Alternative Minimum Tax: the tax you didn’t see coming

Just when you thought you’d figured out your taxes, along comes the alternative minimum tax—the law’s way of saying, “not so fast” to Canadian taxpayers. For some, this minimum tax requirement will matter when preparing tax returns, especially the taxpayers who are earning more or claiming too many deductions. 

In this article, we’ll discuss how the alternative minimum tax applies, along with some legal alternatives on how to lessen the impact of this other tax system. For sure, it is still best to consult a tax planning lawyer before calculating and filing your tax returns. 

What is the alternative minimum tax in Canada? 

The alternative minimum tax (or the AMT) is one of the ways of calculating one’s taxable income. As a parallel way of computing income tax in Canada, you will again calculate your income tax using the AMT system after computing your regular federal income taxes. Hence, the term “alternative” in AMT. 

Once your income tax is calculated using these two systems, you will then pay whichever is higher. This means that if your AMT is higher than your first computation (the regular income tax), then you will have to pay the AMT, instead of the regular income tax.  

After paying the AMT, its difference with the regular income tax is then considered a refundable tax, which can be applied in any of the next seven years. 

Rationale behind the AMT 

As that “other” tax system, the AMT ensures that taxpayers still pay their fair share of taxes, regardless of how many deductions and tax credits they’re claiming. 

Under the Income Tax Act (ITA), there are lesser deductions, exemptions, tax credits, and other benefits in the AMT computation. This prevents high-income taxpayers from using them excessively, just to have a low payable income tax.  

The idea is that this will result in higher taxes because of the fewer allowed deductions and tax credits. However, in reality, not all taxpayers are affected by the AMT.  

But because there are some taxpayers who greatly rely on these tax benefits, the AMT has a huge impact on their final taxes. As a remedy, they would have to change the way they do tax planning, as compared to other taxpayers. 

Here's a video that explains more about the AMT in Canada: 

Want to know if you’re subject to the AMT? Reach out to the best personal tax planning and estate lawyers in Canada as ranked by Lexpert. 

What are the recent changes to the alternative minimum tax? 

Effective January 1, 2024, there are a lot of changes to the AMT under Canadian laws. This comes after Bill C-69 received royal assent on June 20, 2024. This Bill implemented the 2023 federal budget measure, which contained changes to the AMT for certain individuals. 

Here are some of the important changes on the AMT starting 2024: 

• Increased AMT rate: The most important reform for the AMT is the increase of its minimum tax rate from 15 percent to 20.5 percent. 

• Increased minimum AMT exemption: While the AMT rate has increased, the exemption threshold has also increased from $40,000 to $173,205 for 2024. This is the second highest federal income tax bracket. 

• This amount increases every year to adjust for inflation; for 2025, the minimum AMT exemption threshold is $177,882. 
• When computing the amount of AMT, this exemption is deducted from the taxable income. 

• Limited tax benefits for AMT purposes: Specifically, the changes to the AMT affect the treatment on the following deductions and tax benefits: 

• Reduced deduction of expenses: Previously, most non-refundable tax credits were used to reduce the AMT payable. With the new changes, most of these tax credits will only be allowed for up to 50 percent. 
• Allowed deductions: Full deductions are now allowed for the following: 
• federal logging tax credit 
• Guaranteed Income Supplement (GIS) 
• social assistance 
• workers' compensation payments 
• Charitable donations tax credit: Individual taxpayers can only claim 80 percent of this tax credit (50 percent in the old AMT rules). 
• Employee stock option deduction: The inclusion rate for taxable stock option benefits is increased up to 100 percent (80 percent in the old AMT rules).  

• Changes for capital gains inclusion rate: As for capital gains, the inclusion rate is increased to 100 percent, (80 percent in the old AMT rules). This means that the total amount (or 100 percent) of the capital gains would now be included when calculating the AMT. Compare this to the 50 percent rate under the regular income tax computation. 

• The exception to this 100 percent rate is publicly listed securities, which are now at an increased rate of 30 percent. 
• However, the inclusion rate for capital losses carried forward and back has been reduced to 50 percent maximum. 

• Changes for trusts: Qualified disability trusts can use the minimum AMT exemption ($177,882 for 2025), if conditions for it are met. As discussed below, some types of trusts are now exempt from the AMT.  

