The federal budget announced last month broadens the alternative minimum tax by disallowing certain deductions and increasing the AMT capital gains inclusion rate to 100 percent from 80. The budget also adjusts the rules for intergenerational business transfers originally introduced in Bill C-208.
AMT is an alternative tax that is calculated based on fewer deductions, exemptions and tax credits than under the normal income tax calculation rules. For example, if you used your capital gains deduction to shelter capital gains on qualified farm property or received significant dividend income, you may be subject to the AMT. It applies at a flat rate of 15 percent (federally) with a standard $40,000 exemption.
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The budget proposes several changes to the calculation of the AMT, including to broaden the base on which the tax is calculated, raise the AMT exemption to about $173,000 and increase the federal AMT rate to 20.5 percent. These proposed changes will begin after 2023.
The budget broadens the AMT base by further limiting tax preferences, including to increase the AMT capital gains inclusion rate to 100 percent from 80. Capital losses and allowable business investment losses would apply at a 50 percent rate. Certain deductions and expenses will now be limited to 50 percent. Only 50 percent of non-refundable credits will be allowed to reduce the AMT.
What does this mean for you? These proposed changes will have a greater impact on taxpayers, especially those for whom a significant component of their income is represented by taxable capital gains and those claiming significant tax credits, specifically donations that reduce taxes payable.
If you are considering selling farmland and expect a large gain on the sale, you should consult with a tax adviser on how the new AMT rules may affect you.
The latest budget also amends the rules introduced in Bill C-208 regarding the intergenerational transfer of businesses. Bill C-208 provides income tax relief for situations where parents would incur significantly higher tax by selling shares of a qualified family farm corporation to their children or grandchildren versus selling to an arm’s-length party.
The budget introduces several new restrictions that must be satisfied to qualify for the income tax relief as well as two transfer options: an immediate intergenerational business transfer (three-year test) based on arm’s-length sales terms, or a gradual intergenerational business transfer (five-to-10-year test) based on estate freeze characteristics.
There are several conditions that must be met if the three-year immediate transfer is chosen. Control, economic interest and management must all be transferred within 36 months. The child or children must retain control for 36 months and must work in the business for a 36-month period following the share transfer to qualify for this type of business transfer.
Similar tests must be met for the gradual transfer, but as the name suggests, these tests are considered over a longer time.
The farm owner transferring the property and the child or children must jointly elect for the transfer to qualify. The intergenerational transfer is extended and now applies to children, grandchildren, stepchildren, children-in-law, nieces and nephews and grandnieces and grandnephews. Where the election is made, the capital gain reserve period is extended to 10 years. The changes apply to transactions that occur on or after Jan. 1, 2024.
These rules introduce additional items to consider when thinking about estate and succession planning. It is always a good idea to discuss these new rules and regulations with a trusted adviser to ensure all rules are met.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca.
