A tax aimed at high-income people who shelter income could result in a surprising tax bill for you even in years when you don’t have any taxable income.
The alternative minimum tax (AMT) is meant to ensure that big earners pay at least some tax even when they arrange their finances in tax shelters and similar plans that result in little or no income tax. But the AMT often catches taxpayers who have an unusually large income in one year, even when that income isn’t taxable.
The intention is that AMT will catch only people who earn more than about $40,000 and have a substantial portion of income that isn’t subject to regular taxation. The AMT is an alternative to an individual’s regular income tax: You must pay the higher of the two, but not both.
However, an unusual transaction, such as selling a property, investment or business, can trigger the AMT for more ordinary taxpayers. Because it is an unusual year, the difference between AMT payable and the taxes that would have been paid using all tax shelters gets carried forward to future years as if it were a prepaid tax credit. This amount paid can be deducted from regular taxes any time in the subsequent seven years. The deduction is equal to the amount that the regular tax exceeds AMT.
AMT is calculated by adding back to income items such as tax shelters and the nontaxable portion of capital gains, deducting the basic exemption for the year, and multiplying by the appropriate percentage for the year. Provinces may have their own minimum tax levies.
Here’s a list at what’s allowed and not allowed if you are hit by AMT:
Added Back Items
- A percentage of net capital gains.
- A percentage of employee stock option deductions.
- Home relocation loan deductions.
- Certain types of losses associated with tax shelters.
- Certain types of losses resulting from or increased by claiming capital cost allowance on rental properties or certified feature films or productions.
- Carrying charges on certain investments.
Allowable Deductions
The gross up of Canadian dividends and a percentage of Allowable Business Investments Losses are deducted from regular income.
Allowable Tax Credits
- Regular personal tax credits.
- The age amount, if it’s not transferred.
- Charitable donations.
- Medical expenses.
- Disability.
- Some education, including tuition, interest on student loans if not transferred, and CPP and EI credits.
Disallowed Tax Credits
- The dividend tax credit.
- The pension income credit.
- Any transfers from spouse or dependent.
- Investment tax credits.
- Political tax credits.
- Labour sponsored funds tax credits.
Consult with your tax advisor if you’re contemplating investing in a tax shelter or you’ll have an unusual and large source of income that might subject you to AMT.