Time for the Alternative Minimum Tax to be put aside #CanadaFinance

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The Alternative Minimum Tax is an example of silly taxation policy creating complexity and it needs to be abolished — here’s why.

The AMT was implemented in 1986 as an alternative and mandatory way to calculate your personal tax liability. It was first proposed in the 1985 federal budget in response to the perception that some high-income earners were taking advantage of legitimate deductions and tax credits that were available to them, and so they were not paying a sufficient level of tax. It was most certainly influenced by the fact that the United States had a similar AMT system.

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Without getting into the nitty-gritty of the mechanics, the basic concept is that you calculate your personal tax liability under two ways: the regular way and the AMT way, which adjusts the regular method by adding back certain deductions and tax credits, provides for a basic exemption and then applies an AMT tax rate.

To the extent the resulting liability is higher under the AMT way than the regular way, you’ll end up paying the AMT tax liability. The difference between the regular tax payable and the AMT payable — which is the AMT — is refundable over a maximum seven-year period to the extent that the AMT is not payable in any of those subsequent years.

Yep, you read that right. The AMT is a refundable tax. In my experience, it is a very rare situation when an individual has to permanently pay AMT. In other words, if an individual pays AMT, it is almost certainly later refunded within the seven-year maximum timeframe. While I cannot find statistics to support my assertion, my experience does.

The AMT has not been materially amended since its introduction into tax law until recently. In a purely political stunt, the Liberal Party during the 2021 election campaign announced it was going to “create a minimum tax rule so that everyone who earns enough to qualify for the top bracket pays at least 15 per cent each year.”

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Many were puzzled by this election promise since Canadian law already provided for an AMT. Clearly, whoever was in charge of developing and writing the 2021 Liberal Party election party platform missed that point.

After being re-elected in 2021, the Liberals doubled down on this promise. The 2022 federal budget said the government’s “commitment to examine a new minimum tax regime, which will go further towards ensuring that all wealthy Canadians pay their fair share of tax.”

It wasn’t until 2023 that the 15 per cent promise and new regime turned into broad-based amendments to the existing AMT instead. The amendments are poorly thought out and, even with recent changes, they will have detrimental impacts on many high-income earners, including those who are philanthropic. The amendments, however, do not alter the basic refundable mechanism that has existed since 1986.

If a government imposes a tax, but will later refund it, what is the point? Why waste the effort of charging such a tax, which includes its related administration, collection, refund and other related issues? Does it appear to you that the imposition of the AMT is a simple smoke-and-mirrors game?

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Some left-leaning academics will most certainly disagree with me, but such a tax only adds to the perception that the so-called rich are not paying their fair share, but if the AMT is ultimately refunded, how can one say that with a straight face? Even without the AMT, these people are already paying their fair share and a disproportionate amount thereof.

I find the policy behind the AMT almost laughable. If a tax deduction or tax credit is introduced into the taxing statute, there is generally a policy reason — good or bad — behind it. It is then legal for any person to take advantage of such laws. For example, if capital gains are only partially taxable and charitable deductions are wholly creditable, then Canadians can take advantage of such rules.

Why, then, should a separate taxing regime exist to deny part of those benefits to some people who are perceived to be rich? Especially if the imposition of that extra tax will eventually be refunded?

The AMT is an obvious example of how the Income Tax Act becomes complex. Personal tax credits are another example. Ditto for the ridiculous anti-flipping tax and prohibition of deductions on certain short-term rentals.

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Instead of taking a wise and methodical approach to amendments, the act becomes cluttered with patchwork upon patchwork of political and technical amendments. Introducing silly provisions based upon flawed policy and then letting the Canada Revenue Agency, taxpayers and the tax community deal with its related administration generates complexity.

The consequences of this are not good and include reduced productivity, distorted economic results and average taxpayers being scared of our taxing system, among other things.

The obvious fix is for the country to engage in tax reform. As I stated in a recent podcast, a key objective of tax reform must be a simpler — not simple — tax statute and its related administration. I don’t think it will ever be possible to make our tax system simple, given the large number of public policy objectives that a sophisticated system tries to achieve. But Canada’s system can be made much simpler than it currently is.

As journalist David Harsanyi has said: The simplification of the tax code would not only unlock dormant economic potential, but, in the process, blunt the preferred weapon of social engineers who reward favoured industries, punish success and distort economic incentives.

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I totally agree with the caveat that “simplification” means simpler since that is the better objective to strive for. Included in that exercise should be the abolishment of the AMT.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at [email protected] and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

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