Changes to alternative minimum tax scary for charities

Opinion

Hey there, time traveller!
This article was published 20/07/2024 (413 days ago), so information in it may no longer be current.

How would you like to play a game where there are two sets of rules? And where you’re never really sure which set is going to apply to you?

Doesn’t sound like my idea of either fun or good sportsmanship. However, that’s what Canadian taxpayers go through every year, whether they know it or not.

Every tax return filed each year is also subject to an alternate calculation, with a different set of rules. This is known as the Alternative Minimum Tax or AMT calculation.

The AMT takes a variety of completely legal and policy-endorsed deductions — like the capital gains exemption on the sale of a qualifying private business, which was recently increased in the 2024 budget — and then reduces their effectiveness to see if the taxpayer can be charged more under the alternate calculation.

If the AMT calculation is higher, then the taxpayer pays the larger amount of income taxes.

This can also cause people making significant donations to charity to be caught by the AMT calculation.

What?

In fairness, if the regular tax rules have allowed the person to significantly reduce their income tax in comparison to their gross income for only a one-year period, they may be able to get some or all of the minimum tax back. Any tax paid under the AMT sets up a notional credit against future taxes.

If the taxpayer pays enough tax in the following seven years to utilize the AMT credit, then the AMT extra payment may just be considered a prepayment of taxes.

On the other hand, if a person sells their business under the rules in year one but then retires and does not pay enough income tax over the next seven years to recover the tax, then they suffer a permanent tax on perfectly legitimate deductions.

What really galls me is that recent changes to the AMT under Bill C-69 made it more likely that people making donations or selling businesses — or both in the same year, which is very common and is the lifeblood of many charities — are now much more likely to pay AMT. Ironic that this is the reward for combining years of hard work and job creation with generosity.

In all cases, good planning is now more imperative than ever. Depend on your tax adviser for advice on these issues.

Successive governments have encouraged charitable donations by allowing people to ignore the capital gain on appreciated securities when publicly traded shares are donated directly to a charity.

For example, if you bought some shares 10 years ago for $10,000 and they are now worth $20,000, you can donate that $20,000 worth of shares to a charity and pay no tax on the gain of $10,000.

The charity would issue you a tax receipt for $20,000. You have lost the $20,000 that you generously donated, but you will reduce your taxes in the range of $9,000 for consolation.

On the other hand, if you were to sell those shares and keep the money, then 67 per cent of the gain ($6,700) would be included in your income.

In the AMT calculation, 30 per cent of the capital gain is included in income and only 80 per cent of the donation tax credit counts. If that means more tax for you, then you pay the higher amount.

These changes are causing some high-income earners to decrease and/or spread-out donations or even defer them to their estates. AMT does not apply in the year of death.

As always, our advice to business owners or anyone else who may be incurring one-time high income is to prepare an AMT calculation ahead of time and make any adjustments necessary, and make sure there will be enough taxable income in the ensuing few years to recover any Alternative Minimum Tax payable.

Oh, and write to your MP …

Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice. Please consult legal, tax, insurance and investment experts for advice on your unique situation.