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Updates to the alternative minimum tax (AMT) along with small tweaks to the registered disability savings plan (RDSP) and registered education savings plan (RESP) announced in the federal budget present financial planning opportunities for advisors and clients.
The income exception for AMT purposes will be raised to $173,000 in the 2024 taxation year, up from $40,000 today, and indexed to inflation going forward, says Evelyn Jacks, founder and president of Knowledge Bureau in Winnipeg. Beyond that, a person would have specific income sources that increase their income even further.
“A large capital gain on the sale of an asset such as a rental property could put someone in this tax situation,” she explains. “However, lots of things have to fall into place for the AMT to actually exceed regular taxes payable.”
The new AMT is calculated by adjusting taxable income for a number of tax preferences including 100 per cent of capital gains, she says. Under the old AMT rules, this was 80 per cent.
Furthermore, the AMT rate is increasing to 20.5 per cent from 15 per cent. If a person is subject to the AMT, Ms. Jacks says they are going to pay this higher tax rate on the adjusted taxable income. One silver lining is the client can carry forward AMT for seven years and use it to offset regular taxes owing, she adds.
Many of Aaron Hector’s high-income clients have asked him nervously how the changes to the AMT will affect their bottom lines. Thankfully, he has good news for most of those clients.
“I don’t think AMT will be a big issue for the vast majority of them,” says Mr. Hector, certified financial planner and private wealth advisor at CWB Wealth Management Ltd. in Calgary.
One issue Mr. Hector has with the changes to the AMT concerns donations of publicly traded securities to registered charities. Currently, if a client donates shares, they don’t pay taxes on capital gains, which he says is a “nice incentive for people to help support good causes.”
Now, for a client subject to the AMT, 30 per cent of the capital gain on the donated shares will be included. That means a client who donated the shares could end up paying more taxes, Mr. Hector says.
“It’s unfortunate they decided to do that,” he says. “That’s probably where I would have a few clients that may get captured. We’ll just have to run the numbers on that to see if there’s exposure or not.”
RDSP representatives extended to siblings
Beyond the AMT, Mr. Hector will be discussing revisions to the RDSP with affected clients. The budget will extend the period for a qualifying family member to be the legal representative until Dec. 31, 2026.
Instead of having a parent, spouse or common-law partner as the only possible legal representatives of the RDSP, it has been extended to include siblings.
“That’s just a common sense, practical measure that makes [the RDSP] more accessible,” he says.
He notes he has a client with a disabled son, but if the client were to pass away, then what? The flexibility in who qualifies as an RDSP legal representative opens the door for the sibling to be able to step in.
More money available from RESPs
Another flexible change occurred with RESPs as full-time post-secondary students will be able to withdraw more money in the first semester – $8,000 for the first 13 consecutive weeks of post-secondary enrolment, up from $5,000 previously, says Wilmot George, vice-president, tax, retirement and estate planning at CI Global Asset Management in Toronto.
“With the rising costs of education, the government is providing some additional flexibility to get at more money, and that’s a good thing,” he says.
Mr. George notes that part-time students can now withdraw $4,000, up from $2,500, and these changes are effective immediately, depending on RESP providers updating their plan contracts.
He adds that the budget also extended more flexibility to RESP subscribers. Divorced or separated parents will be permitted to open a joint RESP for their children. Previously, only spouses and common-law partners could open an RESP as joint subscribers.
“When couples experienced marital breakdowns, it created complexity if the couple wanted to transfer the RESP to a different financial institution or if they wanted to establish a new RESP for their children,” Mr. George explains.
“They couldn’t do it as joint subscribers. This change makes the RESP more flexible and useful for families as they go through changes in their family situation.”
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Editor’s note: A previous version of this article stated erroneously that 30 per cent of the capital gains from the donated shares for clients subject to the AMT will be taxed off the top, meaning charities will end up with less.