Summary: changes to the AMT starting 2024 

	Old AMT	New AMT
AMT rate	15%	20.5%
AMT exemption	$40,000	2024: $173,205  2025: $177,882  increases every year to adjust for inflation
Capital gains tax inclusion	80%	100%
Charitable donation tax credit	100%	80%
Employee stock option benefits inclusion	80%	100%
Tax deductions inclusion	most deductions are included or allowed	certain deductions are disallowed at 50%
Other tax credits inclusion	most of the tax credits are allowed	some tax credits are allowed for up to 50% only

Who are covered by the alternative minimum tax 

Aside from high-earning Canadians, there are several instances where the AMT is required. For example, the Canada Revenue Agency (CRA) says that if you report or claim the following in your tax return, then you may have to pay the AMT: 

• capital gains tax: when you report a capital gains tax, which is triggered when you sold a capital property, and you realized a gain out of it 

• deductions: when you claim a deduction, such as: 

• costs to earn property income  
• CPP/QPP, or PPIP premiums, on income 
• childcare expenses  
• disability supports  
• limited partnership losses  
• moving expenses  
• non‑capital losses 
• office and employment expenses 

• tax credits: when you claim a tax credit, such as: 

• federal dividend tax credit 
• federal political contribution tax credit 
• investment tax credit 
• labour-sponsored funds tax credit 

Again, for clarity, it’s better to directly speak to a lawyer to know if you’re covered by the AMT or not. 

Not covered or exempt from the alternative minimum tax 

If you’re getting overwhelmed by the AMT and its changes, it may be a breather to know that there are certain things that can get you away with from this minimum tax. Here are some things that are not covered or are exempt from the AMT: 

• year of death: this is one of the things that were not changed by the AMT reform; as an exception, the AMT is not applied in the year when the taxpayer dies 

• below the exemption threshold: again, if a taxpayer is earning below the AMT exemption threshold, they would not be covered by the minimum tax 

• exempt trusts: some trusts are now exempt from the AMT, such as: 

• graduated rate estates 
• employee ownership trusts 
• trusts that are income tax exempt under the ITA 

What are the effects of the changes to the alternative minimum tax? 

With all the changes in the AMT, it still has different effects on each taxpayer depending on a range of factors. These include the applicable federal income tax rate to the taxpayer, the deductions and other tax benefits they’re claiming, and the amount of income being taxed. 

In any case, we listed some of the important changes in the new AMT: 

• still targets the upper class: as repeatedly claimed by the CRA, the new AMT regime will target the high-income earners by limiting their excessive use of deductions and other tax benefits 

• fewer taxpayers are covered: because the AMT exemption was increased, fewer taxpayers are now covered, further exempting the low- to middle-income earners 

• easier to know if you’re exempt: also, using the increased minimum exemption of around $170,000, those earning below this amount would easily know that they’re exempt from the AMT 

• usually no AMT for corporate dividends: the eligible dividends from Canadian corporations would usually have no AMT, since the tax calculated using the regular income tax is usually higher as compared to the AMT 

• higher capital gains may pay the AMT: a taxpayer may have to pay the AMT if they generate a large capital gain and if their tax rate under the regular income tax is 33 percent, since the AMT tax rate is higher than the regular income tax rate, when both are applied to capital gains 

As to how these changes will specifically apply to your case, it’s better to consult a legal professional, such as those who are experienced in personal tax planning. 

For more details on how the changes to the AMT will apply, watch this video: 

Still confused with these changes to the AMT? Consult a lawyer from the Lexpert-ranked best personal tax planning and estate law firms in Canada. 

What are the ways to minimize the impact of alternative minimum tax? 

The new AMT rules do not weaken how deductions and other tax benefits can be used. Rather, these rules just say that these tax havens must be used sparingly—and wisely. 

Also, the way we look at AMT credits should also be shifted. Since it can be credited against regular tax liabilities in the next seven years, strategically using these credits can mitigate the effects of AMT. 

Here are other ways to minimize how the AMT might affect you: 

Review and adjust your tax planning 

It cannot be overemphasized to talk to your accountant and/or tax planning lawyer to see how these new rules will affect your yearly income tax payables. 

Although the new AMT rules have been implemented for over a year already, it’s still wise to review your plans and adjust them accordingly. This can be done with your tax planning lawyer, who understands the specifics of your assets.  

Also related to this is your estate plan; if you still don’t have one, it’s better to ask your lawyer about it and see how the new AMT rules will apply. 

All these point to one thing—keeping your tax and estate plan up to date. Reforms such as this one are unavoidable and many more will surely come. Being updated with these laws is also a result when you have a lawyer constantly by your side. 

Seek legal advice 

Whether you’re a high-income earning Canadian or you think you’re just a mere middle-class taxpayer, talking to a lawyer is your best defense against these tax reforms. Aside from ensuring that you’re correctly complying with your tax returns, you're preventing legal consequences by keeping abreast of the legal updates. 

Alternative minimum tax: that other way of calculating your tax 

Admittedly, a lot of taxpayers do not know about the AMT; worse, many would not even bat an eye on the changes that it has undergone in the recent years. However, the AMT will matter, especially for those who rely too much on deductions and other tax benefits. For this, estate and tax planning professionals are there to help. Through their guidance, Canadian taxpayers would know if they’re covered by the minimum tax, and ultimately, how much income tax they should be paying. 

To read more about the Canadian laws on taxes, including the alternative minimum tax, check out our Legal FAQs page.