2023 Federal Budget Highlight: What is Alternative Minimum Tax in Canada?

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    23 May 2023
    The federal budget for 2023 comes at a time when Canada is navigating through global financial uncertainty. Even though there were numerous changes to tax rates, the Alternative Minimum Tax (AMT) was in the limelight, since it registered its first set of significant changes in the proposed budget.

    What Do You Mean By Alternative Minimum Tax?

    First introduced in 1986, the alternative minimum tax (AMT) is a substitute for the regular taxation system, which ensures individuals earning higher income don’t get to reduce their tax liability unjustifiably using tax incentives, deductions, and credits. Hence, the taxable income of the subject will be calculated based on a few deductions, credits, and exemptions that are otherwise available under the regular taxation rules.

    What Triggers The Alternative Minimum Tax? Whom Will It Impact?

    All non-resident individuals and Canadian citizens recipients of a major part of their income through capital gains and other tax-preferential sources are subject to AMT. Also, subjects whose income reduces significantly due to substantial deductions/ expenses on their taxable income in the ordinary tax regime.  You may have to pay AMT if you’ve claimed any of the following:
    • Deduction for security options.
    • Carrying charges for some of your investments.
    • Loss (including partnership loss) increased by or resulting while claiming capital cost allowance for rental property.
    • Loss out of limited partnerships.
    • Lastly, loss arising out of claiming development/ Canadian Oil or gas property/ exploration/ depletion allowance. 
    Find out more about these deductions in this pdf, or consult a Corporate Tax Filing Surrey Canada agency. 

    What Are The Proposed 2023 Budget Canada AMT Tax Changes?

    The Canadian budget focused on closing loopholes, increasing tax compliance, and ensuring that the wealthiest pay a fair share of tax. These are the proposed changes as per the 2023 federal budget:
    • Legislative changes to increase the AMT rate from 15 percent to 20.5 percent.
    • Also, limit the excessive use of tax preferences.
    • Further, there will be a 4X rise in basic AMT exemptions: from $40,000 to $173,000.
    • Overall focus on extracting more tax from the wealthy and cutting down on tax disproportion.
    As of now, AMT applies at a flat rate of 15%, and the standard exemption of $40,000. All the proposed changes will come into effect from taxation years that begin after 2023. Consult a CPA in Surrey Canada for more information.  
    Broadening the AMT Base
    Subjects for inclusion/ deduction Before  After 
    Capital Gains Inclusion 80% included  100% included
    Capital loss carryforwards & allowable business investment losses. - 50% deductible
    Benefits associated with employee stock options - 100%
    Inclusion of capital gains on donations of publicly listed securities in the AMT base - 30%
    Deductions and Expenses Check full list: Page 18- Budget 2023 100% 50% (50% disallowed from deduction)
    Percentage of non-refundable tax credits allowed to reduce the AMT 100% 50% (subject to exceptions)
    Raising the AMT Exemption
    Deductions available to lower/ middle-income individuals from AMT. $40,000 $173,000
    Increasing the AMT Rate
    AMT rate 15% 20.5%

    How To Calculate Payable Alternative Minimum Tax Canada?

    A taxpayer has to pay either the AMT on adjusted taxable income or income tax based on the regular regime (whichever is higher). If AMT is payable, the excess amount after the regular income tax will continue to be carried forward for 7 years, so there is no change in this rule. 

    How Can CJCPA Help You With AMT?

    Recipients of taxed earnings will need to watch out for applicable tax calculations. There is a need to determine the impact of revised capital gains inclusion, exercising stock options, etc. in comparison with the ordinary method of taxation.  Taxpayers in the lower income slab may also need assistance with the right preferential taxation rates. CJCPA has a team of experienced tax experts and accountants in Canada who will guide you through planning and understanding the revised Alternative Minimum Tax 2023. Also, CJCPA helps with personal tax and corporate tax filing in Canada.
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