Under the new rules for alternative minimum tax (AMT), a reduced deduction for investment counsel fees — a measure that recently passed into law and is retroactive to 2024 — means many trusts may have AMT liability and need to amend their tax returns.
Bill C-15, which received royal assent last month, reduced to 50% the previously 100% allowed deduction of investment counsel and investment management fees (for taxable accounts and as defined in 20(1)(bb) of the Income Tax Act).
This latest change to AMT affects “some high-income individuals and many trusts,” Ryan Minor, director of tax with CPA Canada in Sudbury, Ont., said in a LinkedIn post on Tuesday. “Because the change is retroactive, some taxpayers may face AMT liabilities for tax years that have already been filed” — specifically, the 2024 and 2025 tax years.
The reduced deduction of investment counsel fees is “a pretty significant change,” Kyle McMurtry, national tax leader with Doane Grant Thornton LLP in Winnipeg, said. “High-net-worth individuals, families or business owners [often] have a trust structure,” he said. “And those trusts often acquire a portfolio of investments that … would have these fees that we would typically have deducted in the past, [and] wouldn’t have created AMT.”
In an interview, Minor said “a high number” of trusts are affected. The AMT liability “represents somewhat of a toll charge on using trust planning if you can’t plan around it,” he said.
CPA Canada asked the Canada Revenue Agency (CRA) whether it would proactively reassess trust tax returns or notify trustees of potentially affected trusts. Minor’s LinkedIn post provided the CRA’s negative response: “The CRA will not automatically reassess trusts that have not added back 50% of investment counsel fees, nor will we be sending letters out to trustees for this information.” (This also applies to affected individuals, Minor said.)
Instead, affected trusts “must take steps to amend their returns where necessary,” Minor wrote. The CRA’s guidance to CPA Canada said that if a filed trust tax return needs to be changed, “do not file another return for that tax year. Send the CRA a completed Form T3-ADJ, T3 Adjustment Request, or a letter providing the details of the change.” Additional information is in Minor’s LinkedIn post.
AMT is an alternative tax calculation to ensure high earners and certain trusts pay a minimum amount of tax when they benefit from significant exemptions, deductions or credits.
The reduced deduction of investment counsel fees follows AMT rule changes that passed into law in 2024, including an increased AMT rate (to 20.5% from 15%), an increased basic exemption threshold to the start of the fourth federal tax bracket ($173,205 for 2024, $177,882 for 2025 and $181,440 for 2026 — up from $40,000) and a broadened AMT base.
The changes generally mean certain high-income earners pay more taxes under AMT while fewer middle-income taxpayers are exposed. Client examples, including those with significant income from capital gains, are provided in recent blog posts by Doane Grant Thornton LLP and ATB Wealth.
With the AMT rule changes, trusts, which generally don’t get the basic exemption, are typically more exposed to AMT. “The reason why is that most trusts allocate all of their net income … to beneficiaries each year,” McMurtry said, and wouldn’t be subject to regular tax on the income.
“So, when there’s a different calculation of net income for AMT purposes [versus] taxable income purposes, it creates … an income inclusion that isn’t being allocated anymore from a trust,” he added. “There is now a liability … for these trusts from a tax perspective.”
In such cases, “the very first dollar of a disallowed deduction for AMT purposes immediately creates AMT in these trusts,” Erica Nielsen, tax and business succession consultant with ATB Wealth in Calgary, said. With the reduced deduction of investment counsel fees, “essentially 50% of the fee would be subject to AMT at the AMT rate,” McMurtry said.
When AMT applies, a taxpayer can carry it forward for seven years, claiming it as a credit to offset future regular taxes owing. However, trusts that allocate their net income to beneficiaries wouldn’t generate regular tax.
The reduced deduction of investment counsel fees passed into law on March 26, and most trust tax returns were due March 31, so affected 2025 returns likely could be “dealt with in a timely manner,” McMurtry said.
2024 tax year implications
The 2024 tax year is a different story, with AMT liability potentially arising with the passage of Bill C-15. “There are probably quite a few trusts and maybe even other taxpayers that wouldn’t have filed based on the changes to the AMT that we saw in the bill,” McMurtry said.
Minor’s LinkedIn post included a reminder from the CRA about its timelines for T3 return reassessments, within which the agency can reassess trust returns, make additional assessments, or assess tax, interest or penalties. For example, the normal reassessment period is three years from the date of an original notice of assessment.
“From a risk management perspective, proactively amending a return would reduce [a taxpayer’s] exposure [to the potential for a later reassessment by the CRA] and limit the amount of interest,” McMurtry said. If they’re proactive, taxpayers may also be able to obtain relief from CRA, he said.
At the same time, “there isn’t legislation that I know of that obligates taxpayers to amend tax returns if the law changes retroactively,” he said. Ultimately, “it is … up to the [tax] advisor and the taxpayer as to what to do.”
In an email, Jamie Golombek, managing director and head of tax and estate planning with CIBC Private Wealth in Toronto, said, “For 2024, now that the law has changed, retroactively, I think you have an obligation to adjust the 2024 returns to take into account the 50% deductibility of investment counselling fees for AMT.”
CPA Canada has asked the CRA for relief but hasn’t received a response, Minor said. Given the change is retroactive and wasn’t previously law nor administered by the CRA, “it seems like a sensible case for interest relief,” he said.
When asked if clients could now be motivated to take a closer look at investment counsel fees, McMurtry said he hasn’t seen that yet. What matters to clients is that “the advice is valuable for the fee being paid,” he said.
Whether clients with AMT liability arising from the reduced deduction of investment counsel fees accept that liability as a cost of the trust structure will depend on individual circumstances, said Debbie Pearl-Weinberg, executive director with CIBC Private Wealth in Toronto, in an email.
Some clients “may move the trust investments into ones with embedded fees, such as mutual funds or ETFs,” she wrote. “AMT will not be an issue where the fee paid is within the investment rather than the trust being charged an investment counsel fee. Overall rate of return (after tax) will be key.”
With the AMT regime changes, Nielsen suggested that taxpayers, along with their tax and legal advisors, consider why a trust was created in the first place, such as for estate planning.
“It’s not necessarily only about how to deal with these retroactive changes but also making sure the trust structure that the clients have in place continues to serve its original purpose and still makes sense for their goals overall,” she said.