An increase to the claimable amount for donations under the alternative minimum tax rules is good news for charities.BrianAJackson/iStockPhoto / Getty Images
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The federal government’s move to increase the amount claimable for the charitable donation tax credit when calculating the alternative minimum tax (AMT) should go a long way toward ensuring Canadians who make large charitable gifts don’t trigger AMT consequences, experts say.
The new AMT regime proposed in the 2023 federal budget raises the AMT rate to 20.5 per cent from 15 per cent and increases the exemption amount to $173,205, indexed to inflation, from $40,000. The government also reduced the percentage of some non-refundable federal tax credits, such as the charitable donation tax credit, that can be applied against the AMT to 50 per cent from 100 per cent.
Lowering the claimable amount for the charitable donation tax credit caused significant blowback, with the charitable sector concerned the change would discourage high-net-worth donors from making substantial gifts. In response, the 2024 budget tweaked the rules to allow individuals to claim 80 per cent of the tax credit under the AMT.
The proposed changes were included in the government’s 2024 budget implementation legislation, Bill C-69, to take effect retroactively as of Jan. 1, 2024.
David Christianson, senior wealth advisor and portfolio manager at National Bank Financial Wealth Management in Winnipeg, says the government appears to have heard the feedback regarding charitable donations.
The initial move to lower the claimable amount “made it very likely the AMT was going to hit [some people] even though [they’d] done something legitimate and allowable under the Income Tax Act,” he says.
Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth, says the changes will be helpful to those using the donation tax credit to offset taxes under the AMT.
The AMT is a parallel tax calculation that allows for fewer exemptions, deductions and credits. Clients pay either regular income tax or AMT – whichever is higher.
Mr. Golombek notes that the typical donation tax credit rate for someone in the highest federal tax bracket is 33 per cent. A client in the highest bracket making a charitable donation can now claim 26.4 per cent (80 per cent of 33 per cent) and shouldn’t be hit with an AMT bill, as that’s higher than the 20.5 per cent AMT rate.
If clients were able to claim only half of the donation credit, as under the 2023 budget proposals, that would translate to 16.5 per cent – lower than the AMT threshold. “You could conceivably have AMT [from that],” Mr. Golombek says.
However, the donation of publicly traded securities remains an area in which clients could face the AMT. When someone donates publicly traded shares to charity, the capital gains inclusion rate under a regular tax filing is zero; for those paying the AMT, it’s 30 per cent.
“There could be a scenario in which someone is making a significant gift of appreciated securities to charity, and they have to include 30 per cent of that gift in their income for AMT,” Mr. Golombek says. “The gift alone shouldn’t trigger the AMT, but if they’re already paying AMT because of other capital gains or employee stock options … then that could increase the amount of AMT payable.”
An analysis by Mr. Golombek and two colleagues at CIBC Private Wealth found very few Canadians will pay the AMT under the 2024 rules, and high-income Canadians are unlikely to pay it if their only income source is taxable employment, professional or business income. Eligible dividends alone are also unlikely to trigger the AMT, even at large amounts.
However, the analysis found that capital gains – including those under the lifetime capital gains exemption – carried-forward capital losses and employee stock options are more likely to make someone subject to the AMT.
Morgan Ulmer, certified financial planner at Caring for Clients in Calgary, says her firm gave the 2023 budget proposals a lot of thought and discussed with accountants the best time for clients to make donations. But she says clients weren’t going to hold off giving due to the possibility of incurring the AMT.
“If you’re charitably inclined, you’re charitably inclined,” she says. “It was only relevant for clients who, for one reason or another, wouldn’t be able to recover that AMT.”
AMT and the capital gains inclusion rate
The federal government also increased the capital gains inclusion rate in this year’s budget to 66.67 per cent from 50 per cent on annual gains of more than $250,000 for individuals starting June 25.
Mr. Golombek says Canadians trying to get ahead of the capital gains increase should be aware that triggering gains on purpose before June 25 could incur unexpected tax consequences, as the AMT capital gains inclusion rate is 100 per cent.
“This is kind of a short-term issue, but we’re telling clients to look at it,” he says.
Ms. Ulmer says she tells clients who are facing the AMT – typically owners selling their business or people exercising their employee stock options, which is common to Alberta’s oil and gas sector – that the AMT is essentially a pre-payment of taxes, as people who pay it can deduct the amount they paid from their regular tax liability over the following seven years.
“There are some projections you can do to at least provide comfort that if you do end up paying the AMT, all is not lost … and it certainly won’t affect your retirement security,” she says.
Mr. Christianson says business owners preparing to sell but worried about the one-time AMT hit can consider negotiating being paid for the sale over time with interest, allowing them to set up a capital gains reserve and declare it over time.
Clients need to be earning taxable income to recover the AMT. Mr. Christianson says those who don’t expect to earn income in the following seven years can take money out of their registered retirement savings plans (RRSPs) or registered retirement income fund. Business owners who are selling on the eve of their retirement could also negotiate being paid a salary by the new owner for the next two to three years or take on consulting work to generate income and recover the AMT.
If someone knows they’re going to experience an AMT event a year in advance, Ms. Ulmer says they can make their RRSP contributions that year and wait until the AMT year to claim the contribution on their tax return.
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