L’impôt minimum de remplacement (IMR) : Fonctionnement et éléments importants à savoir

What is the Alternative Minimum Tax in Canada? 

Let’s face it: Our income tax system is complicated. There are lots of rules and exceptions, and a huge list of deductions and credits you can use to lower your tax bill. Plus, if you earn money from capital gains or dividends, the income tax you pay on that amount is calculated differently than when you earn wages or a salary.

If you fall into a certain category of investment income earners, which in turn allows you to claim certain related deductions and tax credits, you may have to calculate the alternative minimum tax on Form T691 in your tax return. If your total related income is $40,000 or more you may have to pay minimum tax.

Essentially, if you think you might be in this situation, you calculate your tax twice (lucky you!): the standard way, and the AMT way. The higher number is the one you pay for that year. Read on to learn about how AMT is calculated.

What triggers the AMT?

Most Canadians don’t have to worry about the AMT, and don’t even know it exists. Sounds blissful, right? It’s really designed for special situations in which you have a decent income but are able to lower your tax bill substantially—even to zero—due to various exemptions, deductions, credits, and other tax-saving tools.

Here are the relevant situations that may trigger the AMT. 

Note that the AMT would not be triggered with the reporting of a taxable capital gain, however, it may be triggered if this capital gain results from the sale of a qualifying property, such as Qualifying Small Business corporation shares, or farm or fishing property, where the seller may claim a capital gains deduction on that sale.

What are the AMT rules?

If you think you might be subject to the AMT, it’s a good idea to understand how it works. Knowledge is power! Here are some things you should know.

How do I calculate the AMT?

Here’s a (relatively) quick way to see if you might have to pay the AMT. Add together 60% of the amount in line 12700 of your income tax return (that’s taxable capital gains), plus the following amounts:

• A loss resulting from or increased by claiming capital cost allowance on rental Cancel properties (this includes your share of a partnership loss)
• A loss from a limited partnership that is a tax shelter
• Anything you’ve entered in line 22100, carrying charges, and interest paid to earn income on investments
• A loss from resource properties, resulting from or increased by claiming a depletion allowance, exploration expenses, development expenses, or Canadian oil and gas property expenses (whew, that’s a mouthful!)
• A deduction on line 24900 for security options

If the total of these amounts is $40,000 or less, you probably don’t have to pay the AMT. But if it’s more than $40,000, ding-ding! You’ve won extra paperwork, aka Form T691 (see link above). 

In 2023 and previous years, the AMT is (and has been) a flat 15% on adjusted taxable income, with a standard exemption of $40,000. But that’s going to change (see « What are the new AMT rules for 2024? » below).

How do capital gains affect the AMT?

When you sell capital property such as stocks or real estate for a profit, the amount you earned is a capital gain. Typically, you pay tax on 50% of that amount. For example, if your capital gain is $50,000, you would add $25,000 to your taxable income.

There’s also something called the lifetime capital gains exemption, which reduces your tax payable when you sell eligible shares in a small business corporation or farm or fishing property. This amount goes up every year and is quite substantial—in 2022, for instance, it was $913,630 for small business shares and $1,000,000 for fishing and farm property. Nice gig if you can get it.

Under the AMT, you may have to pay some or all of the taxes that would be due without the deduction or exemption. Even though you may be able to recoup those taxes in future years (see « Does AMT get carried forward? » below), it can be a surprising tax hit in a year in which you have a lot of capital gains.

Does the AMT get carried forward?

If you end up having to pay the AMT, there is an opportunity to recover some of that money in future tax years. Essentially, you can carry forward the difference between the AMT and your regular tax liability for seven years, or until you use it up. It counts as a credit, but only against regular tax payable, not against future years’ AMT. You can claim this credit using Form T691. 

Can I avoid the AMT?

To avoid the AMT, you need to make it lower than your tax payable under the standard system. For instance, if you have RRSP deductions, you might decide to save them for a rainy day—ahem, future years—to increase your tax payable and avoid the AMT. 

What are the expected new AMT rules for 2024?

When the federal government released the 2023 budget, it announced that there would soon be changes to how the AMT is calculated. The details aren’t yet available, but here are a few things to watch for:

• More limits on eligible deductions, credits, and exemptions, such as increasing the capital gains inclusion rate from 80% to 100%
• Disallowing 50% of certain deductions, including moving expenses, child care expenses, and interest and carrying costs incurred in order to earn income from property
• A higher AMT exemption, from $40,000 to the start of the fourth federal tax bracket, which will be about $173,000 for 2024
• An increase in the AMT rate from 15% to 20.5%

Should I get more guidance with the AMT?

The AMT isn’t that hard to understand—but organizing your taxes so you get the best outcome can be a challenge. The most important thing to remember is that if you think you’re going to trigger the AMT, it’s probably worth getting help with your taxes.