Alternative Minimum Tax changes poised to take effect in the New Year

Sometimes the federal government makes news by introducing sweeping new policies. At others it does so by saying little—or nothing—on a specific topic. This week’s 2023 Fall Economic Statement accomplished the latter by disregarding the charitable sector’s calls to roll back some proposed amendments to Canada’s Alternative Minimum Tax.

In an earlier blog  we outlined how Ottawa is planning to bolster the existing Alternative Minimum Tax (AMT) regime to limit tax credits, exemptions and deductions that are perceived to be helping higher income individuals minimize their tax burden. But in doing so, the proposed changes will also alter donation-related tax rules for taxpayers assessed under the AMT. Specifically, the new AMT measures will apply a 30 per cent capital gain when qualifying securities are donated to a charity (capital gains on donated securities are currently tax-free), while halving the available donation tax credit.

The change—which takes effect on January 1^st, 2024—could place significant downward pressure on larger charitable donations by major philanthropists. It begs the question: why would the federal government take action that could hurt charities’ ability to support our communities? It’s long been (mistakenly) argued in some circles that high net-worth Canadians use charitable donations as a tax shelter. That simply isn’t true. Philanthropic donations are, in fact, an expense for donors.

This table* quantifies the impact of the changes:

	Existing AMT	Proposed AMT
Tax rate	15 per cent	20.5 per cent
Exemption amount	$40,000	$173,000
Capital gains on donation of public securities	Include 0 per cent	Include 30 per cent
Capital gains on donated property	Include 50 per cent	Include 100 per cent
Donation tax credit and other non-refundable tax credits (including donations of cash)	Full credit	50 per cent of credit

*Source: The Link Between

In that previously mentioned blog, we shared this fictional scenario by Globe and Mail columnist Tim Cestnick to help illustrate the impact the changes could have on major donors:

“Henry has an annual income of $1.33-million [Cestnick assumes that his imaginary philanthropist is based in Ontario, wants to donate $1 million in stocks in the following year to several charities and is in the top income tax bracket]. Under the current rules, Henry’s total tax bill (federal and Ontario) on his income next year would be $672,050 less a donation tax credit of $495,200, for net taxes of $176,850. Under the proposed rules, his tax bill for next year would be $261,350, or $84,500 more because of the changes.”

While stakeholders ranging from financial advisors and charities to the team here at Canada Gives had hoped that the government would change course in the 2023 Fall Economic Statement and cancel changes to the AMT that would affect large charitable donations, that was not the case. Unless they have a sudden change of heart, the Trudeau government seems intent on staying the course, despite the potentially devastating consequences for the charitable sector.

It is worth noting, however, that even once the AMT changes take effect, if large donations of publicly-traded securities-in-kind are made through a corporation or estate, they will not be impacted. If the gift of securities is made through a corporation, the tax-free amount of the capital gain can be added to the corporation’s Capital Dividend Account. Any balance in the Capital Dividend Account can then be paid to shareholders as a tax-free dividend. This tax-efficient donation strategy is often overlooked.

We should note, of course, that this is for information purposes and is not tax advice. Always consult your team of trusted advisors—including a lawyer and accountant with dedicated tax expertise—for strategic tax planning advice specific to your financial circumstances.

There was one recent piece of good news on the compliance side relating to the charitable sector. Ottawa will exempt registered charities from the obligation to file a T3 trust return for internal trusts (an internal trust is created when a charity receives funds from a donor, then holds those funds to later distribute for specific purposes). The reporting requirement would have placed a significant administrative burden on charities.

Canada Gives Foundation families have expressed their disappointment over the government’s determination to push forward with the AMT change. They believe it could create challenging ripple effects that may result in a steep decline in major charitable donations. We agree—and recommend these concerns be raised with local members of parliament and the office of Finance Minister Chrystia Freeland. It’s only with consistent and diligent effort that generous donors can make it clear to the government that Canada’s tax system isn’t a shelter for wealthy philanthropists, but rather a system that helps empower their work in support of countless charities.

The Canada Gives Team

Let’s discuss your philanthropic goals. Contact a member of the Canada Gives Client Services team today.