The Alternative Minimum Tax has been making headlines in the nonprofit world* in response to proposed changes in federal tax law. So, what’s it all about? Here is some background on the AMT, and how you can have your say.
Let’s start with the basics – why do charities care about tax laws for individuals?
When Canadians are called to pay our taxes, we calculate them as a percentage of our net income. We can reduce the income we claim – and reduce the taxes we pay – through tax breaks. One way to receive a tax break is by donating funds to registered charities. A percentage of the donation amount is recognized as a credit against our total income declared, reducing our overall taxes owed.
There can be unintended results when it comes to tax breaks. What if a person is eligible for so many tax breaks that they pay very little or no tax? This is where the Alternative Minimum Tax (AMT) comes in. It was created to “prevent high income earners and trusts from paying little or no tax as a result of certain tax incentives" (RBC, 2023). If the tax owed is below a certain threshold it triggers the AMT and individuals have to calculate their taxes twice, using the conventional method and the AMT. They pay the higher of the two calculations.
Changes are being made to the AMT this year to lower tax breaks for high income earners. For most Canadian taxpayers – those not among the highest income earners – the new rules will have no effect. In fact, an increased flat tax exemption will reduce the chances of the AMT being triggered. The changes are also not anticipated to have a substantial effect on taxable income from salaries. They are most likely to increase the tax burden for high income or high net worth individuals gifting a portion of the value of dividends or sale of property, gifting public securities, or gifting property. The changes to AMT include:
- The flat tax exemption is increasing, which suppresses taxable income
- The basic minimum tax credit (which includes tax credits from donations) is being reduced by 50% of what it used to be, which will increase taxes owing
The AMT will now require taxpayers to claim a portion of capital gains, dividends, public securities and properties, which increases their tax burden
The assumption is that high income earners will be incentivized to reduce their philanthropic contributions. If we take the example of a donor with $5 million in eligible dividends, where once they were incentivized to donate $3.75 million, they might now be incentivized to pay $1.5 million. The difference is vast in this case.
Imagine Canada has submitted a letter to the Federal Government on the proposed changes to the AMT here. In it, they express their “support for the government’s efforts to ensure wealthy Canadians pay their fair share of taxes” – but state that this shouldn’t occur at the expense of revenue to charities. Fewer Canadians are donating to charities, and charities rely increasingly on higher income donors. Imagine Canada members are already hearing from donors wanting to renegotiate their pledges, at a time when charities have seen revenue losses and skyrocketing demand.
They ask that that the federal government:
- Release government projections done to estimate the impact of the proposed changes to the AMT calculation on charitable sector revenues. Include the anticipated impact on donor behaviour per income category.
- Maintain the current 0% inclusion rate for capital gains on donations of publicly listed securities.
- Maintain 100% of the charitable donation tax credit in the calculation of the Alternative Minimum Tax.
The Alberta Network of Community Foundations, Imagine Canada, the Canadian Association of Gift Planners, and others have also made submissions to the Department of Finance expressing concerns about this change to the AMT.
If this issue matters to you, you can weigh in too! Click here and scroll to the bottom for Imagine Canada’s letter campaign.
*This issue most directly impacts registered charities. While there may be indirect impacts on nonprofits that see investments from registered charities, we do not explore that in detail.