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If you’re a high-income earner, you may already be familiar with the Alternative Minimum Tax, which prevents wealthy Canadians from paying little or no tax on their income. Starting in January, some changes to this system could impact you in some key ways. Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Greg Bonnell to walk through some potential scenarios.
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* If you're a high income earner, you may already be familiar with the alternative minimum tax that prevents Canadians from paying little or no income tax. Well, next year, there are some changes coming to the AMT system that could potentially affect you in some key ways.
* Nicole Ewing, Director of Tax and Estate Planning TD Wealth joins us now with what we need to know. Nicole, always a pleasure to have you here. Let's start with a little refresher for those who aren't keeping up with some of these issues. What is the alternative minimum tax?
* It's, essentially, a parallel income tax calculation that is done right alongside the ordinary income tax calculation. But it has different inclusion rates, different credits and deductions that are allowed to be used. And ultimately, if the amount that is calculated under the AMT rules is higher than what you would have owed in federal income tax, it becomes your new federal income tax owing.
* So, it's essentially the higher of them, really designed to ensure that high income earners cannot use excessive credits and deductions to reduce their tax liability to very little or, essentially, none. So this is intended to ensure that everybody pays their fair share of tax.
* OK. We now have a full understanding of what it is. Now, let's get into these key changes that we're talking about. What are they?
* So big changes we have-- we're going from a rate of 15% to 20.5%. So we have a higher rate of tax applying, but we have a significantly larger exemption amount. So $40,000 is the amount under the current rules. That's going up to $173,000.
* So that's a very big difference. If you are anywhere under $173,000 when you do that AMT calculation, you will not have any tax owing. So it means that fewer people will be impacted, but they'll be impacted in a higher way. And other changes include changes to the inclusion rate for capital gains, for donated securities, loss carry forward rules are reduced to 50%. So a lot of the math is changing, and we'll need to see whether or not individual circumstances are impacted by the changing rules.
* OK, lucky for us, you brought along some examples, some scenarios. Scenario number one, an investor who realizes significant gains from selling publicly traded securities, we're calling him Max.
* And here I say "significant." Because if you're not realizing significant gains, you actually might find yourself paying less tax than you would under the current rules. If you have those significant gains like Max, where we have a $600,000 fair market value of publicly traded securities in their non-registered account, adjusted cost base of $150,000, that means we have a capital gain of $450,000.
* Now, under the current rules, you can see that Max's federal tax liability would be $50,523. But next year, that amount would jump to going up to $56,785 under the new rules. So Max would not have an AMT liability this year, but would next year. So perhaps they're thinking about advancing and realizing that gain this year instead of next.
* OK, good example. We have another one here. Someone named Gabrielle, who has realized significant gains from selling a significant gains-- again, from selling a business and using the lifetime capital gains exemption.
* Right. So here we're hit by a couple of the new rules. So 100% of capital gains are included in the AMT income calculation, as I noted a second ago. And the lifetime capital gains exemption amount has changed as well to 7/5 of the regular tax calculation. So as we run through here, we see Gabrielle selling the shares for $1 million. The shares qualify for the exemption.
* Under the example, she would owe AMT under the current rules, but would actually unless under the new rules. And that's because of that significant $173,000 exemption amount. So the math is very important. Gabrielle might want to consider whether to sell the business next year, or this year, or next year, but really looking into to what the results will be. And there might be changes in the way that sale is structured.
* OK. Last example here, we have someone named Sebastien-- seems to be generous-- making a substantial donation of publicly traded securities with an accrued gain.
* Right. So Sebastien's delighted to be making a significant donation. But we can see by these rules if he's donating 25% publicly traded securities that he holds in a non-registered account again, and he takes the other 75% into income as his only source of income, the securities have a fair market value of $500,000, adjusted cost base of $150,000-- under the old rules, there would be no AMT payable, while under the new rules we have that $5,618.
* And that's because we saw that change, that 30% of the donated securities, the gain on donated securities needs to be included. We have 100% untaxable capital gain on securities that were sold. So the math has changed a little bit here. And under the new rules, Sebastien would have an AMT liability.
* OK, so three examples, three scenarios there with individuals. What about trusts?
* Well, trusts are very interesting, and I don't know if they're on the radar of everyone. Because what's critical here is that $173,000 number does not apply to trusts. There is no exemption amount. There is no amount under which you don't need to pay AMT.
* If AMT is calculated within the trust, you don't have the benefit of that exemption. And so you want to be cautious in terms of what types of income you're earning in the trust, how you're using it, and frankly, whether or not you want to continue having a trust. It might be time to wind that up as well.
* All right, so now we understand the alternative minimum tax. We understand the changes that are coming, some scenarios that are pretty clear. At the same time, strikes me, as a layperson, as a bit complicated. If someone finds himself in this situation, what do they need to do?
* I would strongly recommend working with your investment advisor together with your accountant and seeing what changes need to be made. Firstly, are you going to be impacted by the rules? And then if you are, your investment advisor, for example, might want to look at the type of income that they're earning for you, whether it's capital gains or dividends.
