Alternative minimum tax (AMT) is a separate method of tax calculation made by Canada Revenue Agency (CRA) that runs in parallel with a taxpayer’s regular income tax calculation.
The application by CRA of the AMT method ensures that a taxpayer who can take advantage of various preferential tax policies, pays at least a minimum level of tax.
This is accomplished by the AMT method removing the preferential deductions and tax rates that a taxpayer is eligible to use that enables their taxable income to be lowered.
After the AMT method has adjusted taxable income back up to a more regular level, it then applies a special federal tax rate to calculate and arrive at the AMT minimum tax amount.
The taxpayer then pays the greater of the calculated regular tax amount given the application of all the preferential tax policies, or the AMT amount, and since the preferential regular tax policies often lower taxes considerably, the AMT amount is what is usually paid to CRA.
Common triggers of the AMT method include: a taxable capital gain or a loss created by the share sale of a Canadian Controlled Private Corporation, the sale of qualified farm and fishing property, the share of a partnership loss resulting from or increased by claiming capital cost allowance on rental properties; a loss from a limited partnership; carrying charges on certain investments; a loss from resource properties resulting from or increased by claiming a depletion allowance, exploration expenses, development expenses or Canadian oil and gas property expenses; a deduction for an employee home relocation loan; a deduction for security options; a federal political contribution tax credit; an investment tax credit; a labour-sponsored funds tax credit; a federal dividend tax credit; or, an overseas employment tax credit.
Given AMT’s recognition of exceptionally high income from particular sources and the calculation and identification of tax associated with that particular source of income, the AMT amount paid may become applicable to the taxpayer’s future tax reporting.
To this point, if a taxpayer must remit AMT in one year but nothing triggers the AMT method in the following year or years, the taxpayer is able to claim a tax credit for that prior AMT payment against future taxes payable.
An AMT amount paid can be carried forward and credited up to seven years, but it cannot be carried back.
Why have the AMT method in the first place if it’s just going to be refunded in the future?
Remembering that the AMT method is in place to ensure that a taxpayer who has extraordinary income and/or preferential deductions pays some sort of minimum tax, the availability of the AMT tax credit, or “refunding” of taxes paid if you will, is the recognition by CRA that a taxpayer who experiences a one-off year of unusually sourced high income and/or use of preferential deductions should not necessarily be treated the same as the taxpayer who annually has extraordinary income and/or has eligibility to use preferential tax policies every year.
Ron Clarke, owner of JBS Business Services in Trail, provides accounting and tax services.