11 What is the Alternative Minimum Tax? How is the AMT applied? Why does it exist?

Sharon Basi

What is the Alternative Minimum Tax?

The Alternative Minimum Tax has been in effect since 1986. “It is a means to bring fairness to the tax system.” (RBC Wealth Management, p.1). The AMT prevents the wealthy and middle class high-income earners and trusts from using certain tax incentives to reduce or eliminate their tax obligations.

How is AMT applied?

AMT is usually triggered when high-income earners invest in tax shelters, such as limited partnership units. It only applies to individuals and trusts and not to corporations. According to the CRA the following table is a list of some of the most common situations in which people need to pay the minimum tax.

A. When the taxable capital gain reported is $40,000 or more
B. When any of the following is claimed on the tax return:

  • a loss (including your share of a partnership loss) resulting from, or increased by, claiming capital cost allowance on rental properties
  • a loss from a limited partnership that is a tax shelter
  • most carrying charges on certain investments
  • a loss from resource properties resulting from or increased by claiming a depletion allowance, exploration expenses, development expenses, or Canadian oil and gas property expenses
  • a deduction for security options
C. When any of the following tax credits are claimed on the tax return:

  • a federal political contribution tax credit
  • an investment tax credit
  • a labour-sponsored funds tax credit
  • a federal dividend tax credit

Information Retrieved from CRA webpage

The calculation of the Alternative Minimum Tax can be found in 127.51 of the ITA

Why does it exist?

AMT exists because the government wants those who earn higher incomes to pay at least a minimum amount of tax rather than paying less tax than the lower income earners or even no tax, due to having more incentives than those who earn less.

Interactive content (Author: Sharon Basi)

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March 2020

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