Does the capital gains exemption eliminate alternative minimum tax on a sale?
No. The capital gains deduction lowers regular tax, but the alternative minimum tax is a separate calculation with its own limits on that deduction. If the minimum amount exceeds regular tax, the higher figure is payable, though the excess may be deductible from regular tax in later years.
The lifetime capital gains deduction lowers tax inside the regular calculation. Canada runs a second, parallel calculation, the alternative minimum tax (AMT), and an individual’s tax payable is based on the minimum amount when that is higher. So a sale that looks fully sheltered on the regular return can still produce a minimum tax bill.
How the two calculations meet
Section 127.5 of the Income Tax Act says that where regular tax is less than the individual’s minimum amount (after a special foreign tax credit), the tax payable is worked out from the minimum amount instead. The minimum amount comes from adjusted taxable income, a separate computation, with an exemption amount and a flat rate applied above it. The details are amended from time to time, so this page quotes none.
Why the deduction is touched
Adjusted taxable income is worked out on assumptions that restrict many deductions. For deductions under sections 110 to 110.7, which include the capital gains deduction, the Act lists the only amounts allowed. It counts the whole of a capital gain rather than the regular taxable portion, and it counts the capital gains deduction at a stated multiple of the amount claimed on the regular return. The result is that part of a gain fully sheltered on the regular return can still count toward the minimum amount.
Whether the extra tax comes back
Section 120.2 lets an individual deduct earlier additional minimum tax from regular tax in later years, but only for a limited number of years and only to the extent regular tax then exceeds the minimum amount. AMT can therefore behave like a timing cost. Recovery depends on having enough regular tax later, which may not happen if income drops after the sale.
Questions for your accountant
- What are the regular and minimum-tax results for the year of sale?
- Would a capital gains reserve, which spreads the gain over later years, change either result?
- How much of any minimum tax could be recovered, and in which years?
Sources
This answer is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentLine 25400 – Capital gains deduction
- 03Canada Revenue AgencyGovernmentClaiming a capital gains reserve
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