The 2023 Federal Budget proposed changes to the Alternative Minimum Tax (AMT), which would come into effect on Jan. 1, 2024, is a negative for charities. The Department of Finance released the draft legislation on Aug. 4, 2023. The proposed changes would broaden the scope of AMT to subject high-income individual taxpayers to potentially paying more income tax, depending on their sources of income, deductions or credits.
The proposed changes to AMT may also affect the tax benefits when high-income individual taxpayers donate to charity. Before we get into the details of this recent AMT change, let’s do a quick refresher on charitable giving to put the changes into greater context. Below is the information that we share with our clients.
Tax benefits of donating to charity
When you donate to registered charities, those donations can help reduce your income taxes payable. A federal donation tax credit of 29 per cent is applicable to donations over $200, and 33 per cent if you have income over the top federal marginal income tax bracket of $235,675 (in 2023). An additional tax credit available in British Columbia of 16.8 per cent is applicable to donations over $200, and 20.5 per cent if you have income over the top B.C. tax bracket of $240,716. The top combined donation tax credit in B.C. is 53.5 per cent.
Claiming donations and carry-forwards
Donations can be made up to and including Dec. 31, with the donation receipt dated accordingly. You will only be able to claim donations to registered charities up to the limit of 75 per cent of your net income for the year, but you may carry forward any unused donation amount and claim it on your tax return in any of the following five years.
In-kind donations of publicly listed securities
We help many of our clients donate securities in-kind to charities.
The strategy to donate in-kind publicly listed securities typically begins with looking at those positions with the largest accrued unrealized capital gain. The tax credit is based on the fair market value of the shares on the day donated, and any realized capital gain triggered on the disposition/donation has a zero percent inclusion rate rather than the normal 50 per cent inclusion rate, which essentially yields a tax-free charitable donation.
An in-kind donation of publicly listed securities may enhance the tax efficiency of your charitable giving. See our article Using your stock portfolio to make donations which outlines the benefits of donations in-kind.
Introduction of Alternative Minimum Tax
AMT was introduced in 1986 and for the most part is not applicable to most Canadian taxpayers. We have all heard stories of wealthy individuals paying little or no tax through various tax shelters and tax deductions.
The AMT was introduced to prevent high-income earners from paying little or no tax through investing in investments such as flow-through shares and limited partnership units that were very popular at the time.
What is AMT?
Essentially, AMT is an alternative way to calculate Canadian income tax when you earn preferentially taxed income, such as capital gains and dividends from Canadian corporations, in excess of an annual exemption. AMT may also arise when you claim preferential tax deductions to reduce your taxable income, such as the lifetime capital gains exemption (LCGE), and certain credits to reduce your tax liability.
As its name implies, AMT is a “minimum” or “floor” amount of tax that you may be subject to. Essentially, it is an “alternative” tax calculation that runs parallel to the “normal” tax calculation in your annual income tax return; whichever result is greater is your final tax liability for the year.
AMT only applies to individuals and certain trusts, not to corporations. Provincial AMT may also apply, varying by province (including B.C.) and territory, and is generally calculated as a percentage of the federal AMT. AMT does not apply in the year of your death.
Recovery of AMT
If you are subject to AMT in a given year, AMT paid (the difference between the “alternative” tax calculation and the “normal” tax calculation) can be recovered over the following seven years if you have sufficient full rate taxable income in those future years.
Generally, you may need to have income taxed at full marginal rates (e.g., salary, pension, RRSP withdrawals, RRIF income, interest, foreign dividends, etc.) and not preferentially taxed to recover AMT previously paid. We will diarize those clients impacted by AMT and discuss the recovery strategy with our clients’ accountants.
What are the proposed changes to AMT?
The federal AMT rate is set to increase to 20.5 percent (current 15 percent). AMT is calculated at a flat rate of tax and is not calculated using gradual rate taxation like in your annual income tax return. The AMT exemption is set to increase from $40,000 to approximately $173,000 (the start of the second-highest federal income tax bracket for 2024, indexed to inflation annually).
Other significant proposed changes to the AMT calculation include the following:
• Inclusion of 30 per cent (from 0 per cent) of capital gains on donations of shares (or employee stock options) of publicly listed securities.
• Inclusion of 100 per cent (from 80 per cent) of capital gains.Capital gains eligible for the lifetime capital gains exemption (LCGE) will still only be included at 30 per cent, per current AMT rules.
• Inclusion of 100 per cent of employee stock option benefits.
• Reduction of certain non-refundable tax credits to 50 per cent deductible (from 100 per cent), such as the donation tax credit, basic personal amount, medical expense credit, disability credit, and tuition credit.
• Reduction of certain tax deductions to 50 per cent deductible (from 100 per cent), such as interest or carrying charges incurred to earn property income, certain employment expenses, childcare expenses, moving expenses, and non-capital loss carryovers.
