Let’s face it, no one’s exactly jumping for joy when it’s tax time, right? We’re all looking for ways to keep more of our hard-earned cash, whether it’s through deductions, tax credits, or smart planning. The thing is, cutting your taxable income too much might actually end up costing you more.

Here’s where the Alternative Minimum Tax (AMT) comes in. It’s designed to make sure that everyone, even those who’ve found ways to save big on taxes, still pay at least a baseline amount. Never heard of it? You’re not alone. Even though it’s been part of Canada’s tax system since 1986, the AMT tends to fly under the radar for a lot of people.

It primarily targets high-income earners who reduce their tax liability to very low or even zero through the use of aggressive tax planning. Average income earners can also be affected though, in certain situations. For example, a one-time event like a large capital gain, exercising stock options, or claiming substantial deductions (such as high charitable donations or business losses) can sometimes trigger the AMT.

The AMT recalculates taxable income by adding back certain deductions and exemptions. If the AMT calculation results in a higher tax amount than your regular tax liability, you’ll pay the AMT instead.

How Does the AMT Work?

Let’s say Sarah sells shares in her small business and makes a $1 million capital gain. Normally, because these are Qualified Small Business Shares, she can use something called the Lifetime Capital Gains Exemption (LCGE) to reduce her taxable income to $0 — meaning she wouldn’t owe any regular tax.
However, the Alternative Minimum Tax (AMT) is a separate tax calculation designed to make sure that people with high incomes — especially those using large deductions, exemptions, or tax breaks — still pay at least some tax.

This applies even if everything Sarah is doing is fully legal and completely allowed under the tax rules — AMT isn’t about catching mistakes or abuse, it’s about ensuring that some minimum tax is paid when income is significantly reduced by tax planning.

Under the updated AMT rules, Sarah has to include 30% of her exempted capital gain (so $300,000) when calculating AMT. After subtracting a basic exemption amount (currently $173,000), she’s left with $127,000 of income for AMT purposes.

AMT applies a flat tax rate of 20.5% to that amount, meaning Sarah owes about $26,000 in AMT.
Since this AMT amount is higher than the $0 tax she would have owed under the regular rules, she has to pay the AMT.

The silver lining? Sarah can carry forward the AMT she paid and use it as a credit to reduce her regular taxes in future years (for up to 7 years), as long as her regular taxes are higher than her AMT in those years.

It’s a little complicated, but here is another example to make it make sense:

John recently sold one of his rental properties, which resulted in him realizing a capital gain of $400,000, 50% of which is taxable. A few years ago John sold another one of his properties at a loss, and as a result has a $100,000 in net capital loss carry-forward that he’ll be able to apply against this new gain. By applying this loss John will effectively reduce his taxable capital gain to $100,000. Assuming his marginal tax rate is 20%, John will owe $20,000 in income tax on the sale of his property.

Now let’s look at the AMT calculations. First, 100% of the capital gain is included (as opposed to 50%), resulting in a $300,000 taxable gain ($400,000 capital gain – $100,000 net capital loss). Of that, $173,000 is exempt from tax, leaving $127,000 subject to AMT. $127,000 x 20.5% = $26,035. Since this is higher than the $20,000 John would have paid under the regular calculations, John must pay the AMT.

Again, John will be able to apply his AMT paid as a credit towards his regular taxes for up to 7 years, making it possible for him to recover the full amount over time (assuming his regular taxes in those years exceed his AMT).

Is Paying AMT Worth It?

You might be thinking, if the AMT lets you carry forward credits to reduce future taxes, isn’t it better than just paying regular taxes, even if it’s a bit higher upfront? While the AMT’s carryforward credit can be helpful, it comes with some significant drawbacks.

For one, you need to have enough regular tax liability in the next seven years to actually use the credit—otherwise, it expires. Plus, paying the AMT upfront can put a strain on your cash flow, especially if you were expecting a lower tax bill . On top of that, the extra complexity of the AMT system often means higher accounting fees over the eight years you’ll spend tracking and applying the credit.

In many cases, simply paying regular taxes upfront can save you time, stress, and money in the
long run, so it’s often best to avoid AMT when you can.

Scenarios Where AMT Might Apply

• Large capital gains, especially if exempted through the QSBS or principal residence
• exemptions.
• Excessive use of non-refundable tax credits.
• Significant deductions from stock options or tax shelters.
• High charitable donations reducing taxable income significantly.

Given the complexity of the AMT, consulting a tax professional is wise if:

• You plan to sell assets with large capital gains.
• You have significant unused capital losses.
• You rely heavily on tax deductions or credits.
• You’ve encountered AMT in the past.

A tax professional can help structure your transactions to minimize the AMT’s impact or ensure you’re prepared to use any AMT credit effectively in future years.

In short, while the AMT is designed to maintain fairness in the tax system, it can catch savvy tax planners off guard. By understanding how the AMT works and incorporating it into your tax strategy, you can avoid unexpected surprises and continue maximizing your savings in the long run.

If you’re unsure how the AMT could impact your tax planning, it might be time to chat with a professional to ensure you’re on the right track. Don’t leave your hard-earned savings to chance—reach out today for expert guidance!