All the Numbers

The alternative minimum tax

From the All the Numbers wiki · Tax

The alternative minimum tax (AMT) is a second calculation run beside the regular one. It uses a broader definition of income, a large exemption and a flat rate, and fewer credits. The tax payable is the larger of the two results. The rate is 20.5% under the rules that apply from 2024.[1] It rarely applies to ordinary salaries; it catches a year with an unusually large gain, such as a sale of an investment property or a large taxable account.

The formula (2024 rules and later)

adjusted taxable income = taxable income, with
                          capital gains at 100% instead of the usual inclusion,
                          dividends at the cash amount (no gross-up),
                          only half of interest and fees deducted to earn property income
minimum tax = 20.5% × (adjusted taxable income − exemption)
              − 50% of the main non-refundable credits

Capital gains are counted in full.[2] Dividends are counted at the cash amount, without the gross-up.[3] Only half of the interest and fees deducted to earn property income is allowed.[4]

The exemption is the start of the fourth federal bracket, $181,440 for 2026, indexed.[5] The dividend tax credit is not part of the credits allowed. The basic credits are allowed at 50%.[6] The credits in question include those described in age, spouse and caregiver credits.

If the minimum tax is higher, the difference over regular tax is additional tax. It carries forward for 7 years[7] and is deducted in any later year when regular tax exceeds the minimum amount. Ontario adds its own additional tax, 24.63% of the federal additional tax, and the Ontario tax reduction is denied that year.[8] A special foreign tax credit applies, counting two-thirds of non-business foreign tax.[9][10] See capital gains, dividends and foreign withholding tax for the inputs.

What the engine does

  • Runs the minimum tax calculation in every annual assessment and pays the larger of the two federal amounts.
  • Carries the additional tax forward, uses it as later years allow, and adds the Ontario additional tax and carryover.
  • Applies the federal brackets' fourth threshold, grown with the plan's inflation, as the exemption; see income tax brackets.

What it deliberately does not

AMT items for donations, stock options, resource and partnership deductions, allowable business investment losses, the lifetime capital gains exemption, the flipped-property rule and reserves are not modelled. Foreign business income and treaty-exempt income are also absent, as is the foreign tax credit proration for minimum tax.

See also

  • Age, spouse and caregiver credits · Some credits depend on who you are or who you support. The age amount starts at 65 and shrinks with income; the spouse amount is the basic personal amount less your partner's income. All the Numbers applies the age amount, and the spouse amount for a couple; not the caregiver credits.
  • Capital gains and the adjusted cost base · Selling an investment for more than its adjusted cost base is a capital gain, and half of it is added to taxable income in the year of the sale. Growth that has not been sold is not taxed.
  • Foreign withholding tax · A foreign country can withhold tax from dividends paid to Canadians; for US dividends the treaty rate is 15%. The foreign tax credit recovers it in a non-registered account, but a TFSA gets no recovery and an RRSP is exempt.
  • How dividends are taxed · Canadian dividends are grossed up by 38% (eligible) or 15% (other), taxed as income, then reduced by a federal and Ontario dividend tax credit. The credits make dividends tax less than interest at the same income.
  • Income tax brackets and your marginal rate · Federal and Ontario tax are each charged in slices of income at rising rates, then reduced by credits, with an Ontario surtax and health premium on top. The marginal rate is what the next dollar costs; the average rate is total tax over income.

References

  1. ↑ITA 127.51 A(B − C) − D, A = 20.5% · Alternative minimum tax rate (2024 and later) · 20.5% · effective 2024-01-01
  2. ↑ITA 127.52(1)(d) · AMT adjusted taxable income includes capital gains and allocated trust gains in full (the 38(a)/(b) fraction read as 1/1) · 100% · effective 2024-01-01
  3. ↑ITA 127.52(1)(f) · AMT adjusted taxable income takes dividends at the cash amount (82(1) read without paragraph (b)) · See the source · effective 2024-01-01
  4. ↑ITA 127.52(1)(j)(ii); 127.52(1)(i)(ii)(B)(IV) · AMT allows only 1/2 of interest and counsel fees deducted under 20(1)(c)–(f) and (bb) to earn income from property; net capital losses of other years arising 2024+ are allowed at the regular amount (127.52(1)(i)(ii)) · 50% · effective 2024-01-01
  5. ↑ITA 127.51 C(a); 117(2)(d); CRA 2026 bracket thresholds · AMT basic exemption = the first dollar amount in 117(2)(d) (the fourth federal bracket threshold, $181,440 for 2026, indexed) · See the source · effective 2024-01-01
  6. ↑ITA 127.531(a)–(d) · Basic minimum tax credit: this share of the credits under 118(1),(2),(3),(10), 118.01–118.07, 118.3, 118.5–118.9 (donations at a higher share; the dividend tax credit is excluded) · 50% · effective 2024-01-01
  7. ↑ITA 120.2(1), 120.2(3) · Additional tax (minimum amount over regular tax before s.126) carries forward 7 years, deductible to the extent regular tax exceeds the minimum amount · 7 years · effective 1986-01-01
  8. ↑Worksheet ON428 (2025) line 72 ("× 24.63%"); Form ON428 (2025) lines 56–61, 72, 80 · Ontario additional tax for minimum tax purposes: this share of the federal additional tax (T691 Part 5 line 11) plus the surtax it attracts; the Ontario tax reduction is denied when it applies; Ontario minimum tax carryover = lesser of (basic Ontario tax − dividend credit) and this share of federal line 40427 · 24.63% · effective 2024-01-01
  9. ↑ITA 127.54(1) "foreign taxes" (2/3 of non-business-income taxes), 127.54(2) · AMT special foreign tax credit: the greater of the s.126 credits and the lesser of 2/3 of non-business foreign taxes and 20.5% × foreign income · See the source · effective 2024-01-01
  10. ↑ITA 127.54(1) "foreign taxes" (2/3 of non-business-income taxes), 127.54(2) · AMT special foreign tax credit: the share of non-business foreign tax counted · 66.67% · effective 2024-01-01