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The Alternative Minimum Tax

I. Introduction

In response to criticisms that there were too many high-income individuals paying little or no taxes, the Government announced in the May 1985 budget its intention to introduce a minimum tax that would take effect on January 1, 1986. The purpose of the alternative minimum tax (AMT), as it became known, was to achieve a fairer tax system by reducing the extent to which high-income filers paid little or no income tax. This was to be accomplished by ensuring that high-income individuals were not able to systematically use tax preferences to substantially reduce or eliminate taxes payable. This paper examines the extent to which the AMT has achieved its objective for the period between January 1, 1986 and December 31, 1997.

II. Background

What is the AMT?

The AMT is targeted towards individuals with high incomes who are able to use tax preferences to substantially reduce or eliminate their taxes in a given year. [1] In general, the AMT increases the tax filer's taxable income by disallowing various tax preferences. In place of these preferences, a $40,000 exemption is granted. The net taxable income is then taxed at a 17-per-cent rate to arrive at the minimum amount of tax that must be paid. The tax filer must pay the greater of the minimum amount and the amount of regular taxes that would be paid in the absence of the AMT. The minimum amount over and above the regular taxes paid can be carried over and used to reduce regular taxes payable to a level no lower than the minimum amount payable in a subsequent year. Example 1 briefly illustrates how the AMT works. This example, and all subsequent examples, are based on the 1997 tax system.

Example 1 – How the AMT Works


Regular Tax AMT
($) ($)

Total Income 250,000 250,000
Deductions 125,000
Taxable Income 125,000 250,000
AMT Exemption 40,000
Net Taxable Income 125,000 210,000
Tax on Income 31,812 35,700
AMT Carry Forward 3,888

Review of the 1985 Discussion Paper

The Government released a discussion paper [2] with the May 1985 budget for consultation before implementing a minimum tax. The paper reviewed the extent to which high-income individuals paid little or no income tax during the 1970s and early 1980s, examined the reasons why this occurred and set out the general framework for how a minimum tax should operate.

The paper observed that only a small percentage of tax filers had high incomes and paid little or no taxes. Furthermore, few high-income individuals managed to pay no taxes for more than a year (none for more than six consecutive years). The paper also noted that the dividend tax credit was a major reason for high-income individuals not paying income tax. Other reasons included deductions for carrying charges in excess of investment income, the partial taxation of capital gains and deductions for business losses claimed on their tax returns. Social policy items such as registered retirement savings plan (RRSP) deductions were found to be of secondary importance when compared to investment items.

The paper reviewed three possible forms that a minimum tax could take: an AMT, an add-on minimum tax and a limit on tax preferences. [3] The AMT was eventually chosen since it was more easily targeted towards high-income earners who pay little tax and did not interfere with tax calculations for the rest of the population. The remainder of this section reviews some of the arguments made in the discussion paper regarding the appropriate structure of an AMT.

Exemption Level

While the choice of the exemption level was somewhat arbitrary, it had to be high enough to exempt the majority of taxpayers who had low incomes and/or few preference items, but low enough to catch high-income individuals who used preferences to offset large amounts of their income.

AMT Tax Rate

Like the exemption level, the rate had to be "high enough to ensure that substantial levels of income did not go untaxed, while low enough to recognize that a low regular tax liability may be the result of legitimate incentives." [4] The paper argued that the AMT rate should not exceed 17 per cent, which was equal to one-half the top marginal rate at the time. The reason given was that this was equivalent to the top rate on capital gains, which had a 50-per-cent exclusion rate at the time. Presently, the AMT rate is equal to the statutory rate for the lowest tax bracket and the rate used for most non-refundable credits.

Choice of Preference Items

The discussion paper laid out two criteria in choosing preferences that would be included in the AMT base. The first was the degree to which a preference was seen to create a potentially inappropriate or excessive tax preference. The second was the complexity and administrative effort associated with capturing any preference for the AMT base. The preferences that were chosen are discussed in detail in the next section.

The AMT in Practice
How the AMT Is Calculated

In general, the AMT disallows preferences that can be used to generate losses that offset other sources of income. [5] When calculating adjusted taxable income for AMT purposes, the amounts claimed for these preferences are added to regular taxable income. These preferences include the following:

When claiming a loss from previous years, any portion of that loss due to any of the preferences mentioned above must also be added to taxable income under the AMT.

The AMT also adds the non-taxable portion of capital gains [8] to the taxfiler's income. [9] In addition, two other deductions are disallowed by the AMT: the deduction for home relocation loans and the stock option and shares deduction. [10]

Dividends are included in the adjusted taxable income at their cash value, and no dividend tax credit is given. [11] In addition, allowable business investment losses are 100-per-cent deductible under the AMT rather than 75-per-cent deductible. This provides symmetric treatment of capital gains and business investment losses.

Most non-refundable tax credits (including charitable contributions and personal and spousal credits) can be used to decrease the minimum amount of tax. [12] Two exceptions are credits that were transferred from a spouse or dependant (e.g., tuition fee credit) and the credit for pension income, which are disallowed for minimum tax purposes. The minimum amount net of the non-refundable credits is compared to the individual's regular basic federal tax. If the minimum amount exceeds the basic federal tax, then the individual must pay the AMT.

In addition, the AMT disallows some other tax credits that are used to decrease regular tax payable: the political contribution tax credit, the investment tax credit, the labour-sponsored venture capital corporations credit, the logging tax credit and the overseas employment tax credit. [13] However, an adjusted foreign tax credit can be used to decrease the amount of minimum tax.

The Carry-Over Provision

Any minimum tax over and above regular taxes can be carried over for up to seven years to be used as a credit against future regular taxes. The carry-over can only reduce regular taxes to the minimum amount of tax in future years. This has the effect of reducing the cost of the AMT to the taxpayer. The carry-over is there to ensure that tax incentives put in place for valid economic and social reasons are not undermined by the AMT. It ensures that taxpayers "will be able, in effect, to apply unused deductions and tax credits against their regular tax liability in future years, but in each and every year will never pay less than the minimum tax." [14]

Changes to the AMT Base

While the rate and exemption level have not changed since 1986, there have been some changes to the preferences included in the AMT. First, beginning with the 1995 tax year, the AMT tax base was broadened with the addition of losses due to carrying charges on certain investments. Second, the 1998 budget included a measure to remove RRSP contributions and rollovers from the AMT tax base, retroactive to 1994. The latter change was made because many individuals were receiving large severance packages that were being rolled over into RRSPs during the economic restructuring of the 1990s. The large RRSP contributions triggered the AMT. Since retirement savings were important to Canadians, and given the limitations on RRSP contributions already in place, the Government decided that it would be appropriate to remove this preference from the AMT base.

