AMT Impact on Giving

How AMT changes affect philanthropic planning

December is traditionally the month when most of the year’s charitable giving takes place. The reason? Donors want to ensure they get a tax receipt for the current year, which can be used to reduce their tax payable when they file their tax returns next April. But December 2023 may see even more significant gifts due to the looming changes to the alternative minimum tax (AMT), set to come into force in 2024.

Before reviewing the new AMT rules and their impact on charitable giving, let’s review some of the tax advantages of giving to charity.

Tax Receipt For All Donations

For many donors, simply donating cash — by writing a cheque, using a credit card, or applying some form of digital payment — is the way to go. As with any type of donation, these donors can receive a donation receipt to claim both federal and provincial non-refundable tax credits.

On the federal side, donors get a credit of 15% for the first $200 of annual charitable donations. The credit rate jumps to 29% for cumulative donations above $200 (or 33% if the donor has income subject to the top 33% federal rate, which is income of more than $235,675 in 2023). Parallel provincial credits work similarly, providing most Canadians with a minimum combined federal/provincial tax credit worth at least 40% for donations above $200 annually.

TAX SAVINGS FROM DONATING “IN-KIND”

In-kind donations of publicly traded shares, mutual funds, or segregated funds to a registered charity provide the donor with a tax receipt equal to the fair market value of the securities or funds being donated and allow them to avoid paying capital gains tax on any accrued gain.

A similar rule applies to the donation of securities obtained through the exercise of employee stock options. The employee may be able to avoid paying tax on employee stock option benefits by donating the obtained securities in-kind to a charity within 30 days of exercise.

Proposed Changes To The Amt

Changes proposed to the AMT system in 2024 may motivate some large gifts in December 2023, depending on the donor’s personal tax situation. The AMT imposes a minimum level of tax on taxpayers who claim certain deductions, exemptions, or credits to reduce the tax they owe to very low levels.

In the 2023 federal budget, the government announced that “to better target the AMT to high-income individuals,” several changes would be made to the rules for calculating the AMT, beginning in 2024. The changes, which were formally introduced in Parliament over the summer, include raising the AMT rate to 20.5% from 15%, increasing the amount of income below which AMT will not apply ($173,000 in 2024), and broadening the AMT base by limiting certain amounts that reduce taxes. All provinces and territories also impose AMT, which is generally calculated as a percentage of the federal AMT.

Since AMT can only arise in 2024 if income calculated under the AMT rules exceeds the proposed $173,000 AMT exemption, most taxpayers don’t have to worry about it. But AMT could be an issue for higher-income taxpayers if a charitable gift is made in 2024, as opposed to 2023.

Why? Because a couple of AMT changes specifically target charitable giving.

First, starting in 2024, only 50% of the donation tax credit will be allowed when calculating the AMT. This alone, however, is not enough to trigger AMT, even for high-income donors. It’s only a concern when a donor earns some tax-preferred income or takes certain deductions. For example, a donor who has a significant capital gain, exercises qualifying employee stock option benefits, or has losses carried forward from a prior year could be affected.

The second AMT adjustment relates to in-kind donations of publicly traded shares, mutual funds, or segregated funds to a registered charity. Starting in 2024, 30% of the capital gains on securities that are donated in-kind will be included in income under the new AMT rules. Since only 50% of the donation credit will be allowed for AMT purposes, as explained above, significant donations of publicly listed securities may result in additional AMT in 2024 that would not have arisen had the donation been made in 2023.

This means that now is the time to reach out to your clients to determine whether they should do some proactive planning as 2023 draws to a close to minimize the impact of AMT in 2024. Such planning could include triggering a capital gain in 2023, exercising employee stock options, or making a charitable gift before year-end. Those who opt to make a charitable gift but haven’t decided how to allocate it yet can consider donating to a donor advised fund (DAF) — an account at a public foundation that will hold the donation. The donor gets a 2023 tax receipt for the donation and avoids any 2024 AMT consequences of delaying the gift. Then, in 2024 and beyond, the donor can have the DAF make distributions to any favourite charities.

JAMIE GOLOMBEK, FCPA, FCA, CFP, CLU, TEP, is the managing director, tax & estate planning with CIBC Private Wealth in Toronto. He can be reached at Jamie.Golombek@cibc.com.

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BY KEVIN WARK