Alternative minimum tax changes in 2022: everything you need to know

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Launched in 1986, Canada’s alternative minimum tax is a secondary way of calculating income tax. Its main purpose is to ensure that high-income earners pay their fair share of taxes, since tax incentives, deductions and exemptions can allow them to pay less.

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The AMT is currently 15%, but the Canadian government believes it needs an update to account for more Canadians not paying what the Department of Finance considers an amount fair in personal income tax terms.

Why do we need the alternative minimum tax?

The latest federal budget, released in early April, showed that 28% of Canadians with incomes over $400,000 — the top 0.5% earners — paid an average federal tax rate of 15% or less. in 2019. Additionally, 2019 tax rate returns show that more than one in 10 of these top earners paid less than five percent.

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In an attempt to combat this trend, the government announced changes to the tax. The final details on the alternative minimum tax are expected to be published in the fall economic and fiscal update. The final date should be announced by the Minister of Finance, probably a few weeks before the change comes into effect, usually in November or early December.

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“There are still thousands of wealthy Canadians who pay little or no personal income tax each year,” the finance department said. “It’s unfair, and the federal government is committed to changing that,” the department added.

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How does the alternative minimum tax work?

The AMT is applied when someone earning more than $400,000 claims a large tax deduction or exemption.

As described by MNP in a 2022 report, tax owed is measured by subtracting preferential tax deductions and credits from your total income. However, the alternative minimum tax is applied when the regular measure is compared to a second set of calculations, “where you do not receive those same deductions and credits, but your tax is calculated at a lower tax rate (currently, this lower tax rate is 15%). »

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“In most cases, the normal calculation will result in an increase in tax payable. When the second calculation gives a higher amount owing, you will pay that higher amount. The difference between the normal tax due and the second calculation is the AMT.

It’s time to include ‘new tax avoidance measures’

“The existing AMT in Canada is very, very, very narrow and doesn’t really appeal to many people,” says Kevin Milligan, professor of economics at the University of British Columbia.

“And so the intention of the new one would be to cast the net wider.”

Milligan thinks the current AMT needs updating to “take into account new tax avoidance measures that are being used. And so I can’t wait to see what they come up with.

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However, not everyone thinks the AMT should be broadened – and some people think it’s already too broad.

Jamie Golombek, managing director, tax and estate planning at CIBC Private Wealth in Toronto, says Canadians earning $100,000 or more already generate more than half of overall tax revenue.

And the alternative minimum tax has so far accounted for a very small share of the federal government’s tax revenue — it raised $303 million in 2017, out of $219 billion in taxes collected from the federal government. Canadians.

Is the alternative minimum tax reserved for high incomes?

Golombek explained that the AMT doesn’t necessarily only apply to high-income earners — it can also apply if someone made a capital gain or reported certain deductions — and the total was over 400,000. $.

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There may be cases where someone will have to pay AMT even if they do not have a stable income of more than $400,000.

“Like someone who sells a chalet once in their life. Are they rich? You know, it’s debatable,” he said.

Milligan also has questions about how the new alternative minimum tax will be applied.

“I don’t know what definition we’ll have of income for the new version of AMT,” he said.

So far, under the current alternative minimum tax, several deductions and exemptions are neutralized, and this may change with the revised AMT. However, Finance Minister Chrystia Freeland tweeted on April 11 that the current AMT will remain and the updated guidance will be “layered”.

What should we learn from the US alternative minimum tax?

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Whether or not you believe that the current alternative minimum tax is tight, the United States has lessons for Canada.

Canada’s southern neighbor introduced an AMT in 1969 after the Treasury Secretary testified that 155 people with adjusted gross incomes over $200,000 paid no federal income tax on their 1967 tax returns .

Since then, the United States has raised its alternative minimum tax from 10% to 30%. Milligan says a move like this “is not desirable”.

“I think it’s worth considering trying to find a middle ground between those two (narrow versus wide),” Milligan said.

“You have to be careful that you don’t end up catching too big a horse in the population, because you end up having two parallel tax systems, and it gets very confusing.”

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.