Changes Made to Some Preferences Targeted by the AMT

The Government has been actively eliminating or limiting the use of various preferences targeted by the AMT. Nevertheless, these preferences are still included in the AMT base since there may be losses carried over from previous years. For example, the 100-per-cent CCA provisions on certified films was eliminated in the 1995 budget and replaced with a tax credit for producers. One of the reasons cited in the budget was that the CCA measures were simply tax shelters used by high-income individuals.

In addition, the tax shelter on multiple-unit residential buildings has been eliminated. Before the changes, CCA on these properties created losses that could have been used to offset other forms of income. This provision has now been changed and CCA can only be deducted up to the amount of net income from the property.

Minimum Taxes in Other Jurisdictions

In Canada the province of Quebec has a minimum tax that is similar to the federal AMT. Internationally, only the United States has a minimum tax similar to the one used in Canada. A number of countries have minimum taxes for corporations (such as a minimum tax on assets) but not for individuals. Some countries in Europe have wealth taxes, some of which are tied to the amount of income tax paid. These taxes can be interpreted as a form of minimum taxation. Norway has a national income tax on gross income for which no deductions are provided which affects only high-income individuals. However, this tax does not apply to capital income. [15] In Germany, limits on the set-off of losses result in a form of minimum taxation for individuals with positive incomes over DM 100,000. [16] A brief discussion of minimum tax measures in other countries can be found in Larin and Jacques. [17] An overview of the Quebec and U.S. versions of the AMT is provided below.

The Quebec AMT

The Quebec AMT was introduced at the same time as the federal AMT and it operates in a similar manner to the federal version. [18] It also targets the same preferences. [19] In Quebec the AMT rate was initially 16 per cent, but was raised to 20 per cent in 1993 and to the current rate of 23 per cent in 1998, which is the rate used for non-refundable tax credits. Quebec also reduced the basic exemption from $40,000 to $25,000 in 1996 as a means of increasing revenue and fairness in the tax system. The Quebec government also excluded RRSPs from its AMT base beginning with the 1997 tax year.

The U.S. AMT

The United States has had a minimum tax since 1969. The tax was implemented for the same policy reasons as in Canada. The U.S. originally used an add-on minimum tax but eventually switched to an AMT. The U.S. has a minimum tax for both individuals and corporations. [20] The basic method for calculating the AMT is the same as in Canada. Approximately 700,000 U.S. taxpayers paid $4.5 billion in AMT in 1997.[21]

While the American system is similar to the Canadian one, there are two important differences. First, the Canadian system's non-refundable tax credits (such as the basic personal credit) are separate from the $40,000 AMT deduction. In the U.S. system, the personal exemption is treated as an AMT preference and is added back into taxable income. Second, the Canadian AMT deduction is not phased out at higher incomes. Therefore, the American AMT appears to be stricter than its Canadian counterpart.

There has been a great deal of criticism in the United States regarding the AMT, especially the tax on corporations. Most of this criticism concerns the complexity of the tax and the additional compliance costs (e.g., companies have to calculate depreciation two different ways).

III. Overall Impact of the AMT

The 1985 press release announcing the AMT stated that the minimum tax "ensures that high-income Canadians will pay a fair share of taxes in each year." [22] This section examines the performance of the AMT for the period 1988 to 1997 to determine if it is working as intended. Since the removal of the RRSP deduction from the AMT base was done on a retroactive basis, the tax return data for those years do not take these changes into account. Nevertheless, through the use of the Personal Income Tax T1 model, some of the effects of removing the RRSP deduction from the base have been determined and they will be noted where appropriate. However, it was not possible to determine the effects on the carry-over amounts of individual filers.

Revenue and Number of Filers Affected
Before RRSPs Were Removed

Table 3-1 presents the number of filers and the amount of additional revenue collected by the Government from the AMT. Generally, fewer than 30,000 filers paid additional tax as a result of the AMT each year from 1988 to 1997 with revenue well below $100 million per year between 1989 and 1992. The increase in AMT revenue between 1992 and 1993 is mainly due to the increase in the number of filers paying AMT because of increased use of rollovers into RRSPs. The use of the RRSP preference accounted for only 4 per cent of AMT revenue in 1992 but 31 per cent in 1993 (see Appendix 1, Table A1.3). AMT revenue peaked in 1994, with 42,320 individuals paying a total $197 million in additional tax. Since the lifetime capital gains exemption was being phased out in that year, there was an increase in the amount of capital gains declared, leading to more individuals having to pay the AMT.

Since taxpayers can claim the amount of incremental AMT they pay against future regular taxes, the amount of carry-over applied must be taken into account to determine net AMT revenue. As Table 3-1 indicates, while $1.02 billion in gross AMT revenue was collected between 1988 and 1997, $784 million was claimed back by AMT filers, leaving total net revenue from AMT for the period at $237 million. Gross AMT revenue averaged just over $100 million per annum during the period. However, on a net basis, revenue averaged only $23.7 million. In fact, in 1990 and 1995, the Government paid out more in AMT than it collected. With the exception of 1993 and 1994, net revenue on an annual basis was less than $50 million.

Table 3-1
Additional Revenue From AMT


Incremental AMT Carry-Over Applied Annual
Year # of Filers Amount ($) # of Filers Amount ($) Net Revenue ($)

1988 17,354 115,286,000 31,389 83,570,000 31,716,000
1989 15,102 85,874,000 23,209 71,624,000 14,250,000
1990 13,810 48,062,000 24,762 84,776,000 ( 36,714,000)
1991 16,268 63,251,000 18,726 54,677,000 8,574,000
1992 17,005 64,976,000 19,027 48,353,000 16,623,000
1993 29,125 121,516,000 23,045 58,871,000 62,645,000
1994 42,320 196,848,000 29,444 76,591,000 120,257,000
1995 28,368 118,694,000 42,693 124,587,000 ( 5,893,000)
1996 28,872 100,481,000 36,224 99,638,000 843,000
1997 25,765 105,753,000 31,014 80,945,000 24,808,000
Totals 1,020,741,000 783,632,000 237,109,000

Effect of RRSP Removal

Since the 1998 budget measure regarding RRSPs was retroactive to 1994, the revenue shown for 1994 to 1997 is lower than the value shown in Table 3-1. This is shown in Table 3-2. In 1996 the number of filers falls below 10,000 while gross revenue was $58.2 million, just over half of what it was before RRSPs were removed from the base.

