The giving season is fast approaching, and the needs of Canadian charitable organizations are pressing. Higher inflation over the past few years has placed greater stress on families in need, and charities are trying to do more with less.
This problem is compounded by larger trends in giving. According to the Giving Report 2023 from CanadaHelps, donation frequency and size have decreased across all income levels between 2010 and 2020. For those looking to make an impact, giving now is more important than ever.
As discussed in a previous article, it is possible to donate shares that have appreciated in value from your personal portfolio or even from your holding company’s portfolio. As an individual, donating shares of publicly traded companies is more advantageous than donating cash because you avoid the capital gains tax on the shares’ appreciation and the full market value counts for the donation tax credit.
Donating through a holding company is even more enticing. Donations are tax deductible for the corporation and, in the case of donating shares, not only is the capital gain on the shares not taxed, but the full value of capital gain is added to your company’s capital dividend account, allowing you to withdraw more from your corporation tax free.
Upcoming Alternative Minimum Tax changes for individuals
The Alternative Minimum Tax (AMT) is a parallel tax calculation to the regular method of calculating your income tax owing. If the tax you owe using the AMT method is greater than it is using the ordinary method, you must pay the AMT amount.
The purpose of the AMT is to limit the tax benefit of certain types of income or incentives for high income earners, such as significant capital gains income and/or large tax credits. The AMT calculation allows fewer deductions, credits and exemptions than the ordinary income tax calculation, and it applies a flat tax rate on all taxable income.
Starting January 1st 2024, the federal AMT rules are changing significantly, notably:
- Only individuals with incomes of $173,000 and above are affected.
- The AMT flat tax rate is increasing to 20.5% from 15%.
- Capital gains will be fully included in income (up from 80% in the prior AMT calculation and compared to only 50% inclusion in the regular tax calculation).
- On donated shares, 30% of the capital gain will be included in income (up from 0%).
- Most non-refundable tax credits will be cut in half (including the donation tax credit).
These are the changes at the federal level only. While the Quebec government has not yet formally announced modifications to its minimum tax for 2024, it has signalled that it will likely pursue a harmonized version of the federal AMT. For Canadians in other provinces, the provincial minimum tax will likely remain the same i.e., a percentage of the federal AMT, which varies by province.
How could this impact your philanthropic goals?
Starting in 2024, not only will a portion of the capital gain be included as income to calculate the AMT when you gift shares, but the donation tax credit will also be halved. This is in stark contrast to the current AMT rules and regular tax calculations.
For someone whose income is above $173,000 in 2024, here’s a simplified illustration of the impact of the new AMT:
| Description | Regular calculation | 2023 AMT | 2024 AMT |
| Fair market value of donation | $50,000 | $50,000 | $50,000 |
| Adjusted cost base of shares donated | $10,000 | $10,000 | $10,000 |
| Capital gain | $40,000 | $40,000 | $40,000 |
| Portion of gain included in income | $0 | $0 | $12,000 |
| Federal tax on donation | $0 | $0 | $2,460 |
| Federal donation tax credit (29%) | ($14,412) | ($14,412) | ($7,206) |
| Federal net tax credit | ($14,412) | ($14,412) | ($4,746) |
| AMT tax impact | – | – | +$9,666 |
Remember, this is only the impact at the federal level. You can expect a similar impact on the Quebec tax return and a percentage of that impact in the other provinces. If you earn over $173,000 and make significant donations of shares, contact your financial planner or accountant to see if you’re likely to be affected.
Plan your giving carefully
The needs of charities are increasing. As always, if you are in the position to donate from a corporation, this remains the best option. When donating as an individual, keep the AMT changes in mind and discuss them with your financial advisors to see how you can maximize the impact of your generosity.