The Canadian tax system is progressive, which means your taxes increase as your income increases. While this system works in regular sources of income from salary or business, it does not always work in alternate sources of income such as capital gains and dividends. Why? Tax benefits, such as capital gains tax, dividend tax credit, and long-term capital gain exemption (LCGE), help Canadians significantly reduce their tax liability on alternative income. The Canada Revenue Agency (CRA) strives to ensure that everyone is taxed fairly, and one way it achieves this is through the Alternative Minimum Tax (AMT). If you are one of those investment income earners earning six figures, you have to calculate your tax twice: the regular tax way and the AMT way.
Alternative Minimum Tax – The CRA’s Way of Fairly Taxing High-Income Earners
The AMT system is designed for special situations where you can significantly reduce your tax bill. The AMT calculation has fewer deductions, exemptions, and credits compared to regular income tax calculations. Moreover, AMT has a flat tax rate, while regular income tax has a progressive tax rate.
A high-income taxpayer calculates their tax using both the regular tax system and the Alternative Minimum Tax (AMT) system. If the AMT is higher, the taxpayer pays the difference to the Canada Revenue Agency (CRA). However, taxpayers can recover the AMT paid over the next seven years by deducting it from their regular income tax, provided they are not subjected to AMT in those years.
If taxpayers don’t have a regular income, they may not be able to recover the AMT. This ensures that alternative income earners pay tax like regular income earners, making taxes fair.
The CRA announced changes to the Alternative Minimum Tax (AMT) that took effect on January 1, 2024. These changes made AMT more targeted towards high-income taxpayers, bringing relief to most middle-income taxpayers. Let’s see how.
How is the Alternative Minimum Tax Calculated?
The income tax calculation begins with the total income and deducts regular tax deductions, exemptions, and credits.
For instance, only 50% of the capital gain is taxable as part of regular income. (Note the capital gain inclusion rate will increase to 66.67% from January 1, 2026, on individual capital gains above $250,000.) However, in the AMT system, 100% capital gain is taxed.
Tax exemptions reduce your total income, as you need not include that in your tax calculation at all.
Tax deduction reduces your taxable income.
Tax credit reduces your tax liability.
This difference is important as they appear in different steps of tax calculation. Let us understand with an example.
Illustration:
In July 2024, John sold a property for $500,000, which had an adjusted cost base of $100,000. His capital gain is $400,000. He has a $200,000 capital loss that he can carry forward to reduce his capital gain. Here’s how John will calculate his tax in the regular system and AMT system.
Step 1 – Total Taxable Income:
In regular tax, John will have a total taxable income of $200,000 (50% of the capital gain is exempted).
In AMT, John will have a total taxable income of $400,000 (100% capital gain is taxable).
Step 2 – Tax Deductions: The regular system allows 50% of capital loss to be deducted. In 2024, AMT reduced allowable capital loss deduction from 80% to 50%.
In both regular and AMT, John can deduct $100,000 in capital loss from the total taxable income.
Step 3 – Adjusted Income: The CRA has a flat AMT exemption. Before 2024, it was $40,000, because of which many middle-income owners fell under its purview. Now, it has been increased to the start of the fourth federal tax bracket. AMT exemption for 2024 is $173,205, and for 2025 is $177,882.
This exemption is deducted from the taxable income to arrive at adjusted income.
In regular income, John’s adjusted income is $100,000.
In AMT, John’s adjusted income is $300,000 – $173,205 = $126,795.
Step 4 – Tax Rate: The graduated tax rates apply to regular tax calculation, while a flat tax rate applies to AMT. In 2024, the CRA increased the AMT flat tax rate to 20.5% from 15% before.
In regular income, John’s tax liability is $17,427
In AMT, John’s tax liability: $126,795 x 20.5% = $25,993
Step 5 – Deduct Tax Credits: AMT system allows 50% of non-refundable tax credits, such as basic personal amounts (BPA), while regular system allows 100%. For 2024, the BPA tax credit was $2,271.
In regular income, John’s net tax liability is $17,427 – $2,271 = $15,156
In AMT, John’s tax liability: $25,993 – $1,136 = $24,857
Since AMT is higher than regular income tax, John has to pay the difference of $9,701 as AMT to the CRA. The bigger the tax credit and deductions in regular income, the higher the AMT.
For ease of reference, the above calculation is presented in table form.
| Particulars | Regular Tax | AMT |
| Total taxable capital gain | $200,000 | $400,000 |
| 50% Capital Loss carry forward | ($100,000) | ($100,000) |
| AMT Exemption | – | ($173,205) |
| Adjusted Income | $100,000 | $126,795 |
| Tax Amount | $17,427 | $25,993 |
| BPA Tax Credit | ($2,271) | ($1,136) |
| Net Tax Liability | $15,156 | $24,857 |
| AMT payable | $9,701 |
If John has a regular income, he can deduct this $9,701 AMT from his future regular tax liability. For instance, if his 2025 regular tax is $5,000, he can reduce the liability to $0 and use the balance, $4,701 AMT, for future taxes. This can be carried forward up to seven years.
Are You Subject to the Alternative Minimum Tax?
Unless you calculate, you may not know your AMT liability. However, if you did not earn any significant capital gain or dividend, your AMT will be lower than the regular tax.
It is because the $173,205 AMT exemption filters out business and employment income, where the taxpayer has already paid 20.5% and 26% regular tax in the second and third tax brackets.
The AMT rules have a long list of which tax credits, exemptions, and deduction is allowed and at what percentage. As it is, the regular income tax calculation is complex. Accurately calculating the Alternative Minimum Tax (AMT) is a task that is better left to experts.
Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You With Your Taxes
A professional tax advisor is knowledgeable and updated about the complex tax laws and changes in the rules. At Edelkoort Smethurst CPAs LLP, our tax experts can provide services such as calculating all possible tax liabilities, tax planning, and strategy to help you claim refunds, credits, and exemptions. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best tax expertise, contact us online or by telephone at 905-517-2297.