2024 AMT Changes - Could You Be Impacted?
April 26, 2024 update following the release of the 2024 Federal Budget:
- The below article was originally published on December 4, 2023 and has been updated to reflect a few keys updated following the April 16, 2024 Federal Budget.
- Please refer to the following Raymond James Federal Budget Highlights article which outlines the amendments to the previously proposed AMT changes.
- A key change, which has been reflected in the calculations in the article below and the example calculations is the change to the charitable donation tax credit when calculating AMT, which is now includable at a rate of 80% of the donation tax credit, instead of the previously proposed 50%.
- Another important change is the limitation of the 50% capital gains inclusion rate and 50% stock option deduction on capital gains and stock option income exceeding $250,000 after June 24, 2024. Please note that the calculation examples within this article assume the transactions occurred prior to June 24, 2024, and thus, do not compute the impact of these changes.
Following Canada's Fall Economic Statement on November 21, 2023, the federal government has confirmed that they intend to enact the new Alternative Minimum Tax ("AMT") legislation as proposed in August 2023. These AMT changes could potentially have a significant impact to your tax liability for 2024 and future years. As a background, AMT is a tax regime that runs parallel to the regular tax regime, and has an impact when your tax calculated under AMT rules exceed the federal tax calculated under ordinary rules.
These rules are in place to ensure that those earning a significant amount of income and receive preferential tax treatment pay more of what the government considers a fair share of tax. Preferential tax treatments in this contexts includes, but is not limited to items such as, the 50% inclusion rate on capital gains, the use of the Lifetime Capital Gains Exemption on the sale of QSBC shares, the 50% stock option deduction under 110(1)(d) of the Income Tax Act, and generous tax credits on charitable contributions.
The main questions to ask are - will these rules apply to me? And, are there any 2023 year end planning opportunities available to alleviate potential AMT impacts in 2024 and beyond? To answer these questions, it's first important to outline what the AMT regime is and compare it to the regular tax regime.
The AMT rules generally apply to individuals and trusts, and tax is calculated under both the ordinary and AMT tax regime - whichever regime yields the highest tax result is the one that a taxpayer is ultimately subject to. Note that these AMT changes will not apply to corporations.
These new rules are aiming to capture more higher earning taxpayers in the AMT regime, but may impact less middle income earners. This is evidenced by the AMT basic exemption being increased to $173,000, from $40,000 under the current regime.
Here are some key changes:
| Key Changes | |||
| Ordinary Tax Regime | Previous AMT Regime | New AMT Regime - 2024 | |
| Capital Gains | 50% of capital gains are taxable | 80% of capital gains are taxable | 100% of capital gains are taxable |
| Security Option or Stock Option Income | 50% security option deduction may be available | 80% of security option income is taxable | 100% of security option income is taxable |
| Lifetime Capital Gains Exemption (LCGE) | 100% of capital gain of QSBC shares may be excluded from tax, to the extent of LCGE room available | 30% of capital gain shelted by LCGE is included in taxable income | 30% of capital gain shelted by LCGE is included in taxable income |
| Donated Publicly Listed Securities | 0% inclusion rate for capital gains from donated publicly listed securities | 0% inclusion rate for capital gains from donated publicly listed securities | 30% inclusion rate for capital gains from donated publicly listed securities |
| Non-Refundable Tax Credits - Excluding Donation Tax Credit (2024 Federal Budget update) | Fully included in computation of tax payable | Fully included in computation of tax payable | 50% of non-refundable tax credits, excluding the donation tax credit, is disallowed |
| Donation Tax Credit (2024 Federal Budget update) | Fully included in computation of tax payable | Fully included in computation of tax payable | 20% of donation tax credit is disallowed |
| Interest and carrying charges incurred to earn property income | Generally fully deductible against taxable income | Generally fully deductible against taxable income | 50% of the deduction is disallowed |
| Capital Loss Carryforward | 50% of net capital losses carried forward from previous years offset the 50% taxable capital gains in the current year | 80% of net capital losses carried forward from previous years offset the 80% taxable capital gains in the current year | 50% of net capital losses carried forward from previous years offset the 100% taxable capital gains in the current year |
| AMT Exemption | $40,000 | $173,200 | |
| Tax Rate | Based on marginal tax rates, with the highest federal rate being 33% | Flat 15% rate | Flat 20.50% rate |
Once taxable income is calculated under the AMT regime through the inclusion of otherwise non-taxable income, and limitation of deductions, there is a threshold of $173,200 where AMT will not apply. Therefore, only "AMT Taxable Income" above this threshold could make one be subject to additional AMT.
AMT taxable income above the threshold is then multiplied by the AMT rate of 20.50%. Only if your AMT federal tax exceeds your regular federal tax, would you be subject to pay the difference.
AMT is a refundable tax as well, and can be carried forward for 7 years to use against future years where federal income tax exceeds tax calculated under AMT.
Let's walk through an example of when AMT may or may not apply, dependent on the types and level of income, deductions and credits.
