Federal Budget 2023: Tax items relevant to small business owners and farmers - A change to the “Alternative Minimum Tax” (“AMT”)

Sean Rheubottom, B.A., LL.B., TEP

When the Alternative Minimum Tax (“AMT”) was first introduced in the 1986 Federal Budget, tax commentators described it as a “political tax” - a tax that would not significantly affect government revenue but rather would generate political support for the government among those who might see various tax deductions and credits as unfair tax advantages for wealthy people.

The AMT is an alternative calculation of income tax under a different set of rules. If it exceeds the tax you would pay under the normal rules, you have to pay the AMT. Simplified, the AMT calculation adds certain tax preferences back into your income, including 60% of the non-taxable portion of realized capital gains (that is, 30% of the entire gain), and it disallows certain credits such as the dividend tax credit. The tax is then calculated at 15% on the resulting income above an exempt amount of $40,000, and you then know whether you have to pay AMT.

A typical scenario in which AMT may apply is where a farmer sells land, realizes significant capital gains and uses their $1,000,000 lifetime CGE. Under the AMT calculation, a certain amount of the capital gain gets added back into their income, and they find out that they owe AMT. However, the AMT is recoverable against your taxes over the next 7 years to the extent that your regular tax exceeds your minimum tax in those years.

Federal budget announced changes: farmers largely unaffected

Under the AMT changes announced March 28, 2023, the amount of the non-taxable portion of capital gains that is added back into income for the alternative tax calculation is not being increased. This combined with the increase in the exempt income amount under the alternative income calculation (see below) means that fewer farmers should be caught by AMT. The Feds’ Tax Measures Supplementary Information provides:

“Lifetime Capital Gains Exemption

“Under current rules, 30 per cent of capital gains eligible for the lifetime capital gains exemption are included in the AMT base. The government proposes to maintain this treatment.”

“Raising the AMT Exemption

“The exemption amount is a deduction available to all individuals (excluding trusts, other than graduated rate estates) that is intended to protect lower and middle-income individuals from the AMT.

“The government proposes to increase the exemption from $40,000 to the start of the fourth federal tax bracket. Based on expected indexation for the 2024 taxation year, this would be approximately $173,000. The exemption amount would be indexed annually to inflation.

Other highlights from the Feds’ Tax Measures Supplementary Information:

“Increasing the AMT Rate

“The government proposes to increase the AMT rate from 15 per cent to 20.5 per cent, corresponding to the rates applicable to the first and second federal income tax brackets, respectively.

“Carry Forward Period

“The length of the carry forward would be maintained at seven years

“Broadening the AMT Base

“A number of changes are proposed to broaden the AMT base by further limiting tax preferences (i.e., exemptions, deductions, and credits).

“Capital Gains and Stock Options

“The government proposes to increase the AMT capital gains inclusion rate from 80 per cent to 100 per cent. Capital loss carry forwards and allowable business investment losses would apply at a 50-per-cent rate. It is also proposed that 100 per cent of the benefit associated with employee stock options would be included in the AMT base.

“Donations of Publicly Listed Securities

“The government proposes to include 30 per cent of capital gains on donations of publicly listed securities in the AMT base, mirroring the AMT treatment of capital gains eligible for the lifetime capital gains exemption. The 30-per-cent inclusion would also apply to the full benefit associated with employee stock options to the extent that a deduction is available because the underlying securities are publicly listed securities that have been donated.

“Deductions and Expenses

“Under the new rules, the AMT base would be broadened by disallowing 50 per cent of the following deductions:

• employment expenses, other than those to earn commission income;
• deductions for Canada Pension Plan, Quebec Pension Plan, and
Provincial Parental Insurance Plan contributions;
• moving expenses;
• child care expenses;
• disability supports deduction;
• deduction for workers’ compensation payments;
• deduction for social assistance payments;
• deduction for Guaranteed Income Supplement and Allowance
payments;
• Canadian armed forces personnel and police deduction;
• interest and carrying charges incurred to earn income from property;
• deduction for limited partnership losses of other years;
• non-capital loss carryovers; and
• Northern residents deductions

“Dividend Tax Credit

“The proposed AMT would continue to use the cash (i.e., not grossed-up) value
of dividends and fully disallow the Dividend Tax Credit.”

© Heritage Private Wealth Law

General information only; not intended as legal or tax advice. Readers are encouraged to obtain legal and tax advice before acting in their specific circumstances.