Tax Insights: Changes to the alternative minimum tax are enacted ─ How will it affect individuals and trusts starting 2024?

Issue 2024-22

In brief

On June 20, 2024, federal Bill C-69, An Act to implement certain provisions of the budget tabled in Parliament on April 16, 2024, received royal assent. Bill C-69 includes legislation to implement the 2023 federal budget measure that significantly changes the alternative minimum tax (AMT) regime for individuals. These changes are the most extensive reforms to the AMT regime since it was introduced in 1986 and are intended to better target the AMT to high‑income individuals.

The main changes to the AMT regime,¹ which are effective for taxation years beginning after 2023:

• increase the federal AMT rate from 15% to 20.5% and the basic exemption amount from $40,000 to the start of the second from top federal tax bracket (i.e. $173,205 in 2024; to be indexed annually)
• adjust the calculation of taxable income to expand the limits on certain tax benefits, such as certain exemptions and deductions
• limit access to certain tax credits that could otherwise reduce the AMT payable

This Tax Insights provides an overview of the changes to the AMT and some examples of how they will affect individuals and certain trusts.

In detail

Background

The AMT is designed to target high-income individuals and trusts by having them pay a minimum amount of tax notwithstanding that they are entitled to various exemptions and deductions under the Income Tax Act (the Act). The AMT involves a complex calculation that adjusts an individual’s regular taxable income by limiting access to certain exemptions, deductions and credits that are otherwise allowed.

Overview of the pre-2024 AMT regime

An individual’s adjusted taxable income (ATI) is calculated by computing the individual’s regular taxable income and then making adjustments to deny certain tax incentives. The ATI is reduced by the basic exemption ($40,000, pre‑2024), multiplied by the AMT rate (15%, pre‑2024) and reduced by certain tax credits. The AMT, for taxation years beginning before 2024, was therefore equal to:

15% x (ATI – $40,000) – eligible non-refundable tax credits

If the AMT calculated exceeds the regular federal income tax otherwise payable, the individual will have to pay the AMT instead of the regular federal income tax. The difference between the AMT and the regular federal income tax is considered a refundable tax that, once paid, can be applied in the following seven years to reduce federal income tax that the individual would otherwise have to pay, to the extent that the income tax otherwise payable exceeds the AMT calculated for that year.

Certain trusts were also subject to the AMT, but only graduated rate estates (an estate that is a testamentary trust for the first 36 months after the date of death) benefited from the basic exemption.

Overview of the changes to the AMT regime (the new 2024 AMT regime)

Increasing the rate and basic exemption and limiting non-refundable tax credits

The changes:

• increase the AMT rate to 20.5% and the basic exemption amount to the start of the second highest federal tax bracket (which is $173,205 in 2024)
• limit deductibility of certain eligible non-refundable tax credits to 50% (exceptions apply, such as for the charitable donations tax credit, which will be limited to 80%, instead of 50%)

Now that Bill C-69 is enacted, the new AMT calculation for 2024 is:

20.5% x (ATI – $173,205) – (50% x eligible non-refundable tax credits, with certain exceptions)

Adjusting the ATI calculation

The changes modify the ATI calculation by adjusting the inclusion rate for certain types of income, and limiting or restricting access to certain deductions and expenses. Key changes follow:

• The inclusion rate for capital gains, allowable capital losses and gains from listed personal property increases to 100% (from 80%).
• The inclusion rate for business investment losses² decreases to 50% (from 80%).
• The employee stock option deduction is no longer available; this effectively increases the inclusion rate for taxable stock option benefits to 100% (from 80%).
• The capital gains inclusion rate on donations of:
  • publicly listed securities increases to 30% (from 0%)
  • all other property increases to 100% (from 50%)
• The deduction of certain expenses is limited to 50% of the amount otherwise deducted for the year (this includes, among others, interest and financing costs incurred to earn property income,³ moving expenses, childcare expenses and the disability supports deduction).
• The deduction for non‑capital losses and limited partnership losses of other years is limited to a maximum of 50% (from 100%).
• The inclusion rate for capital losses carried forward and back is reduced to a maximum of 50% (from 80%).
• Deductions for Guaranteed Income Supplement, social assistance and workers compensation payments are allowed.

