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Advisors should prepare their wealthier clients for reforms to the alternative minimum tax (AMT) set to take effect in 2024 that include some proposed changes announced recently.

The federal Liberal government proposed updates to the AMT in the 2023 budget, released in March, to get some of the richest Canadians to pay more taxes.

Draft legislation to implement the AMT changes was released in August. It proposes raising the AMT exemption to approximately $173,000 from $40,000 (indexed to inflation), along with increasing the AMT rate to 20.5 per cent from 15 per cent. It would also further limit certain tax preferences such as exemptions, deductions and credits. Examples include raising the AMT capital gains inclusion rate to 100 per cent from 80 per cent, limiting the deductibility of interest expenses and loss carryovers, and restricting charitable donation tax credits.

The draft legislation includes some other “unexpected changes,” according to a recent KPMG in Canada report, such as a proposal to increase the AMT inclusion rate for capital gains on property donations other than publicly listed securities to 100 per cent from 50 per cent. The proposed legislation also expands the types of trusts that won’t be subject to AMT rules, including graduated rate estates, trusts with classes of their units traded on a designated stock exchange, certain investment funds and others.

Ottawa said about 70,000 Canadians paid AMT under the old rules, generating about $200-million in annual revenue. The proposed changes are expected to generate an estimated $2.6-billion in revenue from individuals over a five-year span, according to a report released earlier this month by the Office of the Parliamentary Budget Officer. It said about 26,000 individuals would be subject to the AMT next year, and that number would increase gradually to just less than 29,000 individuals in 2028.

The Globe spoke with Brian Ernewein, senior advisor at KPMG in Canada’s National Tax Centre, recently about the AMT and the recent changes:

What is the AMT in a nutshell?

The AMT is a parallel income tax calculation, first introduced in 1986, that allows fewer deductions, exemptions and tax credits than the regular income tax rules. It applies a flat tax rate instead of a progressive rate structure and provides a basic exemption. Individuals and trusts must pay AMT or regular tax, whichever is higher. From the government’s perspective, it’s a way to ensure high-net-worth individuals avoid paying little or no tax.

What are the impacts to charitable donations?

The changes mean individuals and trusts that intend to make substantial charitable donations after 2023 may have to pay more in taxes. Consider an Ontario resident who earns $1-million in income donating $750,000 of public securities, which under the Income Tax Act are exempt from the capital gains tax. Depending on the capital gain on the donated shares, the AMT liability could be more than $50,000. The lesser the gain, the lesser the impact on the AMT.

Advisors should look at a client’s circumstances and run the numbers under the basic tax liability and the AMT. They should also consider the structuring of their charitable giving.

Anything else advisors should be aware of?

The draft legislation was released on Aug. 4, and the consultation period closed on Sept. 8, which signals that the federal government expects to move forward with this legislation before the end of the year.

This interview has been edited and condensed.

- Brenda Bouw, Globe Advisor reporter

Must-reads from Globe Advisor this week

How ethnic advisors are supporting their diverse mix of clients

One of Kelly Ho’s niches is helping clients collaborate personal finance ideas they learned in their country of origin with perspectives from their newly chosen country. “The easiest part is doing the financial plan. The hardest part is really understanding what’s important to the clients,” says Ms. Ho, certified financial planner and partner at DLD Financial Group Ltd. in Vancouver. And what’s important to immigrant and second-generation Canadian clients often differs from what she calls “the North American way of thinking” – ideas based on individual or nuclear family needs instead of a multigenerational lens. Deanne Gage explains.

How Canadians are dealing with higher mortgage payments as renewal options dwindle

Higher interest rates aim to tame inflation, but they also lash many Canadians’ finances with significantly higher payments on mortgages. That’s leading to tough conversations for financial advisors meeting with cash-strapped clients whose mortgage payments have jumped much higher than anticipated. Many clients entered into variable-rate mortgages near all-time lows in 2021 and early 2022 before the Bank of Canada (BoC) began hiking interest rates rapidly in March – now up 475 basis points – with possibly more to go. Joel Schlesinger reports.

The hotel stock this money manager is betting on for long-term growth

Daniel Goodman doesn’t invest based on forecasts of whether or not a recession is coming. Instead, the chief executive officer at Toronto-based GFI Investment Counsel Ltd. chooses to own a handful of companies he believes are strong and will survive some of the toughest economic cycles. “We never say we’re getting more defensive or offensive,” says Mr. Goodman, whose firm oversees about $1.7-billion in assets. “Instead, we establish an asset mix of equities and bonds for a particular client and stick with it unless their circumstances or comfort level changes.” Brenda Bouw asks what he’s been buying and selling.

Why GICs may not be the best choice despite their high rates

Rising interest rates have made guaranteed investment certificates (GICs) a hugely popular investment over the past year, but there are drawbacks investors need to consider before locking in. Advisors say GICs make sense for short-term financial needs and investors who need peace of mind, but warn profits are taxed at a higher rate than capital gains or dividend income. Brenda Bouw explains.

Also see:

Why this scientist retired after decades of fighting infectious diseases – including COVID-19

How students and graduates can tackle the enormous pressure student loans are creating

What price cuts, supply and demand issues and more competition mean for EV investors

Money managers divided on energy’s prospects as demand for oil hits ‘highest point in history’

All eyes on U.S. inflation ahead of Fed’s interest rate decision in this week’s Advisor Lookahead

What you and your clients need to know

Laurentian Bank completes strategic review without finding a buyer

Laurentian Bank of Canada has concluded a lengthy strategic review on Thursday without finding a buyer for the country’s ninth-largest lender and announced plans to simplify its structure to boost profits. Montreal-based Laurentian Bank ended a months-long search for an acquirer, saying that it will continue with the turnaround plan it set out on almost two years ago. It also shuffled its senior leadership to fill vacancies as some executives part ways with the lender and said it plans to unveil a revised strategic plan early next year. Stefanie Marotta and Andrew Willis have the story.

Canada needs 3.45 million more homes by 2030 to cut housing costs as population grows, CMHC predicts

Canada needs an additional 3.45 million homes by the end of the decade to bring housing costs down as the population increases, according to a new report from the federal housing agency. This is the second report from Canada Mortgage and Housing Corp. that quantifies the number of new homes the country needs to build to ensure households are not spending more than 40 per cent of their disposable income on shelter. Rachelle Younglai reports.

Canada’s bankers lash out at Liberals for ‘picking on’ financial services firms with new taxes

Canada’s banking industry lobby group is calling out Ottawa for targeting financial institutions and ignoring warnings that the government’s taxes aimed at extracting billions of dollars from banks and insurers will dampen lending and further stunt slowing profit growth. The talks between the voice of the industry and the government have led nowhere, according to the Canadian Bankers Association. Stefanie Marotta has this exclusive interview with CBA.

Accountants express opposition to Ontario, Quebec plan to split profession’s governance

A plan by the governing accounting bodies in Ontario and Quebec to break away from the Chartered Professional Accountants of Canada is facing growing opposition from those who want the profession to remain unified across the country. A group of past chairs of CPA Canada, the national industry organization, are calling on CPA Ontario and Quebec CPA Order to reconsider their decision to withdraw from the group. And as the two provincial groups are explaining themselves to their members, they’ve also faced sharp questions about why the decision was made and why it was not put to a vote. Clare O’Hara and David Milstead have the story.

– Globe Advisor Staff

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