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High-income taxpayers that make large donations of cash or qualifying securities (e.g., public company shares) may have unintended tax consequences, under proposed changes to the alternative minimum tax (AMT) rules.
Specifically, under the proposed rules, a taxpayer can only use 50% of the donation tax credit on eligible charitable donations to reduce any AMT payable. Furthermore, 30% of capital gains on donated shares to registered charities will be included in income for AMT purposes (instead of being excluded under the current rules). If enacted, these changes would be effective as of January 1, 2024. The Department of Finance (Finance) released draft legislation on August 4, 2023.
To prepare for these potential changes, taxpayers should plan ahead to limit the impact of these rules.
Existing AMT rules are intended to help ensure that Canadians pay their fair share in tax by preventing certain individuals and trusts from claiming exemptions, deductions, and tax credits that would generally be available under ordinary income tax rules. Recent changes to these rules, introduced in Federal Budget 2023, would result in certain high-income taxpayers paying more taxes, but fewer middle-income taxpayers being subject to the regime.
The current federal rules prevent high-income taxpayers from significantly reducing their regular tax payable by calculating an adjusted taxable income which limits certain deductions and credits that can be claimed. Taxpayers would then pay the higher of the AMT or the regular tax, and any additional amount paid between AMT and regular tax can be carried forward and credited against regular tax for up to seven years. Provincial AMT may also apply and is generally calculated as a percentage of the federal AMT amount.
Under the current rules, you’re deemed to have disposed of the donated public company shares at fair market value which leads to a capital gain for tax purposes for the amount exceeding the original purchase price. When the shares are donated directly to a registered charity, the capital gain is deemed tax-free. This is the favourable option over donating cash for many high-net-worth individuals who have large investment portfolios with accrued gains. Additionally, taxpayers would be entitled to claim the donation tax credit which further reduces their federal and provincial tax. For purposes of calculating AMT, the tax treatment of donating public company shares follows the regular tax method. The disposition is therefore fully exempt from AMT.
Finance proposed several changes to the AMT which would impact high-income taxpayers, and which would significantly impact large donations. A few of the notable changes are:
For more details on proposed changes to the AMT regime, see our tax alert.
Several high-income taxpayers include charitable giving in their year-end tax planning; however, unintended AMT consequences may arise under the proposed rules. As a result, donors need to carefully consider the amount and timing of their donations.
Let’s consider a couple of scenarios to illustrate how these changes will impact the way your donations are taxed starting in 2024. These scenarios consider only the federal tax calculation and do not consider any provincial tax that may apply.
Click below to read about two different scenarios.
Mr. A realizes a capital gain of $2,000,000 from the sale of public company shares. He also realizes a capital gain of $500,000 ($1,000,000 proceeds of disposition less $500,000 original purchase cost) on the donation of public company shares to a registered charity. In this scenario, Mr. A, who wouldn’t have been liable for taxes under the current rules, now faces a federal tax payment of approximately $245,000 under the proposed AMT rules, based on the following calculations.
Regular federal taxes payable
Federal AMT payable under existing rules
Federal AMT payable under proposed rules
Ms. B received $2,500,000 of eligible dividends and made a cash donation of $1,000,000. In this scenario, Ms. B’s faces an additional federal tax payment of $46,000 under the new rules, based on the following calculations:
Federal AMT payable under existing rules
Federal AMT payable under proposed rules
The proposed rules can create a tax cost of making large donations after 2023, as shown in the scenarios above. However, there are ways you can plan ahead so that you aren’t negatively impacted by the new rules. For example:
The proposed rules are complex but there are ways you can continue to donate while mitigating the consequences. Contact your local advisor or reach out to us here before making any sizeable donations.
Disclaimer
The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.
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