AMT on prescribed-rate loan trusts (pp. 9-10)
- Where a family member with high taxable income has lent money to a trust at the prescribed rate provided in Reg. 4301(c), under s. 127.52(1)(j) only 50% of the interest paid by the trust under this loan is deductible in computing its adjusted taxable income (ATI) (and only 50% of any fees paid to an investment advisor would be deductible in computing ATI).
- The s. 104(6) deduction is only available for distributions of income computed under the ordinary rules and does not permit the distribution of the additional ATI.
- A possible solution is for the trust to forgo claiming deductions under s. 20 and distribute the resulting increased income to its beneficiaries (provided they are both capital and income beneficiaries), and who might be in a low tax bracket.
AMT to a non-resident disposing of TCP (pp. 10-11)
- The preamble to s. 127.5 states that alternative minimum tax (AMT) applies to all individuals (with no exemptions for non-residents). Accordingly, a non-resident selling taxable Canadian property (TCP) often will be subject to AMT on the resulting capital gain (100% of which is included in ATI under s. 127.52(1)(d)), with likely no opportunity to recover the AMT in subsequent years.
- Although the purchaser of the TCP may have withheld under s. 116, the non-resident nonetheless is required to file a Canadian tax return to report the capital gain (and claim the withheld amount as an installment payment), so that the application of AMT may give rise to a balance owing upon such T1 filing.
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