New alternative minimum tax regime to raise $2.6B: PBO

Ottawa’s proposed changes to the alternative minimum tax (AMT) will raise an estimated $2.62 billion in net revenue over five years, according to a report released by the Office of the Parliamentary Budget Officer on Thursday.

The federal government’s changes to the AMT, first proposed in the federal budget in March, are intended to more closely target the highest earning Canadians.

The PBO said almost all the revenue raised from the AMT would come from individuals, with $50 million coming from trusts.

More of the tax burden of the AMT is expected to shift to higher income individuals relative to the current AMT regime, with those making above $300,000 contributing approximately 98% of the total AMT paid by individuals, and those with total incomes above $1 million contributing approximately 70%.

However, trusts with lower incomes would face a higher AMT burden than high-income trusts, the PBO report found.

The PBO said there were “significant sources of uncertainty in the projection,” including the magnitude of the behavioural response. “Some individuals may choose to realize more capital gains in 2023 than they had previously planned to avoid potential AMT obligations in 2024 or later,” the report said.

The AMT is a parallel method of calculating tax on regular income and is meant to ensure that high-income earners pay at least a base rate of tax. Under current rules, the AMT applies a flat 15% tax rate to “adjusted taxable income” above $40,000. The taxpayer pays the AMT or regular tax, whichever is higher, but any AMT paid can be carried forward for up to seven years and recovered to the extent that regular tax exceeds AMT in those years.

Under changes proposed in the 2023 federal budget, the AMT rate will rise to 20.5%, but the exemption amount also will rise to an estimated $173,000 for 2024, up from $40,000 under current rules. The tax base used to calculate AMT would include a higher share of total income than under current rules.

In the Budget 2023 document, the federal government estimated that the proposed AMT regime would bring in $2.95 billion over five years. At the budget media lockup, government officials said the AMT currently applied to about 70,000 Canadians annually and brought in about $200 million per year.

Under the current AMT rules, approximately 69,000 individuals would be subjected to the AMT in tax year 2024, gradually increasing to 78,000 in 2028, the PBO estimated.

However, under the higher exemption amount in the proposed rules, approximately 26,000 individuals would be subject to the AMT in 2024, with that number gradually increasing to 29,000 in 2028.

Around $828 million less revenue would be collected from individuals earning less than $300,000 under the new AMT rules compared with the current rules over the next five years. However, $2 billion more in revenue would be collected from individuals making more than $2 million.

The PBO expects the majority of the “fiscal impact” from trusts to come from those that begin to pay AMT under the proposals. It expected the average trust already paying AMT would pay more AMT under the new rules.

Among trusts not already paying AMT, the PBO expected trusts in the lower-income tax bracket ($100,000 to $499,999) to begin paying AMT because of the expanded base under the proposals, not necessarily because of the increase in the AMT tax rate. Income tax rates for these trusts were similar to the higher AMT rate, the PBO said.

Meanwhile, the average trusts in the higher tax bracket ($500,000 and above) already pay income tax at a rate a few percentage points above the proposed 20.5% rate.

“Even with the expanded AMT tax base, the average trust would pay more tax under the normal tax calculation than through the AMT calculation,” the report said. “As such, PBO estimates that there will be no increase in tax revenue from this group of trusts.”