AMT is almost always recoverable, says CIBC tax expert

The alternative minimum tax (AMT) is recoverable in almost all cases, one tax expert said in response to the federal government’s plan to raise the rate and exemption amount.

As announced in the federal budget 2023, a hike in the AMT for wealthy Canadians was announced on Tuesday, with the tax rate going up from 15% to 20.5% and the exemption level being increase from $40,000 to $173,000. It is expected to go into effect in 2024.

“The good news, however, is that in almost every case, the minimum tax is just a prepayment. It is recoverable, there is a seven-year carry forward to the extent that your ordinary tax exceeds minimum tax in a future year,” Jamie Golombek, the managing director of tax and estate planning at CIBC Private Wealth Management, said in a Bloomberg interview.

AMT is already in place in Canada to restrict the tax deductions available to high earners. Depending on which is higher, the taxpayer must pay either standard tax or AMT.

Nevertheless, the budget noted that the AMT hasn't undergone major change since it was introduced in 1986 and that "thousands of the wealthiest Canadians still pay relatively little income tax."

Golombek estimates that over the course of five years starting in the 2024 tax year, the proposed changes to the alternative minimum tax will increase governmental income by around $3 billion. Raising the threshold for AMT payment "would result in a tax decrease for tens of thousands of middle-class Canadians, while the AMT will more accurately target the very rich."

“The question I would pose to the government is, is this real revenue or is it just a timing difference?” Golombek said. “Because if most people end up recovering their minimum tax over a seven-year period, are we just pushing the problem out seven years? Or is this a real permanent savings or a tax revenue grab for the government.”

Golombek stated that if an individual’s income is more than $300,000, the changes are unlikely to affect them. He claimed that the changes to the tax laws truly only affect "high-income Canadians."

“The government budget documents specifically said that 99 per cent of the estimated billions of dollars of new revenue that this will bring in over the next five years, will be brought in by the people earning over $300,000 [annually] with 80 per cent of it earned by the people [with an income] over a million dollars,” he said.

He claims that the changes to Canadian tax laws will affect both salaried people and items like capital gains, CPP/QPP, childcare expenses, moving expenses, and employment expenses. Some clients might consider combining their investment portfolios so that they can "manage the sort of distributions — in terms of dividend income — that they receive on a yearly basis, potentially lowering the influence of some of the AMT preference items."

“Advisors will have to look at how high-net-worth clients are affected by the AMT,” Golombek said.