Recent changes to Canada’s Alternative Minimum Tax (AMT), effective Jan. 1,⁠ 2024, have reshaped how trusts are taxed, and not for the better.

Under the new rules, 100% of capital gains are included for AMT purposes, and key deductions like interest and investment management fees are generally limited to 50%. Most trusts also don’t qualify for the new individual AMT exemption. This means AMT can apply even when all income is allocated out to beneficiaries and little or no regular tax is paid. The result? AMT can end up being payable at the trust level, with limited ability to recover it through future AMT credits.

One area to watch closely is prescribed rate loan trusts. These have long been effective income‑splitting tools, but with restricted interest deductibility under AMT, they can now create recurring AMT liabilities, potentially limiting or even wiping out their intended tax benefits.

Key strategies to reduce trust tax exposure and manage AMT risk

Trust AMT exposure needs to be assessed annually and managed proactively. Potential strategies include:

• Retaining some income in the trust ⁠–⁠ Leaving enough income in the trust to trigger regular tax can help reduce or eliminate AMT and avoid double taxation situations where beneficiaries pay regular tax while the trust pays AMT.
• Reviewing and adjusting deductions ⁠–⁠ Repaying or refinancing loans or choosing not to claim certain discretionary deductions like interest, especially when beneficiaries are in lower tax brackets.
• Matching gains and losses in the same year ⁠–⁠ Realizing capital gains and losses in the same taxation year allows for better offset under AMT than relying on loss carry forwards.
• Careful planning of allocations to beneficiaries ⁠–⁠ Annual reviews should consider whether allocating income, retaining it or directing it to specific beneficiaries leads to the best overall family tax outcome.
• Using AMT credits strategically ⁠–⁠ AMT credits can be carried forward for up to seven years. Generating regular tax in future years can help ensure those credits are used before they expire.
• Reviewing the trust’s income mix ⁠–⁠ Trusts heavily weighted toward capital gains and dividends face higher AMT exposure. In some cases, shifting to more ordinary income can reduce that risk.
• Revisiting prescribed rate loan structures ⁠–⁠ Refinancing at lower prescribed rates, repaying loans or unwinding these structures altogether should be reconsidered under the new AMT rules.

AMT changes, as they relate to trusts, are here to stay. Structures and strategies that worked well in the past, particularly prescribed rate loan trusts, now require closer scrutiny.

Manage risk now to avoid unexpected costs