Clients looking to calculate or plan for their possible exposure to alternative minimum tax (AMT) in 2024 will be largely operating in the dark, particularly after the federal government proposed changes to the capital gains inclusion rate (CGIR) in the 2024 budget.
A revised AMT regime became effective on Jan. 1 of this year, retroactively, when legislation to implement it was enacted on June 20. Meanwhile, the Department of Finance has yet to introduce draft legislation to implement changes to the CGIR — changes that might affect a taxpayer’s potential AMT.
A taxpayer “would have a very, very difficult time trying to compute their AMT exposure” by relying solely on guidance from the Canada Revenue Agency (CRA) and CGIR legislation — once in place — without access to CRA tax forms or professional tax advice or software, said Ameer Abdulla, a partner with EY Canada in Waterloo, Ont.
In an email, the CRA told Investment Executive the 2024 versions of Form T691 Alternative Minimum Tax, which taxpayers use to calculate their AMT, and Schedule 3: Capital Gains (and Losses) are “still under development as we wait for final legislative details.” Both forms will be uploaded to the CRA website “by end of January 2025,” the agency said.
“It’s going to be tricky for people to plan if they’re waiting for the [tax] forms,” said Jay Goodis, a chartered professional accountant and CEO of Tax Templates Inc. in Aurora, Ont., which provides tax calculations and modelling for clients. While AMT calculations can be made without an updated T691 by following budget documentation and draft legislation when released, “very few people can determine AMT impacts without access to software,” he said.
And clients can’t be certain if the legislation to implement the CGIR changes will be enacted, or enacted as proposed.
The Department of Finance said it expects to release the draft legislation over the summer to increase the CGIR to two-thirds from one-half on capital gains above $250,000 earned by individuals, including two types of trusts.
The AMT, first introduced in 1986, is a parallel method of calculating tax that allows fewer deductions, exemptions and credits than under the ordinary tax rules, and is intended to ensure high earners pay at least a minimum percentage of tax.
The taxpayer calculates tax under the AMT and under the regular tax regime and pays whichever is higher. AMT paid can be carried forward for up to seven years and recovered to the extent that regular tax exceeds AMT in those years.
Under changes proposed in the 2023 federal budget and passed into legislation in 2024, the AMT rate rose to 20.5% from 15%, and the exemption amount rose to $173,205 (2024), indexed annually, from $40,000.
Under the revised AMT, 100% of capital gains are included in calculating adjusted taxable income for AMT purposes, up from 80% under the old rules.
Clients who sold appreciated property this year, including those who might have accelerated a sale ahead of the June 25 effective date for the increased CGIR, “might have a disproportionate amount of capital gains potentially [in 2024], which can suck you into AMT,” said Hemal Balsara, head of tax, retirement and estate planning, individual insurance, with Manulife Financial Corp. in Toronto.
Balsara said taxpayers with incomes between $173,205 and $246,752 (the second-highest federal tax bracket) may be more likely to face AMT than those in the highest tax bracket, if most of the income is in the form of capital gains.
Income in the second-highest bracket is taxed at a 29% rate, meaning the effective capital gain tax rate would be 14.5% (half of 29%) on the first $250,000 and 19.3% (two-thirds of 29%) on gains above that amount. As those rates are both under the 20.5% AMT rate, the taxpayer may have AMT payable.
In comparison, someone in the top tax bracket with a federal rate of 33% would face tax of 16.5% on the first $250,000 of capital gains and 22.0% on capital gains above that, under the regular tax system. In this case, given that only the rate on capital gains above the $250,000 threshold is higher than the 20.5% AMT rate, it may be less likely the taxpayer would have AMT payable.
Abdulla said taxpayers earning a significant capital gain in 2024 will have to ask themselves how likely they feel the proposed CGIR changes will become law and how much to set aside from a property sale to pay income tax associated with the increased CGIR. And if revised AMT will apply, the taxpayer would also need to consider how much it would be in their circumstances.
To estimate the appropriate holdback for the tax bill, a client should model what their AMT and income tax would be under the current CGIR regime and what their AMT and income tax would be under the proposed higher CGIR, Abdulla said.
Goodis said his firm’s fastest-growing client segment has been financial advisors looking to help clients model the tax consequences of transactions under consideration, including the possible impact of the revised AMT.
With Finance’s recent changes, “accountants are really busy with compliance,” Goodis said. “I’d say a lot more tax planning has fallen on the shoulders of the financial advisor.”