The Alternative Minimum Tax (AMT) in Canada is a parallel tax system designed to ensure that high-income individuals and corporations pay a minimum amount of tax, even if they use deductions, credits, or tax preferences to significantly reduce their regular tax liability. Here’s a structured overview:
Key Features of AMT in Canada
- Objective:
Prevents taxpayers from excessively reducing their tax burden through specific deductions, exemptions, or credits. - Calculation:
- Step 1: Start with regular taxable income.
- Step 2: Add back certain tax preferences (e.g., 30% of capital gains, employee stock option deductions, tax shelter losses).
- Step 3: Subtract the AMT exemption ($40,000 federally in 2023).
- Step 4: Apply the federal AMT rate (15%) to the adjusted amount.
- Step 5: Subtract limited non-refundable credits (e.g., basic personal amount).
- Step 6: Compare the AMT result to regular tax. Pay the higher amount.
- Common Adjustments (Add-Backs):
- 80% of capital gains (vs. 50% under regular rules).
- Employee stock option deductions.
- Non-capital losses and limited partnership losses.
- Certain dividends and tax-exempt income.
- Some non-refundable tax credits (except basic personal amount).
- Exemption and Rate:
- Federal exemption: $40,000 (indexed annually).
- Federal rate: 15%.
- Provincial AMT: Varies by province (e.g., Ontario uses a similar system with a 33% rate on adjusted income after exemption).
- Recovery Mechanism:
- If AMT is paid, the excess over regular tax can be carried forward for 7 years to offset future taxes when regular tax exceeds AMT.
- Who Is Affected?
Typically high-income earners with large deductions, capital gains, stock options, or tax shelters. Most middle-income taxpayers are unlikely to trigger AMT.
Example:
- Regular Taxable Income: 200,000(includes200,000(includes50,000 from a $100,000 capital gain).
- AMT Adjustments: Add 30% of the capital gain ($30,000).
- Adjusted Income: 230,000−230,000−40,000 exemption = $190,000.
- AMT Calculation: 15% of 190,000=190,000=28,500.
- Compare: If regular tax is 25,000,AMTowedis25,000,AMTowedis3,500. This excess can be carried forward.
Provincial AMT:
Provinces like Ontario and Quebec have their own AMT rules, often aligning with federal adjustments but applying provincial rates and exemptions.
Key Takeaway:
AMT ensures a baseline tax contribution from high-income taxpayers, balancing tax fairness. Taxpayers subject to AMT should consult a tax professional to optimize carry-forwards and planning. For exact figures and updates, refer to the Canada Revenue Agency (CRA) guidelines.
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