The C.D. Howe Institute is the latest to wade into an analysis of the reforms proposed in the 2023 federal budget to the Alternative Minimum Tax (AMT). They say the institute’s findings indicate that the new AMT regime will primarily impact individuals who report occasional instances of very large capital gains.

“The official objective behind the AMT is to ensure a fair tax contribution from all individuals and entities. What is not clear is how disallowing the use of entirely legitimate tax provisions like loss utilization, tax credits for charitable donations and partial inclusion of capital gains enhances fairness. The new regime would primarily target occasionally large capital gains and, to a lesser extent, charitable giving,” the institute’s researchers write. “It is highly probable that sophisticated taxpayers would adopt a variety of tax strategies to diminish the impact of the proposed AMT changes, especially in relation to occasionally large capital gains and donations. Therefore, less informed taxpayers or those unable to manage a capital gains event would likely bear the brunt of the new rules.”

The commentary was part of the C.D. Howe Institute fiscal and tax policy briefing, entitled Capital Gains and Charitable Donations: The Silent Targets of Federal AMT Reforms. They also point out that high income-earning charitable donors will be targeted, resulting in far fewer funds flowing to the charitable sector.

They say the proposed reforms disallow half of the charitable donation tax credit and includes 30 per cent of capital gains on donations of publicly listed securities. “We calculate that the proposed AMT would likely capture just under 10 per cent of the overall value of charitable donations and almost 50 per cent of donations of publicly listed securities.” 

More, they point out that charitable donations respond significantly to tax incentives (the report looks at economic studies on the price elasticity of donations). “Our analysis suggests that the proposed AMT could decrease the overall value of charitable donations in Canada by four per cent. Donations of publicly listed securities might see a decline of 22 per cent.

“Disallowing half of the charitable donation tax credit under the AMT and including 30 per cent of capital gains on donations of publicly listed securities would generate only some $60-million in additional AMT taxes after accounting for the behavioural reaction. These provisions might inflict disproportionate harm on the charitable sector relative to the modest additional tax revenue they produce. These changes merit a serious reconsideration,” they write.

They add: “The government’s focus on capital gains should be explicitly stated, and its rationale explained. The fact that much of the burden of the proposed AMT would fall on very large capital gains also lacks a clear policy explanation.”