This article was originally published in Finance et Investissement.

Changes to the alternative minimum tax (“AMT”) introduced in 2024 have significantly reshaped its role in financial planning. Once viewed as a tax rule affecting only a limited number of taxpayers, the AMT now merits closer consideration by advisors and their clients when evaluating planning strategies.

The reform not only increased the applicable rates but, more importantly, it expanded the tax base used to calculate the AMT. As a result, several transactions that historically had no significant tax implications can now result in substantial tax liability. This is particularly relevant for individuals realizing large capital gains, investors using leverage, and trusts holding investment portfolios.

What is the AMT?

The AMT is a parallel tax calculation designed to ensure that taxpayers who benefit from significant tax advantages still pay a baseline level of income tax.

Each year, individuals and trusts must calculate their tax liability according to the usual rules as well as the AMT rules, which limit certain tax deductions, exemptions, and preferences. When the AMT is greater than the regular tax, the difference becomes payable. This amount can usually be recovered over the following seven years, provided that the taxpayer pays enough regular tax during that period.

Historically, the AMT mainly affected taxpayers realizing significant capital gains or taking advantage of certain specific tax benefits. Since 2024, its scope has expanded considerably.

What are the main changes in effect since 2024?

There are two parts to the reform: higher rates and a broader tax base.

The federal AMT rate rose from 15% to 20.5%, while Quebec harmonized its system by raising its rate to 19%. In turn, the exemption thresholds for individuals were significantly increased to focus application of the AMT on wealthier taxpayers. In 2026, the federal exemption reached $181,440, and Quebec’s rose to $183,680. Trusts generally do not benefit from these exemptions.

Furthermore, several items are now treated less favourably in the calculation of adjusted taxable income:

  • capital gains are included at 100% rather than 80%;
  • stock option benefits are included at 100%;
  • certain carry-forward losses are deductible at only 50%;
  • interest expenses, carrying charges and management fees are usually deductible at only 50%;
  • capital gains on donations of publicly traded securities are now partially included, at 30%; and
  • capital gains associated with other types of donations are now included at 100%.

These changes have considerably increased the number of situations in which the AMT may apply.

Capital gains and retirement: An often-underestimated risk

One of the most important consequences of the reform affects individuals who are approaching retirement or have just retired. Examples of this include an entrepreneur who is selling their business, a property owner selling an income property, or an investor realizing a substantial gain in their portfolio. The AMT payable may now be much higher than before due to the expanded tax base and the higher tax rate.

The real issue, however, is not just the tax paid in the year of the transaction, but its recovery. In theory, the AMT is a temporary tax since it can be recovered over a period of seven years. In practice, this recovery requires that the taxpayer generate sufficient regular taxable income in the years that follow.

However, an individual who retires after selling their business or disposing of assets may have considerably less taxable income in the following years. In such cases, the AMT may never be fully recovered, becoming a permanent cost.

Any retirement projections involving a large capital gain should therefore include an analysis that specifically addresses the AMT.

How does the AMT affect leveraged investment strategies?

The new rules also affect strategies based on investments that are financed with borrowed funds.

Since the calculation of the AMT now recognizes only 50% of interest expenses and various carrying charges, the tax efficiency of leverage has been reduced. A strategy that is beneficial under the normal rules may yield a much less favourable result once consideration has been given to the AMT.

Advisors should therefore evaluate after-tax returns by taking into account both regular income tax and the potential impact of the AMT.

Trusts warrant a review

Trusts are among the structures most affected by the changes implemented in 2024.

Most trusts are subject to the AMT, with the exception of graduated rate taxation estates, employee ownership trusts, and trusts exempt from Part I tax. Furthermore, apart from qualified disability trusts, trusts do not benefit from the exemption granted to individuals. As such, they are more quickly subject to the AMT.

This situation is particularly impactful for trusts that hold investment portfolios. The limitation on deductions of carrying charges and management expenses can result in positive adjusted taxable income, even when little or no taxable income is retained in the trust under the normal rules. The composition of the portfolio also becomes a key factor. Growth-oriented portfolios that have a significant portion of their returns in the form of capital gains generally face a higher risk of being subject to the AMT than those that are more focused on generating current income.

Family trusts financed through prescribed rate loans should also be reassessed to determine whether they still provide the desired tax benefits under the new rules.

A tax that is recoverable… but not always

One of the limitations of the AMT is that its recovery depends on the taxpayer’s future ability to generate taxable income in Canada.

This issue may arise, for example:

  • when a taxpayer retires after selling a business;
  • when a taxpayer emigrates;
  • when a non-resident disposes of taxable Canadian property;
  • upon the deemed disposition of a trust at age 21; and
  • when an individual dies before using their accumulated AMT credits.

In each of these situations, the AMT may lose its temporary nature and become a final tax expense.

Should you consider using a corporation?

One often-overlooked aspect of the AMT is that it applies to individuals and trusts but not to corporations.

This distinction may be important when there is an elevated risk that the AMT will be unrecoverable. In certain situations, and particularly when a client expects to realize a substantial gain while anticipating lower future income, it may be useful to review the structure used to hold assets.

Of course, incorporation is not a one-size-fits-all solution. It needs to be evaluated based on a number of factors, including liquidity needs, corporate tax, estate planning objectives, and the withdrawal strategy. However, when recovery of the AMT appears unlikely, it may be worthwhile to consider using a corporation.

Conclusion

In short, the changes made to the AMT in 2024 have turned it into a genuine planning issue rather than a secondary tax consideration. In a context where many wealth management strategies rely on realizing capital gains, using trusts, or taking on debt for investment purposes, the AMT can no longer be analyzed only at tax time.

For advisors, the AMT should now be part of the standard checks carried out when reviewing any major transaction or making long-term financial projections. A strategy that appears optimal under the normal tax rules may turn out to be much less advantageous once the AMT has been duly considered, particularly when recovery of this tax at a later date is uncertain.

Now more than ever, an advisor’s ability to add value lies in being able to identify such situations early on and assess their implications. In many cases, a simple analysis of AMT could help avoid unexpected tax costs and improve the client’s after-tax net income. This is why the AMT now needs to be considered an essential part of financial planning, on a par with analyses of liquidity, estate taxes, and asset ownership structures.

How Miller Thomson can help

The AMT transforms how many common transactions should be analyzed, including those undertaken to sell a business or implement retirement withdrawal strategies, family trusts, and leveraged structures. A projection that appears optimal under the normal rules can yield a very different result once the analysis has considered the AMT. Miller Thomson’s Private Client Services lawyers help taxpayers and their advisors assess the impact of the AMT on their estate planning strategies before the tax bill becomes final.