Alternative Minimum Tax (AMT) – A Complete Guide by a Montreal CPA Firm Near You

Introduction

The Alternative Minimum Tax (AMT) is one of the most misunderstood parts of the Canadian tax system—yet it increasingly affects high-income earners, investors, business owners, and retirees. With recent changes to AMT rules beginning in 2024, more Canadians will face unexpected tax bills on capital gains, stock options, large deductions, and charitable donations. AMT is designed to ensure that taxpayers who use certain deductions or tax-preferred income still pay a minimum amount of tax. Understanding how AMT works—and how to plan for it—is essential to avoid surprises and optimize tax outcomes.

Legal and Regulatory Framework

AMT is governed by section 127.5 of the Income Tax Act. It requires taxpayers to calculate tax twice: once under regular tax rules and once under AMT rules. If AMT is higher, the taxpayer pays the difference. AMT applies to individuals (not corporations) and affects large capital gains, employee stock options, flow-through shares, rental losses, partnership deductions, and certain tax shelters. AMT paid can generally be carried forward for 7 years as a credit, but only if future regular tax exceeds AMT. CRA monitors AMT filings closely, especially for high-value transactions.

Key Court Decisions

In Walls v. Canada, the court upheld CRA’s AMT calculations on a taxpayer using aggressive deduction strategies. In Hogarth v. Canada, AMT applied due to significant capital gains and donation credits. In Gerbro Holdings v. Canada, the court emphasized that AMT rules override normal tax calculations where required. These cases show that AMT is legally enforceable even when taxpayers follow regular rules correctly.

How AMT Works

AMT starts with regular taxable income but adds back certain deductions and tax-preferred items to calculate Adjusted Taxable Income (ATI). Then a flat AMT rate is applied. If AMT > regular tax, you pay AMT. Items that increase ATI include: 100% of capital gains instead of 50%, 100% inclusion of stock option benefits, restricted use of loss carryovers, reduced credits for charitable donations of appreciated securities, reduced deductions for limited partnership losses, and add-backs for certain tax shelters or interest deductions. These add-backs can drastically increase taxable income under AMT rules.

Who Is Most Likely to Be Affected by AMT?

AMT commonly affects: high-income earners, taxpayers realizing large capital gains, individuals exercising stock options, investors in flow-through shares, real estate investors using capital cost allowance, business owners claiming major deductions, taxpayers making large charitable donations of appreciated securities, and retirees triggering gains on corporate reorganizations or estate planning transactions.

Major AMT Changes Starting 2024

The federal government significantly tightened AMT rules beginning in 2024:

• AMT exemption increased, but

• AMT rate increased from 15% to 20.5%

• Capital gains inclusion increased from 80% to 100%

• Stock option inclusion increased from 75% to 100%

• Only 50% of many credits can be applied

• Large charitable donations of appreciated securities may now trigger AMT
  These changes mean more Canadians—including middle-class investors—may pay AMT for the first time.

Capital Gains and AMT

Capital gains are a major AMT trigger. Under regular rules, only 50% of a capital gain is taxable. Under AMT, 100% of the gain is included. Large one-time gains from real estate, stock sales, business sales, crypto, or stock compensation often create AMT exposure.

Stock Options and AMT

Employee stock option benefits normally enjoy tax deferral and deduction incentives. Under AMT, 100% of the stock option benefit is included in income. Tech workers, startup founders, executives, and employees at public companies may face significant AMT when exercising options.

Charitable Donations and AMT

Normally, donating appreciated securities eliminates capital gains tax. Under AMT, the capital gain is added back, meaning taxpayers may face AMT despite making a large donation. This affects philanthropic planning and requires careful timing and structuring.

Real Estate and AMT

Selling a rental property, second home, or cottage may trigger a large capital gain. Even though the principal residence is exempt, AMT can apply to non-principal residence sales—especially if capital cost allowance was previously claimed.

How to Reduce or Avoid AMT

Effective planning strategies include: splitting large capital gains over multiple years, exercising stock options gradually, timing charitable donations to avoid high-income AMT years, avoiding excessive CCA claims in AMT-prone years, using spousal income-splitting strategies, deferring deductions to future years, planning business reorganizations carefully, and reviewing flow-through share purchases with a CPA before investing.

AMT Credits and Carryforwards

If you pay AMT, the extra tax may be recovered within the next 7 years—but only if your regular tax in future years exceeds AMT. This requires active planning. Without proper strategy, AMT may become a permanent tax cost.

Mackisen Strategy

At Mackisen CPA Montreal, we evaluate every major transaction for AMT exposure. We model capital gains scenarios, analyze stock option planning, structure charitable donations to minimize AMT, coordinate year-to-year recovery of AMT credits, and build personalized tax plans. Our guidance ensures you avoid unnecessary AMT and recover credits whenever possible.

Real Client Experience

A Montreal tech employee exercised large stock options and faced a surprise AMT bill—we restructured future exercises to recover tax. A business owner selling shares avoided AMT by splitting gains over two years. A philanthropist prevented a six-figure AMT by timing donations strategically. A retiree selling investment property avoided permanent AMT through optimized CCA and credit planning.

Common Questions

Do most Canadians pay AMT? No—only those with large deductions or tax-preferred income. Is AMT permanent? Not always—AMT credits can be recovered. Does donating securities still save tax? Yes—though AMT requires extra planning. Does AMT apply to corporations? No—only individuals.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal ensures you navigate AMT confidently. We protect your wealth by planning ahead, reducing unnecessary tax exposure, and maximizing long-term tax efficiency.