for high-income individuals and certain trusts. With a higher tax rate, expanded tax base, and reduced deductions, taxpayers must carefully review their financial situation to understand the potential impact of these changes. 

AMT is complex and subject to change. It’s essential to consult with a qualified tax advisor to assess your unique tax situation and recommend tax planning measures to minimize the impact of AMT. 

About FBC

For more than 70 years, we have helped hard-working Canadian small business owners, farmers, and agricultural producers save time and money by connecting them to a people-powered network of tax, bookkeeping, payroll and financial planning experts.

We deliver industry-specific support for your business that helps maximize your tax savings, simplify your books and manage your payroll. Our paralegal team can get your business incorporated and file your minute books and annual returns. Our financial and estate planning team can help you manage your wealth and plan your transition to retirement.

Take 15 minutes to connect with us. Let’s see if we’re a good fit for you and your business. Book online or call us at 1-800-265-1002.