The Alternative Minimum Tax ("AMT") imposes a minimum level of income tax on taxpayers who claim certain tax deductions, exemptions, or credits to reduce their taxable income. AMT only applies to individuals including certain trusts; it does not apply to corporations. Under the AMT, there is a parallel tax calculation that allows fewer deductions, exemptions, and credits than under the regular income tax calculation. If the amount of tax calculated under the AMT is more than the amount of tax owing under the regular income tax system, the difference owing is payable as AMT for the year. The AMT paid can be recovered over the following seven years if there is sufficient full rate taxable income in those future years.

Draft legislation containing proposed changes to the federal AMT rules was released on August 4, 2023. The changes include raising the flat AMT rate to 20.5% from 15%, increasing the amount of income below which AMT will not apply (the "AMT exemption", estimated to be $173,000 in 2024), increasing the capital gains inclusion rate for calculating AMT from 80% to 100%, and broadening the AMT base by limiting certain amounts that reduce taxes.

This bulletin summarizes the proposed changes to the AMT that could impact charitable giving.

The draft legislation comes into effect on January 1, 2024.

Charitable Donation Tax Credit

Under the current AMT rules, the donation tax credit for making donations to qualified donees under the Income Tax Act (Canada) can be fully applied (100%) against any AMT owing. Starting in 2024, only 50% of the donation tax credit will be allowed when calculating the AMT (and a similar reduction will be implemented for other tax credits such as the basic personal amount, medical expense credit, disability credit, and tuition credit). This is the case whether the donation consists of cash, shares and/or other in-kind assets.

Donations of Publicly-Listed Securities

Under the regular income tax system, donors who make in-kind donations to a registered charity of publicly listed shares and units or shares of mutual funds or segregated funds not only obtain a tax receipt equal to the fair market value of the securities being donated (and can claim the donation tax credit), but such donors also do not pay capital gains tax on any accrued gain of the donated shares. Currently, this zero-inclusion rate for capital gains arising on in-kind donations of publicly traded securities also applies for AMT purposes. However, starting in 2024, 30% of capital gains on publicly listed securities that are donated in-kind will be included in adjusted taxable income under the new AMT rules. Therefore, for significant donations of publicly listed securities, AMT may result in 2024 where it would not have arisen if made under similar circumstances in 2023.

Donations of Employee Stock Options

Under the regular income tax system, assuming certain conditions are met, only 50% of the benefit received on the exercise of an employee stock option is included in income. Starting in 2024, 100% of employee stock options will be included in adjusted taxable income for AMT purposes. Where a donation is made on the exercise of a qualified employee stock option of publicly listed securities, so long as certain conditions are met, no benefit is included in income for regular tax purposes. As of 2024, 30% of the benefit will be included in income for AMT purposes. Therefore, as of 2024, employee stock option benefits exercised in a year, even upon donation of the underlying securities, may give rise to AMT.

Potential Strategies to Mitigate the Proposed Changes to AMT

In consultation with your legal, tax and financial advisors, it may be helpful to consider certain strategies to mitigate the effects of the proposed changes to AMT on your charitable giving, including:

  • making a donation before the proposed changes take place;
  • consider charitable gifting in your estate planning. For example, the proposals will exempt AMT from applying to graduated rate estates. In addition to testamentary trusts already exempt from AMT (e.g. certain types of spousal trusts), the proposals will also exempt other types of testamentary trusts from AMT - including qualified disability trusts. Note also that AMT does not apply in the year of death of an individual;
  • as AMT does not apply does to certain types of exempt trusts, establishing an alter ego trust or joint partner trust that is set up to allow for charitable gifting; or
  • if there is a corporate structure in place, consider making corporate donations, given that corporations are not subject to AMT.

Depending on the context of your particular situation and your goals, all of these strategies come with their own unique advantages and disadvantages.

It is important to discuss the proposed changes to AMT with your legal, tax and financial advisors. The proposed changes may reduce the tax benefits associated with charitable giving. However, various planning options may be available to continue to achieve your philanthropic goals. Should you have any questions about any of these particular strategies, one of our Fasken lawyers would be happy to speak with you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.