Table 3-2
Effect of Removal of RRSPs on Gross AMT Revenues


Before Removal After Removal
Year # of Filers Amount $ # of Filers Amount $

1994 42,320 196,848,000 22,334 110,963,000
1995 28,368 100,481,000 11,645 76,564,000
1996 28,872 118,694,000 9,847 58,208,000
1997 25,765 105,753,000 10,640 68,884,000

Characteristics of AMT Filers

This section looks at the results for 1997 since it is the most recent year for which data is available and because there were no significant shocks to either the tax system or the economy. It was also fairly representative of the period. Figures 3-1 and 3-2 show the income distribution of AMT filers for 1997 after adjusting for the 1998 budget changes. Of the filers affected, 21 per cent had gross incomes below $100,000 (Figure 3-1) and 48 per cent had gross incomes of $250,000 or more. [23] However, if one considers revenue collected, then the picture changes somewhat (Figure 3-2). In 1997, 94 per cent of AMT revenue was paid by filers who had gross incomes of more than $100,000, with 81 per cent of the revenue coming from filers with gross incomes of $250,000 or more. AMT filers with gross incomes of more than $250,000 paid on average an extra $10,851 in tax because of the AMT in 1997. This is similar throughout the 1988-1997 period.

Figure 3.1 - Income Distribution of AMT Filers, by Number of Filers, 1997 and Figure 3.2 - Income Distribution of AMT Filers, by Revenue Collected, 1997 - taxexp1.gif (6,208 bytes)

In 1997, there were no filers with gross incomes below $25,000 paying AMT. However, in other years a small number of filers with gross incomes below $25,000 did pay AMT. [24] Apart from this difference, the results are similar between 1994 and 1996. [25] Before 1994, there were a significant percentage of filers with incomes below $100,000 paying AMT. In fact, in 1991 more than half of AMT filers had gross incomes of less than $100,000. Nevertheless, these low-income filers accounted for less than one-half of the revenue collected. On average, between 1988 and 1997, individuals with incomes in excess of $100,000 paid 83 per cent of the AMT revenue while those with incomes in excess of $250,000 contributed 68 per cent of the revenue.

Figures 3-3 and 3-4 present the age distribution and the occupations of AMT filers respectively in 1997. The vast majority of AMT filers are over 40 years of age, with 20 per cent of AMT revenue coming from seniors (Figure 3-3). The percentage of revenue coming from seniors has been rising steadily in recent years. Otherwise, the results are relatively stable over the 1988-1997 period. Figure 3-4 presents the occupations of AMT filers based on the major source of income on their tax returns. Over 70 per cent of AMT revenue came from investors and property owners while 16 per cent came from public and private sector employees. Based on the above discussion, it can be concluded that a typical AMT filer would be an investor or property owner over 40 years of age with an annual income in excess of $100,000.

Figure 3.3 - Age Distribution of AMT Filers, by Revenue Collected, 1997 and Figure 3.4 - Occupations of AMT Filers, by Revenue Collected, 1997 - taxexp2.gif (6,514 bytes)

The Impact on Individual AMT Filers

This section relies on data from the recently constructed longitudinal tax data file for 1990-1996. [26] The section considers the number of times a filer was taxed under AMT rules during this period and how long it took before such taxes were recouped by these taxpayers.

Table 3-3 presents the number of years that an individual had to pay AMT between 1990 and 1996. Over this seven-year period, 92.14 per cent of AMT filers paid minimum tax only once while a mere 10 filers paid AMT in every year. This suggests that most AMT filers are receiving a windfall gain (such as a capital gain) in one year that triggers AMT.

Another important issue with the AMT is how quickly individuals were able to use the carry-over provision to reclaim the extra tax that they had to pay. To measure this, a sample of filers who paid AMT only once during the period was chosen. Table 3-4 indicates the results for the sample of 9,190 filers who paid minimum tax only in 1990. [27] Over half of these filers had reclaimed the AMT in two years and 70.3 per cent had reclaimed the extra amount of tax they paid in six years. In addition, most of the AMT paid in 1990 by these filers was recouped very quickly. In the first year alone, 68.4 per cent of the tax paid in 1990 was reclaimed. Within two years, only 15.4 per cent of the total amount was remaining. Therefore, those filers who still had not fully claimed back the AMT by 1997 had only a small amount to reclaim in 1997 (an average of $318). If they did not do so, the carry-over would have been lost since the extra tax paid as a result of the AMT can only be claimed up to seven years after it was paid. These findings are similar to those of Larin and Jacques in their study using Quebec AMT data. [28]

Table 3-3
Number of Years Individuals Paid AMT, 1990-1996


# of Years That AMT Was Paid Number
of Filers
%

1 138,840 92.14
2 9,960 6.61
3 1,280 0.85
4 430 0.29
5 130 0.09
6 30 0.02
7 10 0.01
Total 50,680 100.00

Table 3-4
Amount of Carry-Over Remaining for AMT Filers Who Paid AMT Only in 1990


Year Number
of Filers
% $ %

1990 9,190 100.0 30,153,144 100.0
1991 5,130 55.8 9,526,932 31.6
1992 4,050 44.1 4,647,100 15.4
1993 3,560 38.7 2,972,791 9.9
1994 3,210 34.9 1,962,834 6.5
1995 2,910 31.7 1,914,900 4.4
1996 2,730 29.7 868,555 2.9

From the longitudinal data it is clear that, for most minimum tax filers, the AMT is a "once in a lifetime" tax. In addition, the results on the use of the carry-over mechanism support the hypothesis that most filers are able to claim the tax back in the long run and, in fact, claim most of it back in the short run. If the carry-over claimed in each year was discounted at a 5-per-cent rate, the $30.2 million collected from the 9,190 filers in 1990 would have had a present value to the Government of just under $3 million.

Effectiveness at Reducing Non-Taxable Returns

The main objective of the AMT is to reduce the extent to which high-income individuals pay little or no tax in a given year. This can occur in two ways. First, it can cause individuals with no regular taxes to pay a minimum amount of tax. Second, it can induce individuals to change their behaviour so that they pay a small amount of regular tax over time rather than a large amount of AMT.

The impact of the AMT on the proportion of high income non-taxable returns can be seen in Table 3-5. [29]

Table 3-5
Number of High-Income Non-Taxable Returns
(From the Canada Customs and Revenue Agency's Tax Statistics on Individuals)


$100,000 - $250,000 $250,000 and Over Total Over $100,000
Tax Year Number % of Returns Number % of Returns Number % of Returns

1983 998 1.48 178 1.90 1,176 1.53
1984 1,543 2.10 287 2.66 1,830 2.17
1985 1,277 1.41 254 1.78 1,531 1.46
1986 530 0.51 100 0.64 630 0.53
1987 480 0.42 100 0.55 580 0.44
1988 500 0.33 140 0.46 640 0.35
1989 920 0.49 180 0.48 1,100 0.49
1990 1,270 0.62 250 0.69 1,520 0.63
1991 1,700 0.80 190 0.54 1,890 0.76
1992 1,930 0.88 340 0.90 2,270 0.89
1993 1,680 0.70 250 0.57 1,930 0.68
1994 3,230 0.82 290 0.53 3,520 0.79
1995 1,520 0.59 230 0.51 1,750 0.58
1996 1,400 0.49 310 0.58 1,710 0.51
1983-85 Average 1,273 1.66 240 2.12 1,512 1.72
1986-96 Average 1,378 0.61 216 0.59 1,595 0.60

There is an immediate drop in the percentage of non-taxable filers coinciding with the introduction of the AMT in 1986. The drop in high-income non-taxable returns is maintained throughout the period, with the average proportion of high-income non-taxable returns falling 65 per cent between the 1983-85 and the 1986-96 periods. Even though in 1996 there were 1,710 non-taxable filers with total incomes for tax purposes of $100,000 or more, this accounted for only 0.51 per cent of filers in that income group. This suggests that the AMT has been effective at reducing the proportion of non-taxpaying filers at higher-income levels. At the same time, however, other changes in the tax system may have contributed to this decline.

