Alternative Minimum Tax (AMT) is a separate method of tax calculation made by the Canada Revenue Agency (CRA) that works in parallel with the calculation of a taxpayer’s regular income tax .
The CRA’s application of the AMT method ensures that a taxpayer who can take advantage of various preferential tax policies, pays at least a minimum level of tax.
This is accomplished by the AMT method removing preferential deductions and tax rates that a taxpayer is eligible to use, thereby reducing their taxable income.
Once the AMT method adjusts the taxable income to a more regular level, it then applies a special federal tax rate to calculate and arrive at the minimum AMT tax amount.
The taxpayer then pays the higher of the amount of regular tax calculated taking into account the application of all preferential tax policies, or the amount of AMT, and since preferential regular tax policies often reduce taxes considerably, the amount AMT is what is usually paid to the CRA.
Common triggers for the AMT method include: a taxable capital gain or loss created by the sale of shares of a Canadian-controlled private corporation, the sale of qualified farm and fishing property, the share of a loss of partnership resulting or augmented by claim of capital cost allowance on rental properties; a loss from a limited partnership; financial charges on certain investments; a loss of resource properties resulting from or increased by claiming a depletion allowance, exploration expenses, development expenses or Canadian oil and gas property expenses; an employee home relocation loan deduction; a deduction for stock options; a federal political contribution tax credit; an investment tax credit; a labour-sponsored funds tax credit; a federal dividend tax credit; or, an overseas employment tax credit.
Given AMT’s recognition of exceptionally high income from particular sources and the calculation and identification of tax associated with that particular source of income, the amount of AMT paid may apply. the taxpayer’s future tax returns.
At this point, if a taxpayer is required to remit the AMT in one year but nothing triggers the AMT method in the following year or years, the taxpayer can claim a tax credit for that prior AMT payment against the future taxes payable.
A paid AMT amount can be carried forward and credited for up to seven years, but it cannot be carried back.
Why have the AMT method in the first place if it’s just going to be reimbursed in the future?
Remembering that the AMT method is in place to ensure that a taxpayer who has extraordinary income and/or preferential deductions pays some sort of minimum tax, AMT tax credit availability, or “refund” of taxes paid if you will, is the recognition by the CRA that a taxpayer who experiences a single year of high income from unusual sources and/or who uses preferential deductions does not necessarily have to be treated the same as the taxpayer who has an extraordinary income annually and/or who has the right to use preferential tax policies each year.
Ron Clarke, owner of JBS Business Services in Trail, provides accounting and tax services.