By Theresa L.M. Man and Jacqueline M. Demczur

The Department of Finance released Legislative Proposals Relating to the Income Tax Act and the Income Tax Regulations (Budget 2023 and other proposals) on August 4, 2023, to move forward with proposed changes to the alternative minimum tax (“AMT”) for high-income individuals, as well as certain estates and trusts. These proposed AMT changes are of note to the charitable sector as they may negatively impact the making of future transformational gifts to charities by high net worth donors. If enacted, these AMT changes will be effective for taxation years that begin after 2023.

Under the Income Tax Act (Canada) (“ITA”), taxpayers are required to calculate their tax liability under the “regular” method and under the AMT. If a taxpayer has claimed preferential tax deductions resulting in a lower tax liability under the regular method, then they will have to pay the higher AMT. This is a way of ensuring that every individual pays at least a minimum amount of tax.

Currently, the AMT applies a flat 15% tax rate on an adjusted taxable income in excess of a $40,000 exemption. Under the new proposed rules, the $40,000 income exemption will be raised to $173,000, which will be indexed to inflation, and the tax rate of 15% will increase to 20.5%. These changes will increase the income level required for taxpayers to be subject to the AMT but also cause those who are subject to the AMT to pay more taxes.

As well, currently, there are significant tax benefits on donations of publicly listed securities to charities under the ITA. Specifically, there is no taxable capital gain on these shares when they are donated to charities with the donor being entitled to a donation tax credit for the full value of the gifted shares. These benefits apply to tax liability both under the “regular” method and the AMT.

However, under the new proposed AMT rules, the scope of what will be included in the AMT will be expanded. While the proposed new AMT rules are exceedingly technical and complicated, they include the following key provisions that are particularly of note to the charitable sector: (1) the basic minimum non-refundable tax credits will be reduced by half (which include donation tax credits); (2) the capital gains on gifts of capital property to charities will be included at a 100% rate (instead of currently 100% of the charitable tax credit arising from such donations being able to be used to reduce the donors’ taxable income); and (3) capital gains on gifts of publicly listed securities will be included at a 30% rate (instead of currently such donations being tax free).

The proposed changes also include exempting graduated rate estates from the AMT. It is also important to note that corporations are not subject to the AMT.

If these proposed changes to the AMT are enacted, then these new rules will significantly reduce the tax benefits to donors who are subject to the AMT when they donate publicly listed securities and capital property to charities. Donors may have to pursue alternate tax planning methods, which could negatively impact the resources available to charities to carry on their important work in Canada and around the world.

For those interested in providing comments on the proposed new AMT changes, the Government of Canada is accepting feedback until September 8, 2023. Submissions can be made by emailing Consultation-Legislation@fin.gc.ca.

​Read the August 2023 Charity & NFP Law Update