If you’re a high-income earner, it’s important to be familiar with the Alternative Minimum Tax (AMT) rules. AMT was first introduced in the 1985 federal budget to promote fairness in the tax system. For decades, the AMT rules remained relatively unchanged and rarely applied to most taxpayers. This changed significantly with new rules that took effect in 2024. The reforms made the AMT calculation much more relevant to high-income individuals. 

What is AMT?

As its name suggests, AMT is an alternate way to calculate tax. The purpose behind this parallel tax calculation is to ensure that high-income-earning individuals and certain trusts pay at least a minimum amount of tax when benefiting from certain deductions or credits. 

The complex AMT calculation involves adjusting regular taxable income using only those deductions and exemptions permitted for AMT purposes. This adjusted taxable income (ATI) is then reduced by an AMT exemption amount and multiplied by a flat AMT tax rate. The resulting AMT can then be reduced by certain eligible tax credits. If the AMT is higher than the “regular” tax, the taxpayer must use the alternative tax calculation and pay the amount owing. It is important to note that AMT applies to individuals (including certain trusts) but does not apply to corporations. It is also not applicable in the year of death.

Can AMT be recovered?

If AMT does apply, it can typically be refunded over the next seven years. Should an individual continue to earn sufficient taxable income after paying AMT, they can generally claim the historical AMT as a credit against the taxes that would otherwise be payable in those future years. As a result, AMT is often just a prepayment of tax, assuming one continues to earn income. Any AMT that has not been refunded after seven years is generally unrecoverable, becoming a permanent tax.

How does the AMT calculation differ from regular tax? 

The AMT calculation differs significantly from the regular tax calculation. While the regular system uses graduated tax brackets, the AMT is a flat 20.5% federal tax applied above a large exemption amount ($181,440 for 2026). The most important differences are in how income, deductions, and credits are treated:   

• Capital gains inclusion: 100% of capital gains are included in ATI, compared to a 50% inclusion rate for regular tax.
  
  
• Dividends: For regular tax purposes, dividends are subject to a gross-up and a dividend tax credit applies. For AMT purposes, dividends are included in ATI at their actual value (no gross-up) and no dividend tax credit applies.
  
  
• Lifetime capital gains exemption (LCGE): For gains eligible for the LCGE, 30% of the capital gain is included in ATI, compared to a 0% inclusion for regular tax.
  
  
• Donated publicly listed securities: 30% of the capital gain on donated publicly listed securities is included in ATI, compared to a 0% inclusion for regular tax  
  
  
• Employee stock options: 100% of the employee stock option benefit is included in ATI. The 50% stock option deduction (available for regular tax purposes) is disallowed.
  
  
• Deductions of certain expenses: Many deductions are limited for AMT purposes. For example, interest and financing costs incurred to earn property income is limited to 50% for AMT purposes. Note: A similar 50% limitation for investment counsel fees has been proposed but is not yet enacted law.
  
  
• Capital losses carried forward and back: For AMT purposes, the deduction of capital losses carried forward and back remains restricted to 50%. These are applied against capital gains which are 100% included in income for AMT purposes. This results in capital loss carryforwards being only 50% as valuable for AMT purposes as they are for regular tax purposes.
  
  
• Non-capital losses carried forward and back: While non-capital losses from other years are 100% deductible for regular tax, AMT restricts the use of these carryforwards and carrybacks to 50%.
  
  
• Charitable donation tax credits are limited to 80% of their value for regular tax purposes.
  
  
• Non-refundable tax credits: Most other non-refundable tax credits (such as the basic personal amount, medical expense credit, disability credit and tuition credit) are limited to 50% of their value for AMT purposes. 

These specific adjustments apply only for the purposes of the AMT calculation. The inclusion rate for capital gains, for example, remains at 50% under the regular tax system. While the large AMT exemption amount protects lower- to mid-income individuals, high-income individuals may face an AMT liability.

While the federal AMT rate is 20.5%, the effective combined rate is higher once provincial AMT is added. For most provinces, the provincial AMT is calculated as a specific percentage of the federal AMT (for example, in Alberta the provincial AMT is 35% of the federal AMT). 

Who might be impacted?

Below we will walk through a few situations where high-income individuals may be negatively affected by the AMT rules. The examples will compare the 2026¹ regular federal² taxes payable to the AMT.

Individuals realizing large capital gains

For regular income tax purposes, only 50% of capital gains are included in taxable income. This results in a normal federal tax rate of 16.5% on capital gains for individuals who pay tax at the top federal rate. 

The AMT rate of 20.5% is 4% higher than the top federal rate for capital gains. The overall impact is such that significant capital gains realized in 2026 may give rise to AMT.