CHANGES TO ALTERNATIVE MINIMUM TAX (“AMT”) IN 2024

BACKGROUND

Alternative Minimum Tax (“AMT”) was first introduced in 1986 to restrict the benefit of certain tax deductions and credits for higher-income individuals and most private trusts.

Taxpayers (other than corporations) were required to recompute their tax liability under the more stringent AMT rules and then compare that liability to their ordinary return. If the taxes under the AMT rules were higher, that additional tax would have to be paid but could be carried forward for seven years as a credit towards a taxpayer’s ordinary tax payable to the extent it exceeded their recomputed AMT liability[1].

Examples of how the AMT return differs from the ordinary return:

Stock option benefits and capital gains are 80% taxable versus 50% on the ordinary return.
Capital gains subject to the lifetime capital gains exemption are included in income at 30% versus zero.
Dividends are treated as ordinary income.
Real Estate investments, mineral and resource flow-through investments, film investments, etc. are restricted in respect of the amount of interest, carrying charges, depreciation and amortization that could be claimed.
Limited partnership tax shelter losses are denied.
Losses carried forward or carried back from other years to the extent that they include interest, carrying charges, depreciation or amortization as noted above are restricted.

The federal and Quebec AMT tax rates were each set at 15% which is below the top ordinary federal and Quebec marginal rates. Furthermore, individuals (but not trusts) were eligible for a $40,000 exemption on income otherwise subject to AMT.

THE CHANGES

Starting in 2024, AMT will become more onerous with additional limitations on deductions and credits coupled with increases to the AMT tax rate to 20.5% federally and 19% for Quebec. On the bright side, the $40,000 of income exempt from AMT for individuals will be increased to approximately $173,000 for federal tax purposes and $175,000 for Quebec tax purposes. Therefore, if your personal income is in excess of this threshold and you expect to have capital gains, dividend income, stock options, interest expense and donations after this year, you might want to familiarize yourself with the rules so as to plan accordingly.

Examples of AMT changes beginning in 2024:

Stock Options and capital gains will be100% taxable versus 50% on the ordinary return.
Capital gains on the donation of listed public securities will be 30% taxable versus zero.
Certain deductions and credits will be restricted to 50% thereof when computing AMT such as:
- Employment expenses other than those in respect of commission income.
- Canada and Quebec Pension Plans and Quebec parent insurance plan contributions on self-employment income.
- Moving expenses, childcare expenses and disability support payments.
- Interest and other carrying charges in respect of earning income from property, other than under specific circumstances such as with respect to real estate investments.
- Non-capital loss and limited partnership loss carryforwards,
- Donation, medical and personal exemption credits, including pensions and transferred credits for disabilities and tuition from spouse and dependent children.

With all of these changes, it is hard to determine their impact. The following examples may help illustrate the effects on Quebec and Ontario taxpayers.

EXAMPLE 1

Mr. W earns $250,000 of interest income and has a capital gain of $1,100,000. In 2023, his AMT for both federal, Quebec and Ontario purposes will be less than his total ordinary tax, so no additional amounts would be owing. In 2024, however, Mr. W will have $1,000 of AMT to pay federally (as a Quebec resident) plus $28,000 for Quebec. As an Ontario resident, Mr. W will have $2,000 of AMT to pay.

EXAMPLE 2

Ms. X earns $250,000 of interest income, has a capital gain of $1,100,000 and incurred $250,000 of interest expense. In 2023, no AMT would be payable. In 2024, if Ms. X lives in Quebec, she will have $49,000 of AMT to pay federally and $68,000 for Quebec. A combined total of an extra $117,000. As an Ontario resident, Ms. X would have an AMT liability of an extra $89,000.

EXAMPLE 3

Mr. Y earns $250,000 of interest income, has a capital gain of $1,100,000, incurred $250,000 of interest expense and donated $250,000 to charity. In 2023, no AMT would be payable. In 2024, Mr. Y will have $83,000 of AMT to pay federally (Quebec resident) and $101,000 for Quebec. A combined total of an extra $184,000. As an Ontario resident, the extra AMT will be $152,000.

EXAMPLE 4

Ms. Z earns $250,000 of interest income, has a capital gain of $1,100,000, $200,000 of which was due to listed public securities donated having a value of $250,000 and incurred $250,000 of interest expense. In 2023, no AMT would be payable. In 2024, as a resident of Quebec, Ms. Z will have $87,000 of additional AMT to pay federally and $100,000 for Quebec. A combined total of $187,000 of extra taxes. As a resident of Ontario, the extra taxes due to AMT will be $158,000.

Note that corporations continue not to be subject to these AMT rules.

As is evident from these examples, realizing capital gains, incurring interest expense or making donations in significant amounts personally will have a major AMT impact after 2023. Depending on the facts, planning may be available to mitigate the consequences of AMT such as having a corporation donate instead of the individual. Speak with Richter’s tax group as to how AMT personally impacts you.

[1] For example, if tax computed under the AMT rules resulted in an additional cost of $30,000 in Year 1 and in Year 2 their ordinary taxes payable was higher than their AMT taxes payable by $20,000, the taxpayer would be able to reduce their ordinary taxes payable in Year 2 by $20,000