The federal government will allow individuals to claim 80% of the charitable donation tax credit, up from the previously proposed 50%, when calculating the alternative minimum tax (AMT).
The proposed change to the tax treatment of charitable donations, announced Tuesday in the 2024 federal budget, is meant to address concerns expressed by charities that the revised AMT would deter Canadians from making large donations.
Before the government first proposed changes to the AMT in the 2023 federal budget, 100% of charitable donations could be included in adjusted taxable income for AMT purposes.
“Significant charitable gifts should no longer, on their own, attract any type of AMT consequences,” said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth in Toronto. “Fortunately, the government did respond [to the concerns of the charitable sector].”
A new AMT regime, proposed in last year’s budget and effective Jan. 1, 2024, raised the AMT rate to 20.5% from 15%, and raised the exemption amount.
Limiting the inclusion of charitable donation tax credits to 50%, down from 100% under the original AMT rules, meant that high-income people subject to AMT could be subject to additional tax if they couldn’t use their entire donation tax credit to offset tax payable under AMT, Golombek said.
Allowing 80% of charitable tax credits will largely remove this concern, Golombek said.
“If you think about a high-income donor, the typical donation tax credit is at the highest rate of 33% [federally],” Golombek said. “So, 80% of 33% [is] 26.4%, which is higher than the AMT rate of 20.5%, effectively meaning you will no longer be precluded from taking full advantage of charitable donation for AMT purposes.”
Under the previously proposed version of the AMT, “only 50% of donations were included for the calculation of AMT, and you had a donation tax credit of 33%, [so] half of that was 16.5%. That credit rate was lower than the 20.5% tax rate, and therefore you could end up paying AMT even if you’re giving all your money to charity.”
However, the government kept its proposal to include 30% of capital gains on the donation of publicly listed securities in the calculation of AMT. Under the regular method of calculating tax, none of the capital gains on donated securities are taxable.
Whether the 30% inclusion rate for the donation of publicly listed securities is enough to trigger AMT “will depend on the specific situation,” Golombek said.