Despite the sharp drop in the share of non-taxable returns, only a fraction of those who have no regular income tax pay minimum tax (Table 3-6). On average, between 1988 and 1996, 27 per cent of high-income filers who had no regular income tax paid minimum tax, with a higher percentage for the subset of individuals with incomes of $250,000 or more. This also points to a change in behaviour – taxpayers made less use of preferences disallowed by the AMT, but still used other preferences and deductions to reduce their tax liability to zero.

Another perspective to consider is the percentage of AMT filers who had to pay some tax but had their taxes increased as a result of the AMT. This is shown for the years 1988-1997 in Table 3-7 for all income levels. [30] On average, 92.4 per cent of AMT filers were already taxable. These individuals were responsible for 88.2 per cent of additional tax collected from the AMT, paying on average an extra $3,333 in tax.

Table 3-6
Percentage of Filers With No Regular Income Tax Payable Who Paid AMT


Year $100,000-$250,000 $250,000and Over Over$100,000

1988 22 45 29
1989 36 46 38
1990 17 35 21
1991 18 31 20
1992 23 31 24
1993 33 49 36
1994 21 52 25
1995 26 44 29
1996 23 33 25
Average 24 41 27

Table 3-7
Percentage of AMT Filers Who Had Some Regular Tax Payable, 1988-1997


Year Total (All Income Levels)
% of Filers % of Rev. Avg. AMT Paid ($)

1988 90.8 74.4 3,347
1989 92.5 88.9 3,932
1990 93.5 89.9 2,226
1991 93.4 94.1 2,582
1992 93.8 92.7 2,490
1993 95.4 95.0 2,625
1994 93.8 93.6 3,274
1995 91.5 85.7 4,639
1996 89.1 82.9 3,826
1997 89.8 85.4 4,390
Average 92.4 88.2 3,333

IV. Specific Issues

What Does It Take to Trigger AMT?

AMT is triggered when minimum tax payable exceeds federal basic tax. In order for this to occur, the amount of preferences added to regular taxable income under the AMT must satisfy two conditions. First, the preferences must, in principle, exceed the $40,000 exemption. However, this is not the case when there are dividends or capital gains. This is because dividends and capital gains use up some of the room that could have been used for other preferences even though they will not trigger AMT by themselves. Second, when the individual has taxable income in the middle- and upper-income brackets, the amount of preferences must be sufficient to compensate for the difference between their statutory marginal tax rate and the AMT tax rate (17 per cent).

Again, this will depend on whether or not the individual has dividends or capital gains. This is because the top marginal rates on dividends and capital gains are lower than the rate for interest or employment income.

Table 4-1 indicates the level of AMT preferences (other than capital gains) that would be required just to equate regular taxes with basic federal tax at various levels of income. If an individual has preferences in excess of this amount, he or she will likely be subject to minimum tax. Individuals with interest or employment income between $100,000 and $500,000 need to have between 51 and 43 per cent of their income reduced by AMT preferences. If the individual has income only from dividends or capital gains, the level of AMT preferences is much less.

Table 4-1
Amount of Preferences Required Before AMT is Triggered


Source Interest or Employment All From Dividends All From Cap. Gains
Gross
Income
Preferences Req'd % of Total Income Preferences Req'd % of Total Income Preferences Req'd % of Total Income

($) ($) (%) ($) (%) ($) (%)
50,000 40,000 80.0 13,674 27.3 27,500 55.0
100,000 50,525 50.5 17,067 17.1 25,525 25.5
150,000 70,213 46.8 21,528 14.4 32,713 21.8
200,000 90,903 45.5 25,989 13.0 40,903 20.5
250,000 111,592 44.6 30,450 12.0 49,092 19.6
300,000 132,282 44.1 34,911 11.6 57,282 19.1
400,000 173,661 43.4 43,834 11.0 73,661 18.4
500,000 215,041 43.0 52,756 10.6 90,041 18.0

Dividends, Capital Gains and the AMT

The 1985 discussion paper raised the concern that limiting the dividend tax credit in some way would interfere with the integration of the tax system, causing income to be taxed at both the corporate and personal levels. [31] Nevertheless, the relatively low AMT rate and the $40,000 exemption help to reduce the likelihood of double taxation of dividends.

Indeed, under the current system the inclusion of dividends without any other preferences would not trigger AMT. This is because even with the favourable treatment given to dividends under the regular tax system, the top marginal rate on dividends is 19.6 per cent, which exceeds the 17-per-cent rate under the AMT. This is shown in Example 2a. However, if the individual has AMT preference items, there is a potential for dividends to be exposed to AMT, as indicated in Example 2b.

Under the AMT capital gains are fully taxable. As with dividends, the inclusion of the non-taxed portion of capital gains in taxable income will not by itself cause a taxpayer to pay AMT. Again, this is because of the difference between the top federal rate of 29 per cent and the AMT rate of 17 per cent in addition to the $40,000 exclusion (see Example 3a). In this case, the top marginal rate (ignoring surtaxes) is 21.75 per cent (¾´ 29 per cent) under the regular tax system compared to 17 per cent for the AMT. However, if there are other AMT preferences, then the inclusion of the non-taxed portion of capital gains can help to trigger the AMT.

