Federal budget 2022: Highest-earning Canadians face minimum tax rate increase
OTTAWA — The federal government is moving to raise the minimum tax rate paid by wealthy Canadians in the budget and narrowing its focus on the highest earners.
In its budget Tuesday, Ottawa is raising the alternative minimum tax rate and imposing new limits on many of the exemptions, deductions and credits that apply under the system starting in 2024.
“We’re making sure the very wealthy and our biggest corporations pay their fair share of taxes, so we can afford to keep taxes low for middle class families,” Finance Minister Chrystia Freeland said in the prepared text of her remarks.
The alternative minimum tax (AMT) introduced in 1986 is a parallel income tax calculation that allows fewer deductions, exemptions and tax credits than the ordinary tax rules for the country’s highest earners. Wealthy Canadians pay the alternative minimum or regular tax, whichever is higher.
The government announced in the budget that it is increasing the alternative minimum rate to 20.5 per cent from 15 per cent starting in 2024.
To help ensure lower- and middle-income Canadians don’t get caught up in the increase, Ottawa is also proposing to increase the exemption to the start of the fourth federal tax bracket from $40,000. For 2024, it expects the exemption would be about $173,000 and be indexed annually to inflation.
The government estimates that under the new rules about 32,000 Canadians will be covered by alternative minimum tax in 2024, compared with about 70,000 if it did not make the changes.
However, the higher rate and revamping of the allowable deductions and credits mean Ottawa expects to take in an additional $150 million in 2023-24 and an additional $625 million in 2024-25.
Bruce Ball, vice-president for tax at CPA Canada, said there is a broader range of things that will go into the alternative minimum tax calculation, but the good news for most taxpayers is that the threshold will be much higher.
“That should exclude a lot of people even if they have more add-backs than they would have under the old system, so there’s some good news and bad news I guess, depending on your situation,” Ball said.
“If you’re higher income you may end up paying more; if you’re lower income you may not be subject to AMT.”
Brian Ernewein, senior advisor, tax, at KPMG in Canada, said the government isn’t just raising the rate, but also changing the rules for what is included when calculating a tax bill under the AMT rules, including changes for the treatment of capital gains.
“I think this is a very big change,” he said.
Ernewein added that there are also a broad range of changes regarding exemptions, deductions and credits.
"They're only allowing 50 per cent of a fairly large range of deductions and expenses, and 50 per cent of a lot of non refundable personal tax credits," he said.
While the richest Canadians face the possibility of higher taxes, the budget also includes a one-time payment for those who receive the goods and services tax credit to help offset the rising cost of living.
“We all know that our most vulnerable friends and neighbours are still feeling the bite of higher prices. And that is why our budget delivers targeted inflation relieve to those who need it most,” Freeland said.
Under the proposal, billed as a grocery rebate, Canadians who are eligible will receive an additional amount equal to twice the GST tax credit amount for January. For couples with two children the amount could be up to $467, while a single Canadian without children could receive up to an extra $234.
Student budgets will also see a boost from the budget as the government increases the Canada Student Grants compared with pre-pandemic levels and raises the interest-free Canada Student Loan limit.
The changes increase the total federal aid available to a full-time student based on financial need to $14,400 for 2023, up from $13,160 for 2022 and $10,140 in 2019 before the pandemic.
The government is also moving to cap the increase on alcohol excise duties to two per cent for one year. Ordinarily, the rates are indexed to the consumer price index and were previously set to rise by 6.3 per cent.
However, Canadians looking to take a flight next year will face an increase in the air travellers security charge paid by those flying in Canada starting on May 1, 2024. The charges, which are paid by passengers when they buy an airline ticket, help pay for the air travel security system and were last increased in 2010.
The charge for a domestic round trip will rise to $19.87, from its current rate of $14.96. The charge for a transborder flight to the U.S. will rise to $16.89 from $12.71, while for departing international flights travellers will pay $34.42, up from $25.91.
This report by The Canadian Press was first published March 28, 2023.
Craig Wong, The Canadian Press