What is Alternative Minimum Tax?
As the name implies, alternative minimum tax (AMT) is an alternate way to calculate taxes to ensure that higher income earners pay a minimum amount of tax when benefiting from certain deductions, including the lifetime capital gains exemption (LCGE). Beginning January 1, 2024, there are new changes taking place that could impact your after-tax proceeds when selling your business.
At high-level, the following changes are proposed take place, as outlined in the 2023 federal budget:
Increase in the Federal AMT rate from 15% to 20.5%, which when combined with the provincial AMT rate, will be greater than the capital gains tax rate – meaning it is much easier for AMT to kick in when someone realizes a capital gain;
30% of gains sheltered by the Lifetime Capital Gains Exemption will now be included in the AMT base for which the tax is calculated – previously this was 0%;
AMT will still be eligible to be credited against high-rate income tax over the following seven years; however, it will be much more challenging to plan for some that are selling their business.
For someone with income from other sources over $173,000 who then claims a $1M in exemption (LCGE per individual is expected to be greater than $1M in 2024), there will be approximately $80K in AMT plus approximately 1% for capital gains above the exemption, depending on your province.
Depending on the structure of your business, you may want to consider getting a deal in place to sell your business before the end of the year to avoid triggering potentially high levels of AMT payable.