How Do the Alternative Minimum Tax Changes in Canada Impact Charities?

The Alternative Minimum Tax (AMT) is designed to ensure that individuals and corporations who benefit from various tax deductions and credits still pay a minimum level of tax. In Canada, AMT serves as a way to prevent high-income earners from avoiding tax responsibilities through aggressive tax planning. Recently, there have been changes to the AMT rules, prompting important discussions about how these modifications can affect the charitable sector.

Summary of AMT Changes

In June 2024, adjustments to the AMT framework were implemented in Canada. Key changes include:

• 100% of capital gains included in the AMT base, up from 80%.
• 30% of capital gains on donations of qualifying securities included in the AMT base. Previously the inclusion was 0%.
• 80% deduction for the donation tax credit, down from 100%.
• Certain other deductions reduced to 50% deductible, down from 100%.
• An increase in the AMT rate from 15% to 20.5%
• An increase in the AMT exemption from $40,000 to $173,206

Impact of AMT on Charities

The changes to the Alternative Minimum Tax (AMT) in Canada can have a notable impact on charities, primarily through the effects on high-income donors. Here’s a breakdown of the potential impacts:

• Reduced Donations: If high-income individuals are affected by the AMT changes, they might have less disposable income available for charitable donations. This could lead to a reduction in charitable giving from this segment of the population.
• Tax Incentives: Charitable donations are often used as a way to offset income taxes. Changes to the AMT might alter how tax incentives for charitable donations are perceived or utilized. If the AMT is perceived by donors to reduce the effectiveness of these incentives, it could affect the motivation for some high-income individuals to donate.
• Increased Focus on Tax Planning: High-income individuals might engage in more aggressive tax planning to mitigate the effects of AMT changes. This has the potential to cause a shift in the types of donations made, with a possible increase in donations of non-cash assets or more complex planned giving strategies.
• Sector-wide Impact: If overall charitable donations decrease due to changes in the AMT, the broader nonprofit sector could face financial challenges. This has the potential to impact the ability of charities to deliver programs and services.

Bottom Line

In summary, the changes to the Alternative Minimum Tax in Canada represent a significant shift in tax policy that could have notable implications for the charitable sector. While the intention is to address income inequality and ensure fair taxation, there is a legitimate concern that these changes have the potential to cause reduced charitable giving and increased operational challenges for nonprofits.

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.