Example 2 – Dividends and the AMT


Regular Tax AMT

($) ($)
a.  Individual has $100,000 in dividends with no other deductions
Taxable Dividend 125,000 100,000
Taxable Income 125,000 100,000
AMT Exemption 40,000
Net Taxable Income 125,000 60,000
Tax on Income 31,812 10,200
Dividend Tax Credit 16,663
Net Tax on Income 15,149 10,200

b.  Individual has $100,000 in dividends with $50,000 deduction for carrying charges
Taxable Dividend 125,000 100,000
Carrying Charges 50,000
Taxable Income 75,000 100,000
AMT Exemption 40,000
Net Taxable Income 75,000 60,000
Tax on Income 17,312 10,200
Dividend Tax Credit 16,663
Net Tax on Income 649 10,200

 

Example 3 – Capital Gains and the AMT


Regular Tax AMT

($) ($)

a.  Individual has $500,000 capital gain with no other deductions

Capital Gain 500,000 500,000
Taxable Gain 375,000 500,000
Taxable Income 375,000 500,000
AMT Exemption 40,000
Net Taxable Income 375,000 460,000
Tax on Income 104,312 78,200

b.  Individual has $500,000 capital gain eligible for capital gains exemption and no other income
Capital Gain 500,000 500,000
Taxable Gain 375,000 500,000
Cap. Gain Exemption 375,000 375,000
Taxable Income 125,500
AMT Exemption 40,000
Net Taxable Income 85,000
Tax on Income 14,450

c.  Individual has $500,000 capital gain eligible for capital gains exemption and other income
Capital Gain 500,000 500,000
Taxable Gain 375,000 500,000
Other Income 157,400 157,400
Total Income 532,400 657,400
Cap. Gain Exemption 375,000 375,000
Taxable Income 157,400 282,400
AMT Exemption 40,000
Net Taxable Income 157,400 242,400
Tax on Income 41,208 41,208

Effect of the Lifetime Capital Gains Exemption

While capital gains by themselves will generally not trigger AMT, the use of the $500,000 lifetime capital gains exemption by itself will cause a tax filer to pay minimum tax when the tax filer has no other income and the capital gain is greater than $160,000. This situation is shown in Example 3b. The reason is that while the exemption reduces taxable capital gains to zero under the regular tax system, under the AMT, 25 per cent of the capital gain is added to taxable income (see the section entitled "The AMT in Practice" above). On the other hand, if an individual has substantial amounts of other income and no other AMT preferences, he or she may not be subject to minimum tax. For example, for a $500,000 capital gain, if the individual has more than $157,400 in other income, then regular tax payable will exceed AMT payable (see Example 3c).

Reasons for Individuals Having to Pay the AMT

This section addresses the question of why individuals pay minimum tax rather than regular tax. To determine the relative importance of a preference included in the AMT base, the Personal Income Tax T1 Model was used to recalculate the amount of AMT individuals would have to pay if one of the tax preferences was taken out of the AMT base. This exercise was conducted for RRSP deductions (up to 1994), the inclusion of capital gains, CCA losses, resource expenditure losses, carrying charges, employee stock option deductions and deductions for home relocation loans. The model was also used to determine what would happen if the dividend gross-up and credit system was used with the AMT. Table 4-2 presents the percentage of filers affected and the percentage reduction in the amount of AMT paid when a change is made to the AMT base using 1997 data. In effect, Table 4-2 indicates what would happen if a preference was allowed under the AMT rather than disallowed. Because AMT may be triggered by a combination of preferences, the removal of any one of them may cause the individual to pay regular rather than minimum tax (i.e., a 100-per-cent reduction in AMT for that individual), even though it is only a portion of total preferences. Therefore, the contribution of the various preferences should not be added together.

In 1997, 62 per cent of total AMT filers would have been affected if capital gains had been removed from the base, leading to a 42-per-cent drop in total AMT revenue. In general, the inclusion of the normally exempt one-quarter of capital gains was the most important contributor to AMT revenues. In 1994, capital gains were responsible for 86 per cent of AMT revenue. This reflects the increase in capital gains realized in 1994 due to the termination of the general lifetime capital gains exemption. [32]

Losses due to carrying charges on resource expenditures or rental and leasing property were added to the AMT base in 1995, and have become the second most important component in the AMT base. If these carrying charges had not been included in the base, AMT revenue would have been 31 per cent lower in 1997.

Table 4-2
Percentage of AMT Filers Affected and the Percentage Reduction in AMT Revenue Caused by a Change in the AMT Base, 1997


Excluded Capital Gains Losses From Carrying Charges Treatment of Dividends
(%) (%) (%)
Gross Income ($) Filers Amount Filers Amount Filers Amount

25,000 – 50,000 4.1 0.8 0.0 0.0 100.0 89.1
50,000 – 100,000 18.2 1.1 21.6 21.6 54.3 25.8
100,000 – 250,000 65.4 26.9 26.3 48.0 60.9 28.2
250,000 and Over 79.3 47.7 18.9 28.4 61.1 29.1
Total 62.0 42.1 21.3 30.6 60.6 29.0

Losses From Resource Property Losses From CCA Employee Stock Options
(%) (%) (%)
Gross Income ($) Filers Amount Filers Amount Filers Amount

25,000 – 50,000 0.5 0.0 0.0 0.0 0.0 0.0
50,000 – 100,000 1.3 0.7 8.6 21.6 0.0 0.0
100,000 – 250,000 16.3 14.0 1.4 0.1 1.4 1.0
250,000 and Over 12.0 10.8 1.4 2.0 2.9 2.4
Total 11.1 10.7 2.7 2.8 1.8 2.1

If dividends were treated as they are under the regular tax system, AMT revenues would also be lower. In 1997, the drop would have been 29 per cent. On average, between 1988 and 1997 revenues would have been reduced by 20 per cent if the gross-up and credit system had been used.

Losses from resource property are the next most important component, accounting for 11 per cent of revenue in 1997 (down from 15 per cent in 1996). Losses from CCA and the employee stock option deduction each contribute between 2 and 3 per cent of revenue, while the home relocation loan deduction and the disallowed non-refundable credits and other credits had little effect on AMT revenues.

The RRSP deduction was a relatively insignificant factor in the AMT base except in 1993, when it accounted for 31 per cent of gross AMT revenue. It was this sharp rise that prompted the 1998 budget measure to remove RRSPs from the AMT base.

Table 4-2 also presents the results broken down by gross income. For instance, if capital gains were removed from the base, only 4.1 per cent of filers in the $25,000 to $50,000 income group would have had their AMT reduced or eliminated (paying regular tax instead), leading to a 0.78-per-cent drop in the amount of minimum tax paid by that income group. In general, most of these preferences are used by high-income individuals, particularly the employee stock option deduction. However, the treatment of dividends was an important factor for individuals in the $25,000 to $50,000 income group. In fact, all filers in this group were affected and AMT revenue would have been 89 per cent lower if the dividend gross-up and credit was used. (The revenue decline is not 100 per cent since some filers still had to pay AMT due to the amount of their preferences). In addition, losses from CCA were relatively more important for filers with gross incomes between $50,000 and $100,000.

A related issue concerns the change in the number of AMT filers who had no regular tax payable. In particular, how does the removal of a preference affect the number of otherwise non-taxable filers who have to pay AMT? Table 4-3 indicates the percentage reduction in otherwise non-taxable filers who pay AMT when a preference is removed. The removal of capital gains from the AMT base would have the largest impact, while losses from carrying charges and the treatment of dividends also have a significant effect. Most of the reductions were for individuals with high gross incomes. Losses from CCA, the deduction for home relocation loans and the disallowance of certain non-refundable credits had no effect on the number of otherwise non-taxable filers caught by the AMT.