* They may want to be mindful of your alternative minimum tax carry forward amount that you would be able to use for the next seven years. If you did have to pay it, they're going to want to generate income that you can reclaim that those amount paid from. So really need to relook at your situation and see whether the tax benefits have changed significantly.
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* Nicole Ewing, Director of Tax and Estate Planning TD Wealth joins us now with what we need to know. Nicole, always a pleasure to have you here. Let's start with a little refresher for those who aren't keeping up with some of these issues. What is the alternative minimum tax?
* It's, essentially, a parallel income tax calculation that is done right alongside the ordinary income tax calculation. But it has different inclusion rates, different credits and deductions that are allowed to be used. And ultimately, if the amount that is calculated under the AMT rules is higher than what you would have owed in federal income tax, it becomes your new federal income tax owing.
* So, it's essentially the higher of them, really designed to ensure that high income earners cannot use excessive credits and deductions to reduce their tax liability to very little or, essentially, none. So this is intended to ensure that everybody pays their fair share of tax.
* OK. We now have a full understanding of what it is. Now, let's get into these key changes that we're talking about. What are they?
* So big changes we have-- we're going from a rate of 15% to 20.5%. So we have a higher rate of tax applying, but we have a significantly larger exemption amount. So $40,000 is the amount under the current rules. That's going up to $173,000.
* So that's a very big difference. If you are anywhere under $173,000 when you do that AMT calculation, you will not have any tax owing. So it means that fewer people will be impacted, but they'll be impacted in a higher way. And other changes include changes to the inclusion rate for capital gains, for donated securities, loss carry forward rules are reduced to 50%. So a lot of the math is changing, and we'll need to see whether or not individual circumstances are impacted by the changing rules.
* OK, lucky for us, you brought along some examples, some scenarios. Scenario number one, an investor who realizes significant gains from selling publicly traded securities, we're calling him Max.
* And here I say "significant." Because if you're not realizing significant gains, you actually might find yourself paying less tax than you would under the current rules. If you have those significant gains like Max, where we have a $600,000 fair market value of publicly traded securities in their non-registered account, adjusted cost base of $150,000, that means we have a capital gain of $450,000.
* Now, under the current rules, you can see that Max's federal tax liability would be $50,523. But next year, that amount would jump to going up to $56,785 under the new rules. So Max would not have an AMT liability this year, but would next year. So perhaps they're thinking about advancing and realizing that gain this year instead of next.
* OK, good example. We have another one here. Someone named Gabrielle, who has realized significant gains from selling a significant gains-- again, from selling a business and using the lifetime capital gains exemption.
* Right. So here we're hit by a couple of the new rules. So 100% of capital gains are included in the AMT income calculation, as I noted a second ago. And the lifetime capital gains exemption amount has changed as well to 7/5 of the regular tax calculation. So as we run through here, we see Gabrielle selling the shares for $1 million. The shares qualify for the exemption.
* Under the example, she would owe AMT under the current rules, but would actually unless under the new rules. And that's because of that significant $173,000 exemption amount. So the math is very important. Gabrielle might want to consider whether to sell the business next year, or this year, or next year, but really looking into to what the results will be. And there might be changes in the way that sale is structured.
* OK. Last example here, we have someone named Sebastien-- seems to be generous-- making a substantial donation of publicly traded securities with an accrued gain.
* Right. So Sebastien's delighted to be making a significant donation. But we can see by these rules if he's donating 25% publicly traded securities that he holds in a non-registered account again, and he takes the other 75% into income as his only source of income, the securities have a fair market value of $500,000, adjusted cost base of $150,000-- under the old rules, there would be no AMT payable, while under the new rules we have that $5,618.
* And that's because we saw that change, that 30% of the donated securities, the gain on donated securities needs to be included. We have 100% untaxable capital gain on securities that were sold. So the math has changed a little bit here. And under the new rules, Sebastien would have an AMT liability.
* OK, so three examples, three scenarios there with individuals. What about trusts?
* Well, trusts are very interesting, and I don't know if they're on the radar of everyone. Because what's critical here is that $173,000 number does not apply to trusts. There is no exemption amount. There is no amount under which you don't need to pay AMT.
* If AMT is calculated within the trust, you don't have the benefit of that exemption. And so you want to be cautious in terms of what types of income you're earning in the trust, how you're using it, and frankly, whether or not you want to continue having a trust. It might be time to wind that up as well.
* All right, so now we understand the alternative minimum tax. We understand the changes that are coming, some scenarios that are pretty clear. At the same time, strikes me, as a layperson, as a bit complicated. If someone finds himself in this situation, what do they need to do?
* I would strongly recommend working with your investment advisor together with your accountant and seeing what changes need to be made. Firstly, are you going to be impacted by the rules? And then if you are, your investment advisor, for example, might want to look at the type of income that they're earning for you, whether it's capital gains or dividends.
* They may want to be mindful of your alternative minimum tax carry forward amount that you would be able to use for the next seven years. If you did have to pay it, they're going to want to generate income that you can reclaim that those amount paid from. So really need to relook at your situation and see whether the tax benefits have changed significantly.
[MUSIC PLAYING]
