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If, like many high-net-worth individuals, you are committed to supporting your community through philanthropic donations, then you might want to pay attention to upcoming changes to the federal government’s Alternative Minimum Tax program. Introduced back in 1986 to help ensure that wealthy people do not use the various incentives and deductions at their disposal to pay no tax, the AMT is about to undergo perhaps the most dramatic expansion in its history. And it will impact the tax landscape for at least some forms of philanthropic giving in 2024.
First things first: We are not tax experts, so please do not consider this column as tax advice. Every person’s tax situation is different, and if you believe you might be affected by the upcoming changes, please talk over your concerns with a qualified, experienced tax advisor.
For those who may not be familiar with the AMT, it is basically a parallel calculation to a regular tax return. In general, it allows lesser deductions and incentives, and then applies a lower tax rate to calculate the “alternative minimum tax.” If the AMT comes out higher than the tax payable under the regular calculation, then the taxpayer must pay the difference.
For many years, the AMT arguably had little impact on the tax minimization effects available through philanthropic donations, which are typically deducted from taxable income as a non-refundable credit. For some people and some large donations, however, the new rules – proposed by the federal government in August and due to come into effect as of Jan. 1, 2024 – could change that.
First, they will raise the capital gains inclusion in the AMT base (AMT-eligible income) from 80% to 100%. If you donate qualifying securities like publicly traded equities, the capital gains inclusion of the donated shares in the AMT base would increase from 0% to 30%. And while the current rules allow a 100% deduction of non-refundable tax credits (like the donation tax credit) from income used for the AMT calculation, the new measures will cut that to 50%. More generally, the changes increase the AMT rate from 15% to 20.5%, while increasing the AMT exemption from $40,000 to $173,000.
If all of this seems complicated – well, it is. But the upshot is that some donations, particularly if they are large or are made in the form of securities, could incur a tax liability starting in 2024 where they currently would not.
If you are among those philanthropists who may be affected by the AMT overhaul, it makes sense to incorporate it into your giving plans. One might, for example, choose to front-load donations into 2023 to minimize tax consequences in future years. On the other hand, that might not be desirable if your giving goal is to disburse funds over several years, or if you want flexibility in deciding which causes to support going forward. So, another option may be to establish a private foundation this year (with a large donation); the foundation could then disburse funds in 2024 and beyond without invoking AMT.
Incorporating a foundation, however, can be expensive as well as time-consuming in the start-up and on an annual basis, too, and 2024 is coming up fast. Luckily, there are other options. Several charities, including community foundations such as the Toronto Foundation, are alternatives to private foundations without the administrative burden. Their donor-advised funds act similarly to a private foundation in that they are a platform for making charitable donations. Donors can, for instance, make charitable gifts to the Toronto Foundation today and then decide later where they want their grants to ultimately go. “Many philanthropists, even those making large donations, don’t want the hassle of setting up and overseeing a private foundation – they want to focus on giving and impact, not administration,” Aneil Gokhale, Director, Philanthropy, at the Toronto Foundation, told us recently. “With the AMT changes coming into effect in 2024, we can quickly turn around a new fund or a gift to an existing fund before year-end.”
The 2023 window to change donation plans is running out, of course. But even if you cannot alter your giving strategy this year or believe you will not be affected by the changes to the AMT soon, it’s important to look at the big picture. For years now, large charitable donations by high-net-worth individuals have enjoyed highly accommodative tax treatment in Canada. The upcoming shift in AMT might be a signal that such privileges are eroding. A conversation with your wealth advisor can help ensure your giving goals and strategies align with the evolving environment over the long term.
Finally, the reality is that for many, if not most, high-net-worth individuals, the impact of these changes will range from non-existent to relatively minor, and they will probably in no way dissuade them from following through on their philanthropic commitments. As the American jurist Oliver Wendell Holmes once wrote, “Taxes are the price we pay for civilized society.” With the holiday season approaching, let’s remember that the primary beneficiary of giving is meant to be the good cause, not the donor, and an investment in one’s community almost always brings a valuable return.