BACKGROUND
The alternative minimum tax (“AMT”) regime was put into place in 1986 with the goal to ensure high-income individuals, and certain trusts, pay a minimum level of tax. AMT is a parallel tax calculation to the regular income tax calculation, but allows fewer deductions, exemptions and tax credits which may otherwise reduce an individual’s regular income tax liability. An individual is liable to pay income tax equal to the higher of the two amounts calculated under the AMT regime and the regular income tax method. Additional tax paid under the AMT regime (i.e. tax paid in excess of the regular income tax otherwise payable) may be recovered in the following seven years to the extent that the regular income tax exceeds the AMT amount in those years.
The 2023 federal budget announced significant changes to the current AMT rules and draft legislation was released on August 4, 2023. Proposed amendments to the AMT rules include broadening the AMT base such that taxpayers who are currently not affected by the AMT regime may now be caught under the new rules. The proposed changes are expected to be applicable for taxation years that begin after December 31, 2023 although legislation has not yet been tabled.
WHO IS AFFECTED?
Individuals other than trusts
Most individuals (other than trusts) will be exempt from AMT due to the proposed increase to the AMT exemption amount of $173,205. However, the broadening of the AMT base means that AMT could arise in the following situations:
Trusts
Certain trusts are not subject to the AMT rules, most notably Graduated Rate Estates (“GREs”). However, AMT will apply to most trusts because the AMT exemption amount is not available to trusts other than Qualified Disability Trusts (“QDTs”). A common situation in which AMT may arise is where a trust has significant interest and financing expenses may now have to pay tax under the AMT regime under the proposed rules.
Corporations
The AMT regime (existing and proposed) do not affect corporations.
PROPOSED CHANGES
There are three main components to the AMT calculation: the AMT tax rate, the AMT base, and the AMT exemption amount. The proposed changes to the current AMT calculations include increasing the AMT exemption amount, increasing the AMT tax rate and broadening the AMT base by increasing certain existing AMT base inclusions, while reducing certain existing AMT base deductions. However, relief is provided to individuals and QDTs with modest income via an increase in the basic AMT exemption amount, and to GREs, which are no longer subject to AMT. Notable proposed changes are summarized in the table below.
| Description | Current | Proposed |
| Tax Rate | 15% | 20.5% |
| Basic exemption amount | $40,000, for individuals and GREs; $0 for other trusts | $173,205 for 2024, indexed annually, for individuals and QDTs; $0 for other trusts |
| AMT base inclusions (net): | ||
| Capital gains eligible for the Lifetime Capital Gains Exemption (no changes) | 30% | 30% |
| Capital gains on donated publicly-listed securities | 0% | 30% |
| Capital gains on other donated property | 50% | 100% |
| Other capital gains | 80% | 100% |
| Employee stock option benefits | 80% | 100% |
| Description | Current | Proposed |
| AMT base deductions: | ||
| Certain deductions including interest and financing costs, certain employment, childcare, moving expenses, etc. | 100% | 50% |
| Non-capital losses – deductible portion | 100% | 50% |
| Capital losses – deductible portion | 80% | 50% |
| Deductions from AMT: | ||
| Certain non-refundable credits (including donations credit, medical credit, etc.) | 100% | 50% |
There have been no proposed changes to the seven-year carryforward period to recover AMT paid in a previous tax year.
NEXT STEPS
Taxpayers should consider the tax implications of the proposed AMT regime in certain situations such as timing of selling a business, utilization of non-capital and capital losses, realization of large capital gains and plans to make substantial charitable donations. If you have concerns about how the proposed AMT rules will impact your specific tax situation, please contact your D&H Group LLP advisor for further discussion.
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