Why the AMT Represents a 4 Letter Word to Entrepreneurs and Charities?
The Impact of Proposed Alternative Minimum Tax Legislation
In recent discussions, the potential impact of proposed changes to the tax treatment of charitable donations of appreciated securities has come to the forefront. Canadians who pay the Alternative Minimum Tax (AMT), often high net-worth individuals and generous donors, may face challenges under the new rules set to take effect in 2024. These changes are expected to reduce the donation tax credit, including a portion of capital gains in the AMT calculation, and impose stricter limitations on deductible expenses. The implications for philanthropic giving are significant.
Missed Opportunities: Donating Appreciated Securities
One effective strategy for optimizing charitable contributions is donating in-kind non-registered appreciated securities such as stocks, mutual funds, ETFs, and segregated funds. Individuals can benefit from various advantages by donating these securities to a registered charity. They can deduct the securities' fair market value as a donation amount and avoid paying capital gains tax on the appreciation. The donation receipt can also mitigate significant net taxable income and provide tax savings on capital gains. Donating appreciated securities has become a preferred method for making transformational charity donations.
Proposed AMT Changes: Implications for Philanthropists
Unfortunately, the federal budget has proposed changes that are expected to adversely affect the tax treatment of charitable donations for individuals subject to the AMT. These changes include reducing the donation tax credit by 50 percent, incorporating a portion of capital gains into the AMT calculation, and imposing stricter limits on deductible expenses. The new rules, slated to take effect on January 1, 2024, may present challenges for high-net-worth individuals and generous donors who contribute significantly to the charitable sector.
Workarounds and Mitigation Strategies
Several workarounds and strategies can be considered to mitigate the potential negative effects of AMT changes. Donating publicly listed securities with significant capital gains in 2023 rather than waiting for 2024 can be an immediate solution. Donors can also consider using donor-advised funds (DAFs) to fulfill pledges or set up one-payment-only life insurance policies to create annual cash flows for charitable purposes.
Donating publicly traded securities from the corporation rather than individually held assets can offer advantages for individuals who hold assets within a corporation. This approach allows the opportunity to extract funds from the corporation and adds the capital gain back to the capital dividend account (CDA), which is not subject to AMT.
Balancing Philanthropy and Tax Implications
While the proposed changes in tax regulations aim to increase tax revenues from affluent individuals, they may limit tax planning strategies and require careful consideration. Philanthropists and tax advisors must balance their desire for benevolence and the potential tax implications. It is crucial to stay informed, work closely with planning teams, and explore alternative approaches to charitable giving.
Conclusion
Although the exact impact of the proposed legislation is yet to be determined, it is essential for individuals affected by the AMT to stay informed, seek professional guidance, and adapt their strategies accordingly. Individuals can continue their philanthropic efforts by taking proactive steps and exploring available options while optimizing their tax positions. Navigating the changing landscape of charitable donations requires careful planning and considering the potential long-term implications for donors and the charitable sector.
