Tax practitioners say the federal government’s proposed new alternative minimum tax (AMT) regime may discourage philanthropy by punishing people who make large charitable donations.
“The fundamental concern about these changes is they treat charitable donations as tax evasion or personal expenditure,” wrote Malcolm Burrows, head of philanthropic advisory services with Scotia Wealth Management, in a Sept. 21 article on All About Estates.
While Ottawa may have good reason to target aggressive tax planning and tax evasion, “charitable donations are different,” said Burrows, who is a founder of the Aqueduct Foundation, a donor-advised fund managed by Scotia Trust. “Donors make irrevocable gifts to benefit charity and the community. They reduce their wealth by doing so.”
In the 2023 federal budget, the government proposed increasing the AMT rate to 20.5%, up from 15% under the existing AMT regime. The AMT exemption level would increase to an estimated $173,000 (indexed annually) from a fixed $40,000. The changes are meant to take effect Jan. 1, 2024.
Ottawa hopes the changes will ensure the highest earners cannot combine certain incentives in the Income Tax Act, including the donation tax credit, to drive their tax rate below a minimum rate.
Among other proposed changes, only half of the donation tax credit can be applied against the AMT, down from 100% under the current rules. Meanwhile, 30% of capital gains on the donation of publicly listed securities will now be included in adjusted taxable income (ATI).
The AMT proposals “are expected to affect very few taxpayers” due in part to the significant increase to the basic exemption amount, wrote tax and estate experts Jamie Golombek, Debbie Pearl-Weinberg and Kate Lazier in a Sept 2023 CIBC Private Wealth report.
In addition, “high-income donors generally won’t pay AMT no matter the size of a cash donation if they earn primarily (self) employment or rental income,” the authors stated.
However, if a client realizes a large capital gain — such as from selling a business — and makes a significant donation, their AMT under the proposed regime may increase relative to the existing regime. The AMT could also increase if the client generated dividend income and made a large cash donation.
In a Sept. 21 webinar about the AMT presented by Toronto-based Oberon Capital Corp., Kim Moody of Moodys Private Client in Calgary presented a hypothetical scenario of a B.C. client who had $500,000 in capital gains and $250,000 in eligible dividends in 2024, and who chose to donate $300,000 cash that year. Under the proposed regime, the client would owe AMT of $48,995 as opposed to none under the existing rules.
Citing calculations provided Jay Goodis, a CPA and CEO and founder of Tax Templates Inc. in Aurora, Ont., Moody said the same client could reduce their AMT to zero under the proposed rules if they donated just $3,060.
“I find that, just from a [tax] policy perspective, very, very offensive,” Moody said.
Henry Korenblum, vice-president of sales and tax planning at Oberon Capital, said during the webinar: “You’re going from a $300,000 donation to basically nothing to wipe out the AMT, even though the donation is genuinely impoverishing you. It’s not as if you’re consuming something — you’re making a donation to some charitable activity, something designed to promote universal good.”
Under the proposed rules, the AMT will remain recoverable to the extent regular income tax exceeds AMT in any of the following seven calendar years.
However, if the taxpayer doesn’t earn enough employment income in any of those seven years, the tax loss may become permanent, said the authors of the CIBC report.
“In addition, AMT recovery may be further impacted by a gift to charity because the individual can no longer earn income on the gifted property,” they said.
In its Sept. 1 submission to the Department of Finance, the Canadian Association of Gift Planners (CAGP) argued that the proposed AMT rules could jeopardize the donation of “transformational” gifts in the six- to nine-digit range. These gifts represent 35% of the annual $11.8 billion in charitable giving by Canadians, the CAGP said.
To the degree the proposed rules might discourage large donations, “charities and Canadians will look to government to replace this funding in order for vital programs and services to continue,” the CAGP said.
Tax practitioners suggested clients talk to their tax advisors regarding ways to make large gifts while limiting the negative effect of the proposed new AMT regime.
For example, clients could consider making large donations before the end of this year rather than in 2024. Observers expect the federal government to introduce enabling legislation in Parliament to implement AMT changes sometime this fall.
Clients might also consider donating via a will or through a private corporation, as the AMT does not apply at death or to a corporate donor, suggested the CIBC report.
The Department of Finance released draft legislation on Aug. 4 to implement the AMT proposals, and the consultation period ended Sept. 8.