Example 1 - Stock Option Income and Donations - 2024
| Cash Donation - $250,000 | |||
|---|---|---|---|
| Regular Tax Regime | Previous AMT Regime | New AMT Regime | |
| Employment Income | 250,000 | 250,000 | 250,000 |
| Stock Option Income | 1,500,000 | 1,500,000 | 1,500,000 |
| Stock Option Deduction | (750,000) | (300,000) | - |
| Capital Gains | 400,000 | 400,000 | 400,000 |
| Non-Taxable Capital Gains | (200,000) | (80,000) | |
| Investment Income | 50,000 | 50,000 | 50,000 |
| Total Income | 1,250,000 | 1,820,000 | 2,200,000 |
| AMT Exemption | N/A | (40,000) | (173,205) |
| Taxable Income | 1,250,000 | 1,780,000 | 2,026,795 |
| Tax Rate | Marginal Rates | 15% | 20.50% |
| Federal Tax Before Tax Credits | 388,216 | 267,000 | 415,493 |
| Less: Personal Tax Credits* | (84,587) | (84,857) | (67,033) |
| Total Federal Tax After Tax Credits | $303,629 | $182,413 | $348,460 |
| A |
No AMT would apply under current regime because the regular tax exceeds AMT calculated |
B | |
| AMT - Difference between tax under new AMT Regime and Regular Tax Regime | $44,831 | ||
| (B - A) | |||
|
As shown in this example - AMT is triggered because a significant
amount of the taxpayer's income was taxed at a low rate, including
the capital gains and stock option income. In addition, a
significant donation was made which provided a large tax credit
under the regular tax regime.
*Note that employment tax credits, including the CPP and EI tax credits are not considered in this calculation. *Note that the impact of the limitation on the 50% inclusion rate of capital gains and stock option income for transactions after June 24, 2024, as outlined in Budget 2024, is not reflected in this calculation. |
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Example 2 - Capital Gains and Donated Securities - 2024
|
Cash Donation - $350,000 Donate Public Securities - $150,000 FMV |
|||
|---|---|---|---|
| Regular Tax Regime | Previous AMT Regime | New AMT Regime | |
| Pension Income | 100,000 | 100,000 | 100,000 |
| Investment Income | 10,000 | 10,000 | 10,000 |
| Capital Gains on Non-Donated Securities | 2,500,000 | 2,500,000 | 2,500,000 |
| Non-Taxable Capital Gains | (1,250,000) | (500,000) | - |
| Capital Gains on Donated Securities | 50,000 | 50,000 | 50,000 |
| Non-Taxable Capital Gains - Donated Securities | (50,000) | (50,000) | (35,000) |
| Interest Deduction to Earn Property Income | (12,500) | (12,500) | (6,250) |
| Total Income | 1,347,500 | 2,097,500 | 2,618,750 |
| AMT Exemption | N/A | (40,000) | (173,205) |
| Taxable Income | 1,347,500 | 2,057,500 | 2,445,545 |
| Tax Rate | Marginal Rates | 15% | 20.50% |
| Federal Tax Before Tax Credits | 420,391 | 308,625 | 501,337 |
| Less: Personal Tax Credits* | (167,387) | (167,387) | (133,183) |
| Total Federal Tax After Tax Credits | $253,004 | $141,238 | $368,154 |
| A |
No AMT would apply under current regime because the regular tax exceeds AMT calculated |
B | |
| AMT - Difference between tax under new AMT Regime and Regular Tax Regime | $115,150 | ||
| (B - A) | |||
|
As shown in this example - AMT is triggered under the new rules
because a significant amount of the taxpayer's income was taxed at a
low rate, including the capital gains on donated and non-donated
securities. In addition, a significant donation was made which
provided a large tax credit under the regular tax regime.
*Note that the impact of the limitation on the 50% inclusion rate of capital gains and stock option income for transactions after June 24, 2024, as outlined in Budget 2024, is not reflected in this calculation. |
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Now that there is a basic understanding of how the AMT may have an impact on you - you may consider some potential planning opportunities, such as:
- Accelerate exercising stock options in 2023 rather than 2024.
- Recognizing capital gains in 2023 rather than 2024. You may then choose to repurchase the same securities and get an increase in your cost basis.
- Accelerating donations in 2023 by contribution to the Raymond James Donor Advised Fund.
In light of the increased exemption level ($173,200 from $40,000) of the AMT adjusted taxable income also provides opportunities to reconsider your mix of investments and income sources. Under the previous AMT rules, individuals who earned eligible dividends of around $50,000 with no other sources of taxable income, depending on their province of residence, may have had AMT apply. Now with the new rules, individuals may wish to consider rebalancing their portfolio to reflect the fact that a higher amount of eligible dividends could be tax-free.
Our financial advisors and tax consultants are able to help walk you through whether AMT may apply to you and if so, some strategies you can employ to reduce overall taxes.
This has been prepared by the Total Wealth Solutions Group of Raymond James Ltd., (RJL). Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. This is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a Member - Canadian Investor Protection Fund.