Alternative Minimum Tax (AMT): New Rules for 2024
The 2023 federal budget announced significant changes to the Alternative Minimum Tax (AMT) regime to better target high-income individuals. On August 4, 2023, the Department of Finance released draft legislative proposals to modify the AMT regime, effective for taxation years beginning after 2023. The proposed changes would be the most extensive reforms to the AMT regime since it was introduced in 1986.
We’ve put together a comprehensive guide on the new AMT rules and how they could affect both individuals and trusts. Below, you’ll find some of the key changes, but be sure to read our full breakdown for more information and some real world examples to get the full picture.
What is the Alternative Minimum Tax and how is it calculated?
The AMT is an alternative method of calculating income tax in Canada. It’s applicable when a preferential tax deduction, such as the capital gains deduction or exemption, has been claimed or preferential tax rates have been applied.
The AMT regime involves a complex calculation that adjusts the individual’s regular taxable income by limiting access to certain exemptions and deductions that are otherwise allowed. Once the adjusted taxable income (ATI) is calculated, it’s reduced by the basic exemption amount (currently $40,000), multiplied by the AMT tax rate (currently 15%), and reduced by certain tax credits. The AMT is equal to 15% * (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 main proposed changes are:
- An increase of the federal AMT rate from 15% to 20.5%;
- And increase of the basic exemption amount from $40,000 to approximately $173,000 in 2024 (to be indexed annually);
- An adjustment of the calculation of taxable income to expand limits on certain tax benefits, such as certain exemptions and deductions; and,
- Limitations on access to certain tax credits that could otherwise reduce the AMT payable
If enacted, these changes would significantly impact individuals and trusts subject to the AMT regime. For example, increasing the rate and basic exemption amount while limiting non-refundable tax credits would result in higher taxes for many taxpayers. The proposed changes to the AMT regime are expected to be enacted for taxation years beginning after 2023.
It’s important for individuals and trusts subject to this regime to understand how these changes will impact their taxes. For a full breakdown of the implications of these new AMT rules, read our Tax team’s comprehensive guide and talk to your DMCL advisor about how it may affect your situation.