This post was originally shared by The Calgary Foundation.
In Budget 2023 the government of Canada introduced significant changes to the Alternative Minimum Tax (AMT) regime that could impact your clients' charitable giving strategies, effective January 1, 2024. These changes carry important implications for philanthropic planning, requiring a proactive approach to optimizing tax credits from charitable contributions.
What is the AMT?
The Alternative Minimum Tax (AMT) is a parallel tax calculation that allows fewer deductions, exemptions, and tax credits than under the ordinary income tax rules, and that currently applies a flat 15% tax rate with a standard $40,000 exemption amount instead of the usual progressive rate structure.
The taxpayer pays the AMT or regular tax, whichever is highest. To better target the AMT to high-income individuals, Budget 2023 proposes several changes to its calculation.
How the changes apply to charitable giving
The proposed changes in Budget 2023 include a revision to the AMT calculation, specifically focusing on the inclusion rate for capital gains arising from donations of publicly traded securities (such as stocks or mutual funds). Currently, when individuals donate publicly traded securities, the capital gains on these donated securities have an inclusion rate of 0% for AMT purposes. In other words, these donations are not factored into the AMT calculation, and do not increase the taxpayer's AMT liability. However, the proposed change is to adjust the inclusion rate of the capital gains from 0% to 30%. This means that, if the proposed change becomes law, donations of publicly traded securities will be included in the AMT calculation at a rate of 30%, potentially increasing the taxpayer's AMT liability.
Furthermore, at present, most non-refundable tax credits can be applied against the AMT. The government is proposing that only 50% of federal tax credits from charitable donations would be allowable to reduce the AMT for donations made as of 2024.
To provide a clearer picture of these changes, we would like to share two scenarios below, prepared by Richardson Wealth, to help you better understand their implications.
* This publication is intended for informational purposes only and is not intended to constitute investment, financial, legal or tax advice. It does not take into account your particular situation and is not intended as a recommendation. You should seek advice regarding your particular circumstance from your personal tax and/or legal advisors. This publication is based upon information considered to be reliable, but neither Richardson Wealth nor its affiliates warrants its completeness or accuracy, and it should not be relied upon as such. August 2023.
Richardson Wealth Limited, Member Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.