Alternative Minimum Tax (AMT): 2024 Update

The Alternative Minimum Tax (AMT) is a parallel tax calculation that is imposed on taxpayers who claim certain tax deductions, exemptions, or credits to reduce the tax that they owe to very low levels. The new AMT calculation allows fewer deductions, exemptions, and credits than under the current AMT calculation and regular income tax calculation. In this blog, we will focus on the federal level changes to the AMT that will take effect in 2024. The provincial aspects will be discussed in a separate blog.

Let’s first discuss the basics and the 2024 changes:

AMT Calculation: To determine tax payable under AMT, we first need to calculate the tax payable using the deductions, exemptions and credits allowed under the regular tax system. Then we will recalculate taxable income utilising deductions, exemptions and credits allowed under the AMT (Adjusted Taxable Income). If the amount of tax payable under AMT is greater than the tax payable under regular tax calculation, the difference becomes payable for the tax year.

AMT Rate: For 2024 tax year, the AMT rate will increase from 15% to 20.5% which is equal to the second-tier federal income tax bracket.

AMT Exemption. AMT exemption is the threshold amount below which AMT does not apply. It is intended to exclude low and middle-income individuals from paying AMT. Starting 2024, AMT exemption will increase from $40,000 AMT exemption to $173,000.

Deductions. Up until 2023, most deductions that were allowed under regular tax calculation methodology were also available for AMT. Starting 2024, 50% of certain deductions will be disallowed under AMT such as employment expenses (except those to earn a commission), childcare expenses, moving expenses, non-capital loss carryovers, interest and carrying charges to earn income from a property, and limited partnership losses.

Non-Refundable Credits. Similar to deductions, up until 2023, most non-refundable credits which were available under regular tax calculation methodology were also available against the AMT. Starting 2024, only 50% of most non-refundable credits will be allowed under AMT. One notable exception is the dividend tax credit. Under current regular tax calculation, dividends received from Canadian corporations are “Grossed-Up” to account for taxes paid by the corporations and the amount of taxes payable are reduced by a dividend tax credit. Under current AMT calculations, both the gross-up and dividend tax credit are omitted. For 2024, there will be no changes.

Let’s look at an example:

Shaun earns $300,000 in eligible dividends from a Canadian corporation. What would be his AMT under the new regime?

	Regular Tax Calculation	Current AMT Calculation	New AMT Calculation
Eligible dividends	$300,000	$300,000	$300,000
Gross-up (38%)	$114,000	N/A	N/A
AMT exemption	N/A	(40,000)	(173,000)
Taxable income / Adjusted taxable income	$414,000	$260,000	$127,000
Tax at graduated rates / Minimum tax at 15% and 20.5%	$117,990	$39,000	$26,035
Federal dividend tax credit	(62,183)	N/A	N/A
Tax / Minimum Tax	$55,807	$39,000	$26,035
AMT			N/A

In this example AMT does not apply since tax payable under regular tax calculation is higher than AMT calculation.

Capital Gains and Losses. Currently only 50% of capital gains are included in income under regular tax system and 80% under the AMT calculation methodology. Starting 2024, 100% of capital gains will be included in the calculation of adjusted taxable income under AMT.

Under current AMT calculation, 80% of net capital losses carried forward from previous years and 100% allowable business investment losses are deducted. Under new AMT rules, only 50% of net capital and investment losses are deductible.

Let’s look at an example:

Shehla bought an investment property in 2020 for $500,000. She sold the property in 2024 for $1,000,000. She also has an unclaimed capital loss of $300,000 from 2021. What would be her AMT under the new calculation?

	Regular Tax Calculation	Current AMT Calculation	New AMT Calculation
Taxable capital gains (50%/80%/100%)	$250,000	$400,000	$500,000
Net capital loss carry-forward	(150,000)	(240,000)	(150,000)
AMT exemption	N/A	(40,000)	(173,000)
Taxable income / Adjusted taxable income	$100,000	$120,000	$177,000
Tax at graduated rates / Minimum tax at 15% and 20.5%	$17,431	$18,000	$36,285
AMT	N/A	$435	$18,854

Donation of Publicly Listed Securities. Under the current regular tax and AMT rules, donation of publicly-listed shares, mutual funds, and/or segregated funds receive a tax receipt equal to their fair market value and no taxes are payable on capital gains. Under the new AMT rules commencing in 2024, there will be a 30% inclusion of capital gains on publicly traded shares. Donation tax credit under the new AMT calculation rules has also been reduced from 100% to 50%.

Let’s look at an example:

Shana plans to donate 25% of her publicly traded shares with a fair market value of $800,000 and an adjusted cost basis of $300,000. She would sell the remainder of the shares to pay for her son’s wedding. How much her AMT would be under the new regime?

	Regular Tax Calculation	Current AMT Calculation	New AMT Calculation
Taxable capital gains on donated securities (0%/0%/30%)	$0	$0	$125,000
Taxable capital gains on sold securities (50%/80%/100%)	$187,000	$300,000	$375,000
AMT exemption	N/A	(40,000)	(173,000)
Tax at graduated rates / Minimum tax at 15% and 20.5%	$38,427	$39,000	$67,035
Donation Tax Credit	(36,222)	(36,222)	(18,111)
Tax / Minimum Tax	$2,205	$2,778	$48,924
AMT			$46,719

In this example, since AMT is greater than the regular tax calculation, Shana’s AMT due would be $46,719.

Employee stock options. The changes to the Alternative Minimum Tax (AMT) regime in Canada for 2024 will have a significant impact on employee stock options. Under regular tax calculation, similar to capital gains, only 50% of stock option benefits is added to income and therefore taxable. Under current AMT calculation methodology, only 20% stock deduction is allowed and 80% of the stock option benefit is added to taxable income. The inclusion rate for benefits associated with employee stock options will be changed to 100%.

Let’s look at another example:

Sheena exercised her option to purchase shares of a publicly listed company for a total exercise price of $500,000. What is her AMT under the new AMT regime?

	Regular Tax Calculation	Current AMT Calculation	New AMT Calculation
Stock option benefit (100%)	$500,000	$500,000	$500,000
Stock option deduction (50%/20%/0%)	(250,000)	(100,000)	(0)
AMT exemption	N/A	(40,000)	(173,000)
Taxable income / Adjusted taxable income	$250,000	$360,000	$327,000
Tax at graduated rates / Minimum tax at 15% and 20.5%	$57,277	$54,000	$67,035
AMT			$9,758

In this example, since AMT is greater than the regular tax calculation, Sheena’s AMT due would be $9,758.

AMT carryover is a mechanism that allows taxpayers to recover the AMT paid in a prior year. AMT should be considered a prepayment of tax because it’s a tax that’s paid in advance on income that will be recognized in future years. The AMT carryover is essentially a credit that can be used to offset future tax liabilities. If a taxpayer pays the AMT for a specific year, they can carry forward the difference between the AMT they paid and their regular tax as a credit for up to 7 years. This means that AMT is essentially a prepayment of tax if the individual can recover AMT paid within the 7-year period.

For further information please contact Taxtron Support at 416-491-0333 or visit www.taxtron.ca

---