2024-1005801C6 CALU RT - Question 11 - TOSI and AMT credit

Principal Issues: The CRA was asked to confirm the interaction of the AMT and TOSI rules, particularly with respect to the deduction of AMT of prior years' allowed under subsection 120.2(1).

Position: The provided example yields the correct result.

Reasons: The AMT deduction under section 120.2 cannot reduce Part I tax payable for the year below the minimum amount allowed under subsection 120.4(3).

Author: Clarkson, Julia
Section: 120.2(1), 120.2(3), 127.5, 127,51, 120.4(2) 120.4(3)

CALU Roundtable – May 2024

Question 11 – Tax on Split Income (TOSI) and Alternative Minimum Tax (AMT)

Background

Where an individual taxpayer is subject to AMT (endnote 1) on their Part I income, the taxpayer is generally entitled to a refund of such AMT in the following seven taxation years to the extent the taxpayer’s regular Part I tax in a carry-over year exceeds the taxpayer’s AMT in that carry-over year. For example, if in Year 1 Taxpayer A has AMT that exceeds regular Part I tax by $20,000, and in Year 2 Taxpayer A’s regular Part I tax exceeds the AMT payable in that year by $10,000, Taxpayer A can generally receive an AMT tax credit of $10,000 in that year that can be applied against Part I tax in that year. (endnote 2) Taxpayer A also has a remaining AMT carry-over credit of $10,000 that can be utilized over the relevant carry-over period.  

It is proposed that the AMT rules will be modified effective for 2024 (the “modified AMT rules”), which could result in a higher amount of AMT being payable in respect of certain types of income and make it more difficult to recover the AMT over the seven-year carry-over period.

The tax on split income (TOSI) rules (endnote 3) were expanded in 2018 to curb the practice of business owners splitting dividend and other business income (“split income”) with certain family members. These rules impose a special tax at the top marginal tax rate on such split income. (endnote 4)

In determining whether AMT is payable in a particular year, the TOSI rules are considered. However, in determining the deduction for the AMT carry-over amount in a particular year, the carry-over amount is not available to offset the TOSI payable in the year. Generally, the deduction of a carry-over amount in a particular year is limited to the lesser of:

• The additional tax determined for the seven tax years immediately preceding the particular year that has not been deducted by the taxpayer for a preceding taxation year; and

• The amount by which the taxpayer’s Part I tax payable for the particular year, ignoring, among other things, the TOSI, exceeds the individual’s minimum tax for the year. (endnote 5)  

There are no proposed amendments to the manner in which the AMT carry-forward deduction is determined under section 120.2.

Question

Can the CRA confirm that the following example properly illustrates the interaction of the AMT and TOSI rules:

Taxpayer A (age 25) owns common shares of a private corporation (Opco) but has no other involvement with Opco. In Year 1, Taxpayer A has Part I taxable income that includes a taxable capital gain arising from the sale of Opco shares. The taxable capital gain does not qualify as an excluded amount (endnote 6) for the purposes of TOSI, resulting in Part I income taxes (including TOSI) of $50,000. The amount calculated as AMT in Year 1 is $70,000. Taxpayer A therefore has $70,000 of Part I tax payable in Year 1 and the AMT carry-over amount is $20,000. In Year 2, Taxpayer A has total regular Part I tax payable of $60,000, $50,000 of which is attributable to TOSI. The AMT payable by Taxpayer A in Year 2 is $40,000. Taxpayer A will therefore not be subject to AMT as regular Part I taxes (including TOSI) exceeds the AMT payable in Year 2.

However, Taxpayer A cannot deduct any of the AMT carry-over of $20,000 in Year 2. This is due to the fact that Taxpayer A’s Part I taxes less TOSI ($60,000 - $50,000 = $10,000) does not exceed the AMT amount in the year of $40,000.

CRA Response

Minimum tax, or alternative minimum tax (AMT) is determined under section 127.5. In general terms, if the Part I tax payable of a taxpayer is lower that the AMT calculated for the taxation year, the AMT will become the Part I tax payable amount for the year.

Subsection 120.4(3) is a provision that takes precedence over any other provision in the Act, including section 127.5. Subsection 120.4(3) ensures that a specified individual’s Part I tax payable for a taxation year is not less than their tax on split income (TOSI) calculated under subsection 120.4(2) for the year, increased by any Canada Workers Benefit payment they received and included in their tax payable under paragraphs 117(2.1)(a) and (b), and reduced only by the dividend tax credit (section 121) and the foreign tax credit (section 126) available in respect of amounts included in that split income and the disability tax credit (section 118.3).

As the deduction under subsection 120.2(1), or AMT tax credit, is not a listed deduction in subsection 120.4(3), it cannot reduce a taxpayer’s Part I tax payable for the taxation year below the minimum amount allowed under subsection 120.4(3). The AMT credit is calculated in a manner that ensures that subsection 120.4(3) is respected.

In the example provided, for Year 2, the Part I tax that is not related to TOSI is $10,000 ($60,000 less $50,000), while the minimum amount calculated under section 127.51 is $40,000. The AMT credit allowed for Year 2 is calculated under subsection 120.2(1) as the lesser of two amounts. The first amount is the additional tax for prior years of $20,000 (being the excess of AMT for Year 1 of $70,000 less the Year 1 Part I tax payable of $50,000 determined under paragraph 120.2(3)(b)). The second amount is the excess, if any, of the Year 2 modified Part I tax (excluding TOSI) payable of $10,000 over the minimum amount of $40,000 calculated for Year 2, as described in paragraph 120.2(1)(b). As the second amount is nil, no AMT credit is available for Year 2.

Julia Clarkson
2024-100580
May 7, 2024

ENDNOTES

1 Calculated under section 127.5.

2 Section 120.2.

3 Section 127.5.

4 The expanded TOSI rules became effective on January 1, 2018.

5 Section 120.2 and subparagraph 120.2(1)(b)(i). See also CRA TI 2021-0900961C6 dated October 7, 2021 (French).

6 Defined in subsection 120.4(1).

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