Table 4-3
Number of Otherwise Non-Taxable Filers Who Pay AMT When a Preference Is Removed, 1997


# of Filers % Change

Before Changes 1083
Excluded Capital Gains 498 54
Losses From Carrying Charges 891 18
Treatment of Dividends 904 17
Losses From Resource Property 1021 6
Employee Stock Options 1070 1

Why Do Some High-Income Individuals Pay No Taxes Even With the AMT?

While the AMT has reduced the number of high-income filers who pay no taxes, there still remain a significant number of individuals who pay no taxes even with the AMT. This is because the AMT still allows several deductions that, when used by themselves or with other deductions, can allow a high-income individual to reduce his or her taxes to zero.

Even with the AMT, it is difficult to determine exactly why individuals were able to pay no income tax at an aggregate level. This is because, at the individual level, high-income non-taxpaying filers will generally claim a combination of preferences rather than one large deduction. Nevertheless, one can use the aggregate data to get a general sense of the relative importance of various preferences.

In 1997, 24 per cent of the non-taxpaying filers who had a total income for tax purposes of more than $100,000 had zero taxable income, meaning these filers used deductions such as RRSPs, business losses and carrying charges to reduce their taxes to zero. Of the remaining 76 per cent of filers who had positive taxable incomes, over half (57.8 per cent) had taxable incomes of more than $100,000. This suggests that preferences such as the dividend tax credit, the foreign tax credit and charitable contributions, which are claimed after gross regular taxes are determined, were important factors in reducing taxes to zero for many filers.

Table 4-4 presents a list of preferences for individuals with total incomes for tax purposes of more than $100,000 who paid no taxes. Note that some of these preferences are included in the AMT base. [33] Since it usually requires more than one preference to trigger AMT, it is possible for some disallowed preferences to contribute towards reducing taxes to zero despite the AMT. The table indicates the percentage of these filers who used a given preference, the average deduction claimed, and the percentage of the total value of deductions claimed for each preference. Note that these percentages can vary widely from year to year.

From the table, the two most important preferences that allowed many high-income individuals to reduce their taxes to zero, the foreign tax credit and the lifetime capital gains exemption, are not included in the AMT base. The foreign tax credit accounted for 24 per cent of the total deductions of all high-income non-taxable filers and was used by 32 per cent of high-income non-taxable filers.

The lifetime capital gains exemption for farm and small business property is also prominent among these filers, accounting for 22 per cent of total deductions. It was used by 24 per cent of high-income non-taxable filers.

The next preference in Table 4-4 is labelled "Additional Deductions From Net Income," which is how it appears on a tax return and therefore in the data. Deductions for vows of perpetual poverty (where income is earned and given to a religious order), for net employment income from an international organization, and for foreign income received under a tax treaty are included in this item.

Relatively few filers claim allowable business investment losses (3.6 per cent), but the average deduction is very large (nearly $356,000). The same is also true for non-capital losses carried over from previous years. [34] For this reason, these two deductions are fourth and fifth respectively in Table 4-4. The deduction for capital losses of previous years is not as significant, but the average deduction is relatively high.

Table 4-4
Preferences Which Allowed Individuals With Incomes Over $100,000 to Reduce Their Taxes to Zero in 1997


Deduction or Credit % of High-Income, Non-Taxpaying Filers Average Deduction ($) % of Total Deductions

Foreign Tax Credit1 32.3 111,245 24.11
Lifetime Capital Gains Exemption 24.3 137,046 22.41
Additional Deductions From Net Income2 14.4 174,747 16.86
Allowable Business Investment Losses 3.6 355,899 8.61
Non-Capital Losses of Other Years 6.7 167,975 7.56
Carrying Charges and Interest Expenses 27.7 33,304 6.19
Other Deductions From Net Income3 15.0 44,544 4.49
Charitable Contributions4 25.2 26,427 4.48
RRSP/RPP Contributions 40.6 11,481 3.13
Capital Losses of Other Years 5.1 77,118 2.62
Dividend Tax Credit1 17.1 12,666 1.45
Employment Expenses 3.4 19,738 0.45
Employee Stock Options 0.4 81,154 0.23
Alimony/Support Payments 1.5 22,522 0.23
Exploration and Development Expenses 1.2 9,278 0.07
Overseas Employment Tax Credit1 small 73,563 0.05
Minimum Tax Carry-Forward1 1.1 4,894 0.03
Investment Tax Credit1 1.2 3,153 0.02
Labour-Sponsored Funds Tax Credit1 1.1 1,826 0.01

1 Converted to a deduction equivalent assuming a 29% tax rate.
2 Includes any deduction for foreign income received under a tax treaty, for a vow of perpetual poverty or for employment for a prescribed international organization.
3 Included deductions for Canadian motion picture, film and video tapes and other miscellaneous deductions.
4 Amount of charitable contributions assumed to be equivalent to a deduction.

It is important to keep in mind that the amount of losses claimed varies widely from year to year. [35] For instance, while the deduction for limited partnership losses from previous years was not used in 1997, it was used by some filers in 1996.

Many high-income, non-taxpaying filers also had significant deductions for carrying charges. Two common tax credits include the credit for charitable contributions and the dividend tax credit. RRSP contributions may be the most popular preference in the list (it was used by 40.6 per cent of high-income non-taxable filers), but since the deduction is limited to $13,500, it is not a key preference for reducing taxes to zero.

This is indicated by the fact that RRSPs constitute only a little over 3 per cent of the total deductions and credits claimed. The remaining preferences are fairly insignificant, at least for the 1997 tax year. Nevertheless, the size of the average deduction indicates those that are more important to specific filers. The overseas employment tax credit and the deduction for employee stock options are notable examples.

V. Overall Assessment

The AMT was meant to "prevent high-income individuals from using one or more tax incentives to pay little or no tax in any given year." [36] However, it was also important that "existing tax incentives put in place for valid economic and social reasons [not be] undermined by the minimum tax." [37] Therefore, it was important for the AMT to strike an appropriate balance between these two objectives.

When the AMT was introduced, it was observed that "very few high-income individuals [had] been able to avoid paying taxes for any number of years." [38] Therefore, even though the overall scope of the problem was small, the Government still felt that it needed to be addressed.

In addition, it was noted that the allowance of some deductions and tax credits would mean that some high-income Canadians would still pay no tax in a given year "in a strictly limited range of situations." [39]

Has the AMT satisfied its objectives? The proportion of high-income, non-taxable returns has fallen by an average of 65 per cent since the AMT was implemented. While a significant portion of this drop may be due to other changes in the tax system, the immediate drop in the percentage of non-taxable filers in 1986 suggests that the AMT had a substantial impact, either directly by causing individuals with no regular tax to pay some tax, or indirectly by causing individuals to alter their behaviour. While its overall revenue impact has been small, this is not out of line given the size of the problem the AMT was meant to address. In addition, since most of the individuals who pay the AMT were already paying regular tax, it can be concluded that the AMT ensured that many other individuals paid their fair share of tax.