Changes affecting trusts

The legislation in Bill C‑69:

• extends the basic exemption to qualified disability trusts⁴
• excludes certain trusts from being subject to the AMT, such as graduated rate estates, employee ownership trusts and trusts that are exempt from tax under Part I of the Act (e.g. charities and non‑profit organizations which meet the requirements under paragraph 149(1)(l))⁵

Other inter vivos trusts will continue to remain subject to the AMT without benefiting from the basic exemption.

What remains unchanged?

The legislation in Bill C‑69 does not change many features of the pre‑2024 AMT regime, including the following:

• The AMT does not apply in the year an individual dies.
• The ATI includes taxable dividends at their cash value (instead of the grossed-up amount for regular tax purposes) and fully disallows the dividend tax credit.
• The effective inclusion rate for capital gains eligible for the lifetime capital gains exemption (LCGE) deduction remains 30%.
• The carry‑forward period to use AMT payable to reduce regular federal income tax payable remains seven years.⁶

Examples of how the changes affect individuals and trusts

Below are three examples of how the changes to the AMT will affect certain individuals and trusts; for simplicity, only the tax credits noted in the examples are considered.

Individual disposing of capital property

This example considers an individual who:

• earns ordinary income of $250,000 (such as employment income, retirement income or interest income), and
• disposes of capital property in the year and realizes a capital gain of $1,500,000 (either before June 25, 2024, or after June 24, 2024 when the capital gains inclusion rate is proposed to increase to two thirds⁷)

PwC observes

Under the pre‑2024 rules, no AMT would be payable in this example because the regular federal income tax is higher than the AMT for both the before June 25, 2024 and after June 24, 2024 scenarios. However, with the new 2024 AMT rules, the overall federal tax payable by the individual in the:

• before June 25, 2024 scenario, will increase from $303,592 to $322,181 (the additional $18,589 can be carried forward as AMT credits and may be used over the next seven years)
• after June 24, 2024 scenario, will remain $372,342 (regular income tax only, no AMT)

This example illustrates that, because of the proposed increase to the capital gains inclusion rate from one half to two thirds for capital gains realized after June 24, 2024, the new 2024 AMT regime will not generally create AMT for individuals as a result of earning significant capital gains.

Individual donating cash to a qualified donee

This example considers an individual who:

• earns ordinary income of $160,000 (such as employment income, retirement income or interest income)
• disposes of qualifying small business corporation (QSBC) shares before June 24, 2024, realizing a capital gain of $1,000,000, and claims a LCGE deduction for the full amount, and
• donates $100,000 cash to a qualified donee

PwC observes

The new 2024 AMT regime can reduce the tax savings for individuals claiming a charitable donation tax credit, depending on their other sources of income, deductions and credits in the year. The individual in this example is subject to AMT before claiming the charitable donation tax credit; this means that if they make a charitable donation, the tax savings will be determined based on the charitable donation tax credit for AMT purposes. As a result, they will only receive 80% of the tax savings from the charitable donation tax credit that would normally be available to them for the taxation year (i.e. receiving a charitable donation tax credit of $23,178 for AMT purposes, instead of $28,972). For greater certainty, the new 2024 AMT regime does not mean an individual has additional tax payable as a result of a donation; it instead shows that their tax savings have been reduced.

In its 2024 budget, the federal government sought to address concerns raised by the charitable sector by announcing that individuals would be allowed to claim 80% of the charitable donation tax credit when calculating AMT (as opposed to 50% as proposed in the August 4, 2023 draft legislation); the charitable sector was concerned that the 50% limitation would have affected charitable donations made by individuals and trusts.

