More than a quarter of Canadians who make over $400,000 a year paid less than 15 per cent in federal personal income taxes in 2019, according to the federal budget released on April 7. To address the issue, the Trudeau government wants to revamp the little-known alternative minimum tax (AMT).
The intent is to make the tax system fairer and ensure that even high-income earners who employ aggressive tax-planning strategies pay a minimum of tax, said Lindsay Tedds, a professor of economics and scientific director of fiscal and economic policy at the School of Public Policy, University of Calgary.
The AMT is, as its name suggests, is an alternative way of calculating taxes designed to force wealthy tax filers who would otherwise owe little or no tax thanks to credits and deductions to pay at least the federal minimum rate of 15 per cent.
The existing AMT, which dates back to 1986 and hasn’t been meaningfully updated, is badly in need an upgrade, according to the budget.
A new and stricter minimum tax regime would be aimed at only a few thousand Canadians in the top 0.5 per cent of the income distribution, said Alexandre Laurin, director of research at the C.D. Howe Institute. Because the number of taxpayers is so small, any additional revenue raised wouldn’t significantly add to federal coffers, he added.
Still, a tax change could also have implications for ordinary Canadians who experience a financial windfall in a year when they happen to have little or no other income, said Tara Benham, national tax leader at accounting and advisory firm Grant Thornton LLP.
It’s unclear whether Finance Minister Chrystia Freeland intends to update the existing AMT or replace it entirely. In the budget, the government simply said it is committed to examining “a new minimum tax regime, which will go further towards ensuring that all wealthy Canadians pay their fair share of tax.” Details on the new approach would be available in the coming 2022 fall economic and fiscal update, it said.
Progressive tax advocates have welcomed the proposed reform, which was part of the Liberal 2021 election platform.
“The fact that more than a quarter of people earning over $400,000 a year are paying below our lowest tax bracket is clearly egregious to most people and would suggest that the existing AMT is failing to achieve the thing that it’s supposed to achieve,” said D.T. Cochrane, an economist at Canadians for Tax Fairness, an Ottawa-based non-profit.
As of 2022 Canada’s lowest federal tax rate of 15 per cent applies to taxable income up to $50,197. The highest rate, of 33 per cent, applies to income over $221,708. However, wealthy Canadians with income from capital gains, dividends and stock options can often rely on a variety of deductions and credits to reduce their tax burden.
Issues arise when top earners get excessively creative in their use of tax incentives, a practice known as “aggressive tax avoidance,” Ms. Tedds said. Unlike tax evasion, in which tax dodgers flout the rules by hiding income or faking deductions, for example, tax avoidance consists of taking advantage of the technical aspects of the Income Tax Act and regulations to reduce tax owing in a way that’s not consistent with the spirit of the legislation, Ms. Tedds said.
Canadians who trigger the measure can carry the AMT forward and use it to offset taxes payable in any of the following seven years, as long as they’re not subject to the AMT in those years. This limits the impact of the tax on Canadians who trigger the minimum tax because of a one-time financial bonanza, Ms. Tedds noted.
For example, a retiring entrepreneur who sells their small business, which usually qualifies for a tax exemption, and has little or no other income for the year could have an AMT liability, Ms. Benham said.
Figures from the latest federal budget show that, despite the AMT, 28 per cent of tax filers with income above $400,000 paid less than 15 per cent in federal tax in 2019. The data also indicate that 9.8 per cent of this group paid less than 5 per cent in federal tax, while 1.6 per cent paid no tax at all.
The budget didn’t say whether there has been a growing trend of more and more wealthy Canadians paying very little or no tax in recent years, Mr. Cochrane said. Researchers typically can’t slice tax data beyond the top 1 per cent of earners because of privacy concerns around small data sets, he added.
Ms. Benham said she hopes that if the government decides to increase the tax burden that would result from an alternative minimum tax calculation, it will also lengthen the number of years for which eligible Canadians would be allowed to carry that forward. She recalled the case of a retiring Canadian couple who had to pay the AMT after reaping a significant profit from the sale of their farm, another type of property eligible for a tax exemption.
While the couple were able to apply the AMT against tax owing for the following seven years, their annual income in retirement was so low that their tax liability wasn’t enough to recoup the full amount, she said.
“They literally never recovered all of the taxes that they paid.”
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