Changes to Alternative Minimum Tax (AMT) Regime in 2024
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This newsletter is to summarize Canada’s Alternative Minimum Tax (AMT) rules change effective in 2024, along with potential strategies to mitigate the impact of these changes. AMT is designed to ensure that high-income individuals and certain trusts pay a minimum amount of income tax. It limits the use of various deductions, credits, and exemptions, which are otherwise allowed under the regular tax system. Here's an overview:
AMT Rule Overview and Changes for 2024:
1. Capital Gain: In 2024, 100% of capital gains will be taxable for AMT purposes, compared to 80% in the current system and 50% under regular basic T1 tax.
2. Tax Shelters Deduction: There will be no deduction for tax shelters under AMT, while the regular T1 tax allows a deduction.
3. Interest Charge, LP Carrying Charge: Under the new AMT, only 50% of the interest charge and LP carrying charge will be deductible, as opposed to full deduction in the current system.
4. Taxable Dividend: AMT will treat taxable dividends based on the actual amount, not grossed-up under the regular basic T1 tax.
5. Capital Gain Exemption: Under AMT, 70% of the capital gain exemption will be deductible, which is the same as the current system.
6. Capital Gain Donated Public Shares: in 2024, only 70% of capital gains on donated public company shares will be deductible for AMT, as opposed to full deduction under the current system.
7. Loss Carryovers or ABIL: In 2024, only 50% of loss carryovers or ABIL (Allowable Business Investment Loss) will be deductible for AMT.
8. Stock Option Deduction: Stock option deductions will not be deductible under AMT, as opposed to 50% deduction under the current system.
9. Employee Expenses, Childcare Expenses: These expenses will be 50% deductible under AMT, as opposed to full deduction under the current system and regular T1 tax.
10. AMT Exemption: In 2024, the AMT exemption will increase to $173,000, up from $40,000 in the current system.
11. AMT Rate: The AMT rate will increase from 15% to 20.5% in 2024.
12. Tax Credits (Including Donation Credit): Personal tax credits, including donation credits, will only be 50% allowed under AMT, compared to 100% in the current system.
Impact of the New AMT Regime (2024 On):
• Individuals who realize substantial capital gains will face higher AMT tax liabilities. Under new AMT rules, capital gains are fully taxable, and the new AMT rate is higher than the current rate. (See Appendix for an example)
• The increase in the AMT tax rate and the reduction in allowable tax credits may lead to higher tax liabilities for individuals subject to AMT.
• Furthermore, the lower deductibility of certain expenses and deductions under AMT, such as interest, loss carryovers and stock option deductions, can impact tax planning strategies.
When an individual has AMT liability that exceeds their regular tax liability, the excess AMT paid can result in an AMT carryforward. This carryforward allows taxpayers to recover the excess AMT in 7 subsequent years. If your future regular income tax exceeds your AMT liability, you may be able to use the difference between the two to receive a refund or reduce your tax payable.
Strategies to Mitigate the Impact:
1. Manage Capital Gain Timing and Amount: You can strategically time capital losses to offset capital gains in the same year. Spreading capital gains over several years by staged sale of portfolio investments, or by taking back a mortgage can minimize AMT, especially if you're eligible for the $173,000 annual exemption.
2. Owner/Manager Salary: Opt for salary payments instead of dividends as owner/manager to have more regular basic federal taxes instead of relying on the dividend tax credit.
3. Donate Public Stocks: Consider donating public stocks over several years to manage the impact of AMT, as only 50% of the donation credit is allowed.
4. Exercise Stock Options in Stages: Exercise stock options from public companies in stages to spread the capital gain over different tax years, potentially minimizing AMT.
5. Elect out of Spousal Rollover: In some cases, electing out of spousal rollover can trigger a capital gain, which can be beneficial, especially as there is no AMT at the year of death. Another alternative is to sell the investments in the Graduated Rate Estate (GRE) within 36 months as a GRE is exempt from AMT.
6. Set up Holdco: Consider setting up a holding company (Holdco) to roll investments into it at adjusted cost base (ACB). This can help avoid AMT, and you can receive the tax-free portion of capital gains as capital dividends which are not subject to AMT. While no AMT for corporations, incorporating, rollover and maintaining a company can be costly, as well as the land transfer taxes if the investment is real estate.
Non-Residents and AMT: Non-residents can also be subject to AMT, primarily when they have capital gains from the sale of Canadian real estate. However, they face challenges, as they can't roll over to a corporation, and there may be no future taxes to receive refunds on the AMT paid.
Please note that tax regulations can be complex and subject to change. Contact us to get specific advice tailored to your situation.
Illustrative Example
An individual realized a $1,800,000 capital gain in 2023, as compared to in 2024, for the net impact to the AMT liabilities (also assuming he has other investment income of $50,000 being offset by an equal amount of interest expense deduction):
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