Federal budget 2023: Ottawa targets high-income earners with increased minimum tax

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Canada’s top income earners are in for a steep hike to their tax bills under measures proposed in the 2023 budget.

The government plans to tighten up its alternative minimum tax scheme, which it says will squeeze $2.95-billion more over the next five years combined from roughly 32,000 Canadians.

About 80 per cent of that will come from the estimated 8,000 people earning $1-million or more in annual income. Put another way, $1-million earners can expect to pay an average of $59,000 more a year in tax over that five-year period, according to government assumptions.

The AMT was introduced in 1986 by Brian Mulroney’s Progressive Conservative government to prevent high-income-earning Canadians from paying little to no personal income tax. It requires those earners to apply a parallel tax calculation during the normal income tax filing process.

The regime allows fewer deductions, exemptions and tax credits compared with the regular system, levying a flat 15-per-cent tax while offering a $40,000 exemption.

The Liberal Party campaigned in the 2021 election on a promise to reform AMT, saying the wealthiest Canadians still paid comparatively little personal income tax.

“We’re making sure the very wealthy and our biggest corporations pay their fair share of taxes, so we can afford to keep taxes low for middle-class families and invest in our health care system and social safety net,” Finance Minister Chrystia Freeland said in her budget speech to the House of Commons on Tuesday.

The budget states the government will raise the AMT rate to 20.5 per cent and that individuals would pay the higher amount of the AMT calculation or what they would pay through the regular tax system. Any extra tax paid under AMT can be carried forward for seven years and credited against regular taxes.

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But the government is also giving a break to most of the people who pay AMT. It will more than quadruple the basic AMT exemption to $173,000 from $40,000, which would result in a tax cut for an estimated 38,000 out of the 70,000 Canadians who would pay AMT under the old system.

The government estimates more than 99 per cent of the AMT would be paid by people earning $300,000 or more a year, and 80 per cent by $1-million earners.

Those paying the AMT will see some tax-limiting measures cut back. For example, 100 per cent of capital gains will be taxable, up from 80 per cent, while all benefits related to gains from stock options would also be taxable.

A slew of deductions will also be disallowed for AMT claimants, including expenses for employment, moving and child care, deductions for workers’ compensation or social assistance or Guaranteed Income Supplement and Allowance payments, and interest and carrying charges incurred to earn property income. The government will cut to 50 per cent non-refundable tax credits that can be applied to reduce AMT payable.

“The good news is the AMT should affect less people. But those who pay may pay more,” Bruce Ball, vice-president of taxation with the Chartered Professional Accountants of Canada industry association, said in an interview. He added, “if people feel they’ll be subject to AMT they might adjust their situation so they are not and are just subject to regular personal tax,” for example, by timing asset sales to spread capital gains over multiple years. “That might be harder for the government to track.”

But Brian Ernewein, senior adviser for national tax with KPMG Canada, said in an interview the changes “will deliver most of what the government anticipates” will flow into its coffers. “It’s not trying to turn around high-end tax planning, it’s just the application of standard provisions” in the Tax Act, he said.

David Macdonald, senior economist with the Canadian Centre for Policy Alternatives, a left-of-centre think tank, called the AMT changes “a generally positive move. With any changes like this that attempt to increase tax rates among the very wealthy who can pay people to get around paying those higher rates, there will be circumventions. So you have to be willing to continue to change the tax code to adjust for tax planning that attempts to circumvent the tax code.”