Trust with interest expense paid to earn income from property (prescribed rate loan trust)

This example considers an inter vivos trust (that is neither excluded from AMT, nor qualifies for a basic exemption amount) that:

• received an interest‑bearing loan of $1,000,000, for which it pays interest at a 1% rate (incurring $10,000 of interest expense annually), and
• uses the above noted loan to earn interest income at a 3% rate (earning $30,000 of interest income annually)

The trustees of the trust will allocate and make payable the net income of the trust ($20,000) to the trust’s beneficiaries, with the following tax outcome.

PwC observes

Under the new 2024 AMT regime, if a trust deducts interest expense that was incurred for the purpose of earning income from property, the trust may incur AMT, regardless of the amount of net income earned by the trust. This could occur because:

• under the new 2024 AMT changes, 50% of the interest expense deduction will be denied for AMT purposes
• an inter vivos trust does not generally benefit from the basic AMT exemption, and
• if the trustees allocate all of the net income of the trust to the beneficiaries to avoid regular income tax payable, the AMT will always apply instead of regular income tax payable

As this example illustrates, the new 2024 AMT regime could affect situations where a prescribed rate loan has been made to a trust; this will depend on how the trust manages the internally generated income. A trust that has received a prescribed rate loan should plan for this potential AMT exposure as the situation could be more complicated than it initially appears. The trustees of the relevant trust could consider:

• not allocating a portion of its net income to its beneficiaries, so that the amount retained in the trust generates regular tax equal to the AMT and the tax paid by the beneficiaries is reduced, or
• using capital from the trust to pay the AMT; however, these options may not be available for all trusts (depending on the facts)

The takeaway

The increased complexity of the new 2024 AMT regime will present a number of challenges to taxpayers. The complexity of the AMT formula will make it difficult for individuals and trusts to identify when the AMT regime may apply without receiving tax advice from a specialist. It will also be difficult for advisers to provide simple guidance, as a separate calculation of tax (based on the taxpayer’s income, deductions and credits [using different rules]) will be required to determine AMT. In addition, these reforms might cause AMT to apply to taxpayers in many more situations, meaning that taxpayers may not realize that they have AMT exposure until it is too late to prevent it. Furthermore, trustees of trusts that will be subject to AMT because of incurring carrying charges should consider how the AMT will affect the trusts’ year-end income allocation process and ensure there is sufficient cash to fund the AMT.  

<sup>1. The changes to the AMT regime will affect the AMT payable in all provinces and territories, except Quebec, which has its own AMT regime. Quebec intends to generally incorporate the federal AMT changes in its AMT regime, except that Quebec’s adjustments to its AMT regime will ensure that the regime’s general principles are adhered to. Quebec’s position has been announced in Information Bulletin (IB) 2023-4 (June 27, 2023), IB 2023-7 (December 19, 2023) and IB 2024-6 (May 31, 2024). 
2. An allowable business investment loss can arise when a taxpayer disposes of certain shares or debts and realizes a capital loss. If certain conditions are met, the capital loss will be deductible against any type of income for a period of 10 years (whereas capital losses are only deductible against capital gains). If this loss is not used within the 10 year period, it will be converted into a capital loss that can be carried forward indefinitely.
3. This new rule will not affect other limits that apply to certain expenses under the pre‑2024 AMT regime. In addition, this limit will not apply to employee ownership trusts.
4. A “qualified disability trust” is a testamentary trust established for beneficiaries who are eligible for the disability tax credit if certain conditions are met.
5. Certain trusts, including spousal trusts and certain joint partner trusts and alter ego trusts, remain exempt from AMT for the year in which a deemed disposition occurs upon an individual’s death.
6. Under the new 2024 AMT regime, certain disallowed credits under the AMT will now be available for the AMT carry forward (i.e. the federal political contribution tax credit, investment tax credits and labour-sponsored funds tax credit).
7. See our Tax Insights “Finance releases draft legislation to increase the capital gains inclusion rate.”</sup>