Nevertheless, a number of high-income individuals are still able to reduce their tax liability to zero even with the AMT (this was recognized at the outset by the Government before it implemented the AMT). Two significant preferences used by these filers are the foreign tax credit and the lifetime capital gains exemption.

Another issue concerning the AMT is the cost of compliance. Filers have to fill out a complicated form and essentially recalculate their taxes using the AMT base. After numerous calculations, some filers may determine that they do not have to pay minimum tax after all. In addition, the carry-over provision requires extra bookkeeping by both the Government and the taxpayer. Despite this, since most of the information required for the AMT is already provided under the regular tax system, the compliance burden is likely small.

Therefore, it can be concluded that the AMT has contributed to the reduction in the proportion of high-income non-taxable returns at a relatively minor cost to the public. In addition, the structure of the tax does not undermine the policy objectives behind the various preferences and reinforces tax fairness.


Appendix 1: Data Tables

Table A1.1
Income Distribution of AMT Filers, by Gross Income, 1988 – 1997


1988 1989 1990 1991 1992
Gross Income ($) % of Filers Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)

Negative or Nil 6.2 18.9 0.0 0.0 0.7 0.2 0.0 0.0 0.0 0.0
0 – 25,000 2.1 0.7 0.7 1.2 3.7 2.5 5.3 2.9 0.9 0.4
25 – 50,000 10.1 4.1 4.0 1.6 22.6 11.8 24.7 11.6 12.5 6.4
50,000 – 100,000 21.0 7.4 19.4 8.3 21.3 8.7 26.7 16.7 24.3 12.2
100,000 – 250,000 33.8 22.6 41.5 18.9 22.6 13.4 20.8 11.6 27.2 12.4
250,000 – Over 26.9 46.4 34.4 69.9 29.1 63.5 22.8 57.2 35.1 68.5

1993 1994 1995 1996 1997
Gross Income ($) % of Filers Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)

Negative or Nil 0.0 0.0 0.0 0.1 0.0 0.0 0.01 0.02 0.00 0.00
0 – 25,000 1.4 0.5 0.0 0.0 2.4 10. 0.00 0.0 0.00 0.0
25 – 50,000 13.7 6.1 0.0 0.0 18.4 8.2 2.9 0.6 2.0 0.4
50,000 – 100,000 23.3 11.4 5.8 1.8 31.7 13.4 16.0 4.5 18.6 5.6
100,000 – 250,000 26.7 13.0 30.8 9.0 25.3 17.4 26.2 20.3 31.3 13.5
250,000 – Over 35.0 69.0 63.3 89.1 22.2 59.9 44.9 74.7 48.1 80.6

Table A1.2
Average Amount of Minimum Tax Paid, by Income Group, 1988 – 1997


Gross Income ($) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
($)

Negative or Nil 20,183 16,000 878 12,000 6,400 9,800 12,333 18,333 1,000
0 – 25,000 2,335 10,310 2,318 2,131 1,745 1,429 3,000 1,821
25 – 50,000 2,679 2,235 1,817 1,819 1,964 1,865 9,000 1,871 1,189 1,189
50,000 – 100,000 2,335 2,448 1,424 2,460 1,921 2,040 1,512 1,767 1,659 1,936
100,000 – 250,000 4,445 2,595 2,034 2,164 1,740 2,034 1,460 2,876 3,307 2,790
250,000 – Over 11,460 11,549 7,580 9,758 7,465 8,229 6,989 11,283 9,836 10,851
All Filers 6,643 5,686 3,480 3,888 3,821 4,172 4,968 41,841 5,911 6,474

Table A1.3
Percentage of AMT Filers Affected and the Percentage Reduction in AMT Revenue Caused by a Change in the AMT Base, 1988 – 1997


1988 1989 1990 1991 1992
Preferences % of
Filers
Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)

Excluded Capital Gains 62.3 39.9 79.4 77.9 49.6 50.7 43.1 38.3 54.2 61.1
Losses From Carrying Charges n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Losses From CCA 7.9 4.6 3.5 2.5 5.0 4.1 4.9 2.5 10.9 5.0
Losses From Resource Property 17.7 10.2 5.7 4.0 3.8 4.8 1.5 16.0 3.2 3.9
Employee Stock Options 0.3 0.2 0.7 0.7 0.4 0.9 0.1 0.3 0.3 0.2
RRSPs 6.0 2.6 4.0 4.5 2.9 2.8 2.4 2.0 9.0 4.3
Treatment of Dividends 57.5 14.1 48.4 14.0 46.6 26.7 43.0 18.8 43.1 22.4

1993 1994 1995 1996 1997
Preferences % of Filers Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)
% of Filers Amount
(%)

Excluded Capital Gains 62.4 68.2 91.8 86.0 67.5 44.7 63.9 41.9 62.0 42.1
Losses From Carrying Charges n.a. n.a. n.a. n.a. 18.7 34.5 22.3 32.9 21.3 30.6
Losses From CCA 2.5 2.3 1.6 3.9 3.3 7.4 0.6 1.4 2.7 2.8
Losses From Resource Property 3.9 4.1 5.9 5.3 7.2 7.5 11.2 14.5 11.1 10.7
Employee Stock Options 0.6 0.6 3.3 1.8 1.3 2.5 2.5 3.0 1.8 2.1
RRSPs 75.0 31.3 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Treatment of Dividends 45.7 15.7 50.0 18.4 56.9 20.5 52.5 24.4 28.5 29.0

Appendix 2: List of Tax Preferences and Deductions


Tax Preferences Included in AMT Base? Remarks

Before Total Income:
Losses due to CCA and carrying charges on rental and leasing property Yes This tax shelter has been closed since 1994.
Losses due to CCA and carrying charges on certified film property Yes This tax shelter has been closed since 1995.
Losses from limited partnerships or tax-shelter partnerships Yes Some of these deductions were related to those above.
Deductible amounts with respect to tax shelters Yes  
Carrying charges related to limited partnership, or partnership that owns rental, leasing or film property Yes  
Non-taxable portion of capital gains Yes Does not include non-taxable portion of gains resulting from foreclosures, conditional sales repossessions, gains exempt under a tax treaty, and gains on certain gifts and donations.
Exemption of first $500 of scholarship income No  
Other exempt income (e.g., capital dividends) No  

Before Net Income:
RPPs and RRSPs No Effective 1994 tax year.
RESPs No  
Union dues No  
Child care expenses No  
Attendant care expenses No  
Allowable business investment loss No 100% deductible rather than 75% deductible.
Moving expenses No  
Support payments No  
Carrying charges and interest expenses Yes Only for investments relating to tax shelters, limited partnerships, resource property, certified film property or rental and leasing property.
Exploration and development expenses Yes Only to the extent that carrying charges and depletion allowances and other expenditures create a loss.
Interest and dividend income deduction Yes Deduction withdrawn in 1988 tax year.
Other employment expenses No  
Meals and entertainment expenses No  
Other deductions (*see list below) No  

