The new alternative minimum tax (“AMT”) rules slated to come into effect in 2024 may be punitive to high-income earners who take advantage of certain tax deductions and credits, including the donation tax credit. This presents an opportunity for this group of clients to make donations in 2023.
The AMT is a separate income tax regime that runs parallel to the regular income tax regime. It applies to individuals and certain trusts, but not to individuals in the year of death and to corporations. If an individual’s AMT tax calculation in a year is higher than their regular tax calculation, then they would pay the higher AMT amount. The additional AMT amount that’s in excess of the regular tax amount may be applied as a credit against regular taxes in a particular year over a seven-year carry-forward period (assuming AMT doesn’t apply in that year).
The current federal AMT rate is 15%. There’s an annual $40,000 exemption from AMT as well. The provinces also have their own AMT which is typically calculated as a percentage of the federal AMT.
The 2023 Federal budget introduced proposals to enhance the AMT by increasing its rate to 20.5%, catching more types of income and disallowing various deductions and credits that would otherwise reduce an AMT liability. The budget also proposed to increase the annual AMT exemption to $173,000. On August 4th, the Department of Finance released draft legislation that would implement the proposed AMT changes. The table below compares the notable items contained in the draft legislation to both the existing AMT and the regular income tax regimes:
| Regular tax | Current AMT | New AMT | |
|---|---|---|---|
| AMT rate (federal) | n/a | 15% | 20.5% |
| AMT exemption | n/a | $40,000 | $173,000 |
| Capital gains inclusion rate | 50% | 80% | 100% |
| Capital gains inclusion rate on donated publicly listed shares | 0% | 0% | 30% |
| Non-refundable tax credit allowance, including donation tax credit | 100% | 100% | 50% |
| Interest deductibility on loans used to earn property income | 100% | 100% | 50% |
The draft legislation also states that AMT won’t apply to graduated rate estates.
These proposed rules target high-income individuals who have relatively significant amounts of low-rate income, like from capital gains, compared to higher-rate regular income and dividend income. In Ontario, for example, the combined federal and provincial AMT rates will be approximately 33% in 2024. This is higher than Ontario’s combined top marginal effective rate on capital gains of 26.5%.
The new AMT rules will also affect many high-income earners who take advantage of tax incentives designed to encourage charitable giving. As seen in the above table, this includes disallowing 50% of the donation tax credit and increasing the capital gains inclusion rate to 30% on donated publicly listed securities. These AMT measures make it compelling for certain high-income earners who are contemplating a significant donation to make it in 2023 instead of waiting until 2024, or later, when the new AMT rules apply.
The following three examples show how the new AMT will impact clients making a maximum eligible donation (75% of net income) who have income from: 1) capital gains 2) dividend income, and 3) regular income. In each example, assume the same regular tax rates apply in both 2023 and 2024 and a top 33% federal donation tax credit rate.
In this example, an individual realizes a $2,000,000 capital gain in 2024 and makes a cash donation of $750,000. The individual has no other sources of income.
| Regular tax | Existing AMT (2023) | New AMT (2024) | |
|---|---|---|---|
| Income, less AMT exemption | $1,000,000 | $1,560,000 | $1,827,000 |
| Federal tax, excluding non-refundable tax credits | $306,806 | $234,000 | $374,535 |
| Less: donation tax credit | $247,464 | $247,464 | $123,732 |
| Federal tax | $59,342 | $0 | $250,803 |
This example shows that a donation made in 2024 would result in approximately $191,461 more federal tax compared to where that same scenario took place in 2023. That amount of $191,461 would be available as a tax credit against regular taxes in the individual’s subsequent seven taxation years.
In this example, an individual earns $1,000,000 of non-eligible dividend income in 2024 and donates $750,000 of publicly listed securities which have an
adjusted cost base of $100,000.
| Regular tax | Existing AMT (2023) | New AMT (2024) | |
|---|---|---|---|
| Income (cash amount), less AMT exemption | $1,000,000 | $1,155,000 | $1,022,000 |
| Federal tax, excluding non-refundable tax credits, including the dividend tax credit | $252,460 | $173,325 | $209,510 |
| Less: donation tax credit | $247,464 | $247,464 | $123,732 |
| Federal tax | $4,996 | $0 | $88,778 |
This example shows that because of the new AMT rules, a donation made in 2024 would result in approximately $83,782 more federal tax compared to if that scenario took place in 2023. That amount of $83,782 would be available as a tax credit against regular taxes in the individual’s subsequent seven taxation years. Note that if the donation was made with cash instead of public securities, there would have been approximately $40,807 of AMT payable (instead of $83,782).
In this example, an individual earns $1,000,000 of regular income in 2024 and makes a cash donation of $750,000.
| Regular tax | Existing AMT (2023) | New AMT (2024) | |
|---|---|---|---|
| Income, less AMT exemption | $1,000,000 | $960,000 | $827,000 |
| Federal tax, excluding non-refundable tax credits | $306,806 | $144,000 | $169,535 |
| Less: donation tax credit | $247,464 | $247,464 | $123,732 |
| Federal tax | $59,342 | $0 | $45,803 |
This example shows that the new AMT rules will not affect this donation made in 2024.
Based on the forgoing, it’s important that philanthropic high-income earners understand that the new AMT rules may reduce the tax incentives available to them in the year they make a significant donation. This presents an opportunity for this group of clients to make charitable gifts in 2023.
The new AMT will have its greatest impact on high-income earners who realize significant capital gains relative to their other sources of income. These clients are targeted by the new rules and their AMT liability would increase in the event they make a charitable donation with either cash or public securities. However, even high-income earners who receive most of their income from dividends or regular income will need to consider the new AMT when making significant charitable donations, particularly when gifting publicly listed securities with unrealized capital gains.
This material is for information purposes only and should not be construed as providing legal or tax advice. Reasonable efforts have been made to ensure its accuracy, but errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation and interpretations for Canadian residents, which is subject to change. For individual circumstances, consult with your legal or tax professional. This information is provided by The Canada Life Assurance Company and is current as of September 2023.