Very few Canadians pay AMT under the new rules, and even high-income Canadians may not pay AMT if their only sources of income are fully taxable employment. Photo by RobMattingley/Getty Images

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Most taxpayers will likely never have to worry about the dreaded alternative minimum tax (AMT) as it generally only affects high-income Canadians. But AMT does occasionally arise for more modest income earners who realize a one-time capital gain on the sale of their business, vacation home or on an income property. A Montreal taxpayer found this out the hard way and went to court, twice, to challenge the government’s right to charge him AMT. Before delving into the details of this unusual tax case, here’s a primer on AMT.

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The AMT system imposes a minimum level of tax on taxpayers who claim certain tax deductions, exemptions or credits to reduce the tax that they owe to very low levels. Under the AMT system, there is a parallel tax calculation that allows fewer deductions, exemptions and credits than under the regular income tax calculation. If the amount of tax calculated under the AMT system is more than the amount of tax owing under the regular tax system, the difference owing is payable as AMT for the year.

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Changes to the AMT came into effect in 2024 which include: raising the AMT rate; increasing the AMT exemption and broadening the AMT base by limiting certain amounts that reduce taxes (such as exemptions, deductions and credits.) For example, under the regular tax system, only 50 per cent of capital gains are taxable, and you can deduct 100 per cent of any interest expense incurred for the purpose of earning investment or business income. But under the AMT system, taxable income is recalculated such that capital gains are taxable at 100 per cent and deductions (such as interest expense) and credits (such as the basic personal amount) are generally limited to 50 per cent of the regular amounts.

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Before 2024, AMT rules applied a flat 15 per cent tax rate on adjusted taxable income. Starting in 2024, the government increased the AMT rate to 20.5 per cent, which equals the rate for the second federal income tax bracket. All provinces and territories also impose AMT, which is generally calculated as a percentage of the federal AMT.

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Fortunately, most taxpayers will never come across AMT since the exemption, which was frozen at $40,000 prior to 2024, has now been increased to the start of the fourth federal tax bracket, which for 2026 is $181,440. Because of this exemption, very few Canadians pay AMT under the new rules, and even high-income Canadians may not pay AMT if their only sources of income are fully taxable employment, or professional or business income.

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If you do end up paying AMT, you may be able to get it back over the following seven years to the extent your regular tax exceeds AMT in those years, but the recovery of AMT paid in the past is far from a sure thing.

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In the recent case, the taxpayer had realized a capital gain in 2021 of $538,767 and ended up paying AMT of $33,860. While the taxpayer agreed that, according to the wording of the relevant provisions of the Income Tax Act he was required to pay the AMT, he argued that this tax should not apply to him because “he does not belong to the category of high-income taxpayers who abuse deductions and exemptions.” Rather, the capital gain he realized in 2021 was “a one-time event and the income he could earn in the seven years following 2021 will not be sufficient for him to recover the (AMT).”