Dropping temperatures and falling leaves are a reminder that the end of another year is just around the corner. In the tax world, these changes also trigger thoughts of year-end personal tax planning considerations.  We have written articles in previous years on typical year-end planning tips which should be referenced annually.  However, proposed changes to the AMT to take effect in the new year (i.e. January 1, 2024) pose a number of unique considerations as 2023 comes to a close.
 

The AMT is an alternative calculation of a taxpayer’s income tax liability which takes place in the background of each individual’s personal tax return calculation.  A taxpayer’s overall personal tax liability is determined to be the greater of the regular tax payable and the calculated AMT. 

In the vast majority of situations, taxpayers are unaware of this background calculation as the regular tax is the greater amount. However, where high-income taxpayers have claimed significant preferential tax exemptions or deductions limited in the AMT calculation, the AMT may exceed the regular tax, resulting in the greater amount of tax owing. The amount by which the AMT exceeds the regular tax is intended to be a “temporary” refundable tax known as minimum tax. 

The minimum tax is intended to be a prepayment of future tax and can be accumulated and claimed in the following seven years to reduce tax when regular tax exceeds the AMT.   However, in situations where the carryover balance cannot be fully claimed in the following seven years, the minimum tax becomes a permanent tax cost. 

Effective January 1, 2024, significant changes planned for the AMT calculation will likely result in broader and more significant application, particularly for high income individuals reporting significant capital gains and/or claiming significant tax deductions and credits, such as losses and donations.  
 

Charitable donations are a typical year-end tax planning component to focus on in 2023 in light of the pending AMT changes. 

Under Canada’s tax system, there are a number of specifically legislated incentives designed to encourage Canadians to make donations to qualifying organizations.   These measures include donation tax credits and tax-free treatment on the gain resulting from the donation of publicly traded securities. 

At top Ontario marginal tax rates, the donation tax credit can reduce a taxpayer’s tax liability for the year by up to 50.35% of the gift amount. Furthermore, since the top marginal tax rate in Ontario is 26.76% on capital gains, tax savings of up to 77.11% (50.35% + 26.76%) can be achieved on donations of publicly traded securities with accrued gains.

The planned incoming changes to the AMT calculation can pose issues for high-income taxpayers making large donations, especially in the form of appreciated securities, starting next year.  Since both the donation tax credits and tax-free capital gain portion are currently treated the same under the AMT and regular tax calculations, donations have historically not been a concern for AMT.  However, beginning in 2024, only half of the donation credit will be allowed for AMT purposes. Furthermore, 30% of the gain on donated appreciated securities will also be included in the AMT calculation, further magnifying the impact for donations of securities. 

Accordingly, it may be tax efficient planning to make donations and/or gifts in 2023 to avoid potential significant AMT issues that may arise with personal donations made in 2024 and beyond.   Furthermore, since there are generally limitations on the amount of donations that can be claimed in a year, other planning considerations may also be necessary to ensure the donations and any carry forward balances can be claimed in 2023.
 

Another exercise in typical year-end personal tax planning includes reviewing portfolios to identify “underwater” investments that can be sold to trigger capital losses before the end of the year which can offset taxes payable on capital gains realized during the year.  Furthermore, postponing year-end transactions that would trigger capital gains to the following tax year is generally recommended, when possible, to delay the resulting tax liability. 

However, the planned changes to the AMT calculations may warrant the opposite planning considerations for the 2023 taxation year. 

While significant capital gains in a particular year could result in AMT for a taxpayer under the current rules, the AMT impact of capital gains will be more pronounced in 2024.   This is because while the current AMT calculations require an additional inclusion for capital gains of 30% compared to the regular tax calculations, the new AMT will increase the adjustment to 50%.

Furthermore, while capital losses claimed fully offset capital gains dollar for dollar in both the regular tax and the current AMT calculation, starting in 2024 only 50% of capital losses will offset capital gains for AMT purposes.  This mismatch between the regular tax and AMT calculations is likely to result in unexpected AMT surprises starting in 2024. 

Accordingly, appropriate tax planning for this year may include triggering significant capital gains in 2023 before the higher inclusion rates under the revised AMT applicable next year. In particular, taxpayers with capital loss carryover balances available to offset tax on capital gains may wish to accelerate available accrued capital gains to absorb loss carryover balances before the end of the year. 
 

Proposed changes to AMT applicable January 1, 2024 may result in certain unique tax planning opportunities prior to the end of 2023. However, the AMT and related planning considerations are complex.  Accordingly, please be in touch with your Shimmerman Penn LLP representative to discuss how the changing AMT might impact your situation and obtain specific tax advice prior to taking any action.