Before Taxable Income:
Employee home relocation loans Yes  
Stock option and shares deduction Yes  
Limited partnership losses of other years Yes Only losses from CCA and carrying charges on Multiple-unit residential buildings, film property, rental and leasing property, and resource expenditures and depletion allowances.
Non-capital losses of other years Yes See above.
Net capital losses of other years No Net non-deducted losses from previous years are subtracted from the AMT base.
Lifetime capital gains deduction No  
Northern residents deduction No  
Additional deductions No

Non-Refundable Credits:
Personal non-refundable credits No  
CPP/EI contributions No  
Pension income Yes  
Caregiver amount No  
Disability amount No  
Disability amount transferred from dependant other than spouse Yes  
Interest on student loans No  
Tuition and education amounts No  
Tuition and education transferred from child Yes  
Amounts transferred from spouse Yes  
Medical expenses No  
Charitable contributions credit No  

Other Credits:
Dividend tax credit Yes

Dividends are included at their cash value.

Foreign tax credit No

Modified version is used for AMT purposes.

Logging tax credit Yes  
Overseas tax credit Yes  
Political contribution tax credit Yes  
Labour-sponsored funds credit Yes  
Investment tax credit Yes Non-refundable portion only.

* Other deductions include assistance for artists and musicians, and deductions for clergy and those who have taken vows of perpetual poverty.


Notes

  1. The AMT also applies to most trusts. It is not applicable to individuals who are bankrupt or deceased. [return]
  2. Department of Finance Canada, A Minimum Tax for Canada, budget papers (Ottawa: Public Works and Government Services, 1985). [return]

  3. An AMT has a separate structure from the regular tax system in which various preferences are disallowed. An add-on minimum tax is based on the use of a specified list of preferences, and the amount of tax is simply added to regular taxes payable. A limit on tax preferences means that preferences are limited directly within the regular tax system. For more information see the 1985 discussion paper. [return]

  4. Department of Finance Canada, A Minimum Tax for Canada, p. 19. [return]

  5. A complete list of preferences and whether or not they are included in the AMT base is presented in Appendix 2. [return]

  6. Carrying charges are interest expenses and other expenses related to purchasing investments, such as investment advice and management fees. Interest on investments for which the return can only take the form of a capital gain cannot be claimed. [return]

  7. CCA losses from multiple-unit residential buildings were also disallowed when these losses could be used to offset other sources of income. This tax shelter has now been closed. [return]

  8. However, it does not include tax-exempt capital dividends in adjusted taxable income. Capital dividends are the non-taxable portion of capital gains realized at the corporate level that are transferred to shareholders. [return]

  9. Other tax-exempt income, such as the first $3,000 of scholarship income, is not added to the AMT base. [return]

  10. This deduction allows the benefits from employee stock options to be taxed at a preferential rate. The deduction for prospectors and grubstakers, which is reported on the same line on individuals' tax returns, is also disallowed by the AMT. [return]

  11. There is little chance for double taxation of dividends, since removal of the dividend tax credit by itself will not cause an individual to pay minimum tax. See the section entitled "Dividends, Capital Gains and the AMT" for further discussion of this matter. [return]

  12. Since the basic personal credit and other non-refundable credits are credited at a 17-per-cent rate, this effectively raises the amount of income that is not taxed under the AMT to at least $46,456 in 1997. [return]

  13. The refundable portion of the investment tax credit is allowed for AMT purposes. [return]

  14. Department of Finance Canada, "Minister Announces Minimum Tax," Press Release 85-215, December 4, 1985. [return]

  15. International Bureau of Fiscal Documentation, European Taxation Supplementary Service, 1999, loose-leaf. [return]

  16. Ibid. [return]

  17. Gilles N. Larin and Marie N. Jacques, "Is the Alternative Minimum Tax a Paper Tiger?," Canadian Tax Journal, 42(3) (1994), pp. 804-842. [return]

  18. Note that while other provinces do not have their own AMT, the federal version still applies. [return]

  19. The Quebec AMT also disallows some preferences related only to investments in Quebec. Its treatment of allowable business investment losses is similar to the federal AMT. [return]

  20. While Canada does not have a corporate AMT per se, some tax analysts consider the large corporations tax to be like a minimum tax. [return]

  21. Robert P. Harvey and Jerry Tempalski, "The Individual AMT: Why It Matters," National Tax Journal, L(3) (September 1997), pp. 453-473. [return]

  22. Department of Finance Canada, "Minister Announces Minimum Tax." [return]

  23. Gross income is equal to total income for regular tax purposes (line 150 on tax returns) plus the exempt portion of capital gains and losses due to CCA, carrying charges or resource expenditures less the dividend gross-up. [return]

  24. In some years there were some filers who had gross incomes of zero or less (due to losses) who paid significant amounts of AMT. This is because the AMT disallows the portion of losses created by CCA, some carrying charges and resource expenses. [return]

  25. Data for previous years can be found in Appendix 1. The removal of RRSPs from the AMT base in the 1994 tax year dramatically reduced the number of AMT filers with incomes between $0 and $50,000. [return]

  26. RRSPs were not removed from the data in this section. [return]

  27. While some of these filers may have paid AMT before 1990, only the amount of AMT paid in 1990 is used as a carry-over amount. [return]

  28. Larin and Jacques, "Is the Alternative Minimum Tax a Paper Tiger?" [return]

  29. The figures presented in this section are based on total income for tax purposes. [return]

  30. The 1999 edition of Tax Statistics on Individuals was not available at the time of writing. Therefore, data for 1997 was not included in Table 3-5. With respect to Table 3-6, data was readily available only for the years 1988 to 1996. [return]

  31. Note that since the dividend tax credit can be claimed for dividends received from profits on which little or no corporate tax was paid, the minimum tax could help to rectify this problem. The Technical Committee on Business Taxation examined this issue and proposed a corporate distribution tax, which is similar to taxes used in Europe, to address this problem directly. See the discussion on integration in Chapter 7 of the Report of the Technical Committee on Business Taxation (Ottawa: December 1997). [return]

  32. Results for previous years are presented in Appendix 1. [return]

  33. A complete list of preferences indicating those that are included in the AMT base is shown in Appendix 2. [return]

  34. Some of these non-capital losses may be allowable business investment losses carried over from previous years. [return]

  35. As an example of how widely the use of these preferences fluctuates, 20 per cent of high-income non-taxpaying filers had non-capital losses from previous years in 1996, but only 6.7% did in 1997. [return]

  36. Department of Finance Canada, "Minister Announces Minimum Tax." [return]

  37. Ibid. [return]

  38. Ibid. [return]

  39. Ibid. [return]

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