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AMT Changes – A Concern for Charities!

By Edmonton Community Foundation

A concern for charities!

The Federal government has proposed troubling legislation.  In its enthusiasm to ensure that wealthy Canadians pay taxes, changes have been proposed  to how “alternative minimum tax” (“AMT”) is calculated. 

For many “AMT” is a mystery because, in most cases, it has no impact on what taxes a person actually pays, but its application to wealthy Canadians has the potential to discourage large charitable gifts.  In the words of Audrey Guo of Imagine Canada

As high-income Canadians respond to the lowered incentive for charitable donations caused by the AMT changes, there is an increased likelihood that large gifts to organizations in the charitable sector may be reduced, putting the sector in danger of losing a potential source of funding that many charities currently rely on.

What is AMT? 

Each year an individual’s income tax owing is calculated the usual way, which considers certain tax credits and deductions (“normal tax”). This number is then compared to a second calculation (AMT) without the same credits and deductions, but tax is calculated at a lower tax rate.  The higher of the two numbers is the amount of tax a person has to pay.  Usually, but not always, this will be the “normal tax” amount.     

The proposed amendments change how AMT is calculated in 2024 and later years.  Under the changed rules:

  • 30% of the capital gain that is created by a charitable gift of publicly traded securities is added to the AMT calculation; plus
  • Donors are only able to consider 50% of their usual charitable donation tax credit in determining AMT.

While AMT will not affect people with taxable income under approximately $173,000 and AMT might even be recoverable, depending on a person’s tax in future years, its application will be potentially a nasty surprise to donors who would be in a position to provide major support to charities. 

For wealthy donors who make very large charitable gifts (cash or otherwise), AMT is a concern because they can claim only 50% of their usual charitable donation tax credit.  This reduction in tax impact may well have a chilling effect on charitable sector support from the very people best positioned to make large charitable gifts. 

The second problem relates specifically to gifts of “publicly traded securities” (shares that trade on certain public stock exchanges and mutual funds).   

There exists a wonderful tax incentive to encourage gifts of “publicly traded securities.  Under current rules, when donors give these securities “in-kind” to a charity, they:

  • receive a donation receipt for the fair market value of the securities on the day the charity receives them in its accounts; PLUS
  • do not pay tax on any capital gain inherent in the securities (the difference between the fair market value and the adjusted cost base).

The incentive is easy to explain and illustrate to donors and gifts of these securities have become extremely popular. 

Under the proposed AMT changes, 30% of the capital gain that is created by a charitable gift of publicly traded securities is added to the AMT calculation (with the potential of raising a person’s income to levels above the $173,000 AMT exemption amount).

The combination of the 30% tax inclusion for gifts of publicly traded securities, together with the inability to claim more than 50% of the usual donation tax credit, means that some level of tax may indeed be payable as a result of the gift of securities notwithstanding that the donor has completely divested themselves of the securities and received no proceeds of sale with which to pay the tax. 

In addition to the AMT negatively affecting those donors caught in its application, there is also concern that many donors who would not be affected by AMT will be so unsure of its application that they will choose not to make gifts of publicly traded securities.

If enacted, these proposals mean that we can no longer explain these wonderful gifts on the back of a napkin.  We do not know our donors’ income levels or other personal circumstances to identify if a potential tax cost (temporary or permanent) exists.  We can only encourage donors to discuss the matter with their tax advisors (at an additional cost and delay to them) if they have income levels above the AMT exemption threshold.  Donation decisions that were simple and straightforward are made much more complicated when, in fact, donors would prefer to “give simply and simply give”.