Although it’s been around since 1986, most Canadians aren’t aware of the Alternative Minimum Tax (AMT) rule. However, it has recently gained attention due to proposed changes introduced by the federal government in its 2023 budget, which are intended to apply starting in 2024.
How does the AMT work?
The AMT is intended to ensure that high-income individuals pay a minimum amount of tax each year, regardless of legitimate deductions, exemptions, and credits they are entitled to take. In the context of charitable giving, the AMT has previously not been of material concern to individuals who make donations, including donations of publicly listed securities with accrued gains.
However, the proposed changes, which include limiting the amount of donation tax credits that can be claimed and requiring a portion of capital gains from the donation of publicly listed securities to be included as income, could mean more individuals will be exposed to additional tax costs when donating to charity.
The proposed changes could also have a significant financial impact on charities. On one hand, charities may benefit in the short term from donors who decide to accelerate their longer-term donations and make larger donations before 2024. On the other hand, the increased risk of additional tax costs under the proposed changes may force donors to change their charitable giving practices going forward, and this could have long-term negative implications on charities.
If you are concerned about how the proposed changes to the AMT will affect your philanthropic giving, consult with your professional tax advisors to review your situation and determine appropriate planning strategies.
Here are a few examples:
- Make larger donations before 2024. Note that donations can only be claimed up to 75% of your net income for the year, so you would need sufficient income to make this strategy work. If you wish to make larger donations but are not yet sure what specific charities you want to support, consider setting up a Donor Advised Fund this year. This will allow you to take advantage of the donation tax credit this year while you defer your decision on which charities will be the recipients of the funds. If you would like to learn more about Donor Advised Funds, contact your Richardson Wealth Advisor.
- Accelerate realization of income and capital gains before 2024 in order to claim donations made this year or unused donations from prior years.
- Accelerate payment of any donation pledges that you may have agreed to with the charities you support.
- Make charitable donations from your corporation. If you own an investment holding company, have your company make future donations to charities – the AMT does not apply to corporations.
- Plan for donations at death, such as making gifts in your will and designating charities as the beneficiaries of life insurance or registered plans – the AMT does not apply in the year of death. Understand that this strategy would delay the charities’ receipt of funds.
- Purchase life insurance for a charity to own before 2024. Certain life insurance policies may only require a single premium payment, which is made to the charity and would qualify for a donation tax credit. The policy could build cash value that provides the charity, as owner of the policy, with flexibility to access the funds during your lifetime. The charity, as beneficiary of the policy, would also receive the ultimate payout upon your passing. If you would like to learn more about charitable giving strategies involving life insurance, contact your Richardson Wealth Advisor.
Get the right advice
The broader application of the AMT under the federal government’s proposals will require strategic planning on an ongoing basis to ensure that donors continue to make the desired impact on the charities they support, while minimizing the risk of additional tax costs. While draft legislation for the proposed AMT rules has been released by the federal government, it is possible that the final rules may be different.
Consult with your professional tax advisors and your Richardson Wealth Advisor for the latest updates on these proposals.