• Reduction of capital loss carry forwards and allowable business investment losses to 50 per cent deductible (from 80 per cent).
How may the proposed changes to AMT impact you?
If your annual income is less than the proposed AMT exemption of approximately $173,000 (indexed to inflation annually), then you may not be subject to AMT after 2023.
AMT may become a permanent tax if it cannot be recovered over seven years after the year it is paid. This may be the case if you have limited non-preferentially taxed income (i.e. full-rate taxable income) in the seven years following the year you are subject to AMT. For example, this may occur when you sell your business or a large asset and do not earn salary, pension, or interest income after the transaction that subjects you to AMT.
So, consult your financial and tax advisors in a timely manner if you may be involved in the following examples of situations, particularly if you may be donating to charity, to discuss planning options available to you in advance of 2024:
• If you make large donations annually to registered charities
• If you donate publicly listed securities with large, accrued capital gains to registered charities
• If you sell assets with large, accrued capital gains
• If you sell your business via a sale of shares with large, accrued capital gains
• If you claim the LCGE on the sale of shares of a qualifying corporation or qualified farming or fishing property
• If you exercise employee stock options from publicly listed corporations
• If you claim non-capital losses or capital losses from prior years
Planning for the remainder of 2023
If the above items may be applicable to you, we recommend you plan your charitable donations for 2023 to help mitigate the proposed changes to AMT in 2024. You may consider the following strategies in 2023 in consultation with your financial and tax advisors to help mitigate the effects the proposed changes to AMT may have on you if you may be involved in any of the examples noted above:
• If you make significant annual donations of cash or appreciated marketable securities, consider aggregating the donations you may make in the coming years and making an exceptional donation in 2023.
• In coordination with the above strategy, to effectively use the charitable donation tax credit from making a time-accelerated, exceptional donation, you may need to create additional taxable income in 2023. If you have a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), you may consider a lump-sum withdrawal from these accounts. This would create additional taxable income and resulting tax liability in your personal income tax return, which the larger charitable donation tax credit can help offset.
• If you are contemplating selling significant assets in the coming years, such as non-registered marketable securities, real estate, appreciating vehicles and artwork, etc., consider advancing the sale to close in 2023. This strategy assumes the sale of these significant assets can be accelerated and makes financial sense to do so. It may also create additional taxable income in 2023 to help offset a time-accelerated, exceptional donation. Consult with your tax and financial advisors to determine the tax and financial implications of selling these assets before doing so.
• As AMT does not apply in the year of death, you may consider shifting your strategy by donating via your will to help achieve your philanthropic objectives. Unfortunately, this may result in charities having a deferment of the donations.
• If you have a corporate structure in place, you may consider making corporate donations to achieve your annual charitable giving goals either in the current year, and certainly beginning in 2024. It is important to note that corporations are not subject to AMT. We wrote an article on this topic, Making charitable donations from a corporation . Consult with your tax advisor to determine if this strategy may help you achieve your charitable giving goals, as the sources of income your corporation earns must be considered in coordination with your annual corporate charitable giving.
Consulting with your advisers
The calculation of AMT is typically beyond the scope of most do-it-yourself tax preparers. Most importantly is that you must be proactive and implement strategies (if any) before the end of 2023. Given the integration of many factors, and the complexities, we feel it is prudent to consult with your tax advisor to discuss the proposed changes to AMT if you feel you may be impacted by the changes.
Different planning options may be available to you to continue to achieve your philanthropic goals. Everyone’s situation is unique, and not all general tax planning opportunities may benefit every person.
Declining trends concerning
Canadian donation data, obtained from Statistics Canada, is not detailed enough to provide a clear view of individual donations. From the information we can gather, it shows that the long-term trend is the percentage of total taxpayers who claim charitable donations is shrinking dramatically. The decline in ordinary donors is a worrying trend in terms of citizen participation in the community.
The number of donors of exceptional gifts and the value of these gifts have increased significantly over the past 30 years in Canada. This is primarily due to the increase in wealth (albeit unequal distribution) driven by the stock market, business, and real estate values. Exceptional donations are also difficult to quantify with contributions to both private foundations and donor-advised funds at public foundations.
The decrease in ordinary donations and increase in exceptional donations represent both a challenge and opportunity for charities and donors. We’re experiencing a historic change in how Canadians are giving to charity. We need to think differently about planning, engagement, support, equity, and social impact.
With the introduction of the new AMT rules, it may have a significant impact on charities that rely on annual donations from high income individuals.
From a tax perspective, if a higher income earning individual does not have the ability to donate through a corporation, then the AMT changes may result in a shift of strategy. Up until this year, we could easily calculate the benefits of donations of publicly listed securities to charities — this calculation is no longer straight forward with the change to AMT.
The result is that we would anticipate a decline in donations of securities, or at a minimum, a shift to have these types of donations deferred and done through a person’s will upon death.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email firstname.lastname@example.org, or visit greenardgroup.com.