DFK Tax Newsletter

Issue 2 - 2026 Edition - June 18, 2026 - Beth Porter, FCPA, CA, CFP, Tax Partner, Noseworthy Chapman, St. John’s, NL

AMT and the New Reality for Trust Taxation

The updated Alternative Minimum Tax (AMT) rules significantly increase the likelihood that trusts will pay extra tax. The AMT rate has risen to 20.5%, and the rules now apply more broadly. Most trusts no longer qualify for the basic AMT exemption, which puts them at a disadvantage compared to individuals.

As a result, even trusts with moderate income or gains may now face AMT.

How AMT Works for Trusts

AMT applies when a trust’s regular tax is lower than the minimum amount calculated under the AMT rules.

The AMT calculation is stricter than regular tax. In general, it:

  • Includes 100% of capital gains in taxable income 
  • Limits the use of prior year capital losses and certain other losses to 50%
  • Restricts many deductions (such as interest, investment counsel fees and management fees) to 50%
  • Reduces most non-refundable tax credits (typically to 50%, with donations often at 80%)

Because most trusts do not have access to the AMT exemption (now set to the start of the fourth federal tax bracket, indexed annually), they can trigger AMT more easily than individuals, even when their regular taxable income is relatively low.

Trusts Most Likely to Be Affected

Trusts are more likely to face AMT where they:

  • Retain income or capital gains instead of distributing them to beneficiaries
  • Realize capital gains, especially on investments
  • Claim deductions that are limited under AMT (e.g., interest, investment counsel fees and management fees)
  • Use common estate-planning structures such as spousal, alter ego, or joint partner trusts

A key concern is that AMT paid by a trust may not be recoverable. While AMT credits can generally be carried forward for up to seven years, many trusts distribute their income annually and may not generate enough regular tax in future years to use the credit. In these cases, AMT effectively becomes a permanent cost.

Key Planning Considerations

The new rules require a more proactive approach to trust planning. Common strategies include:

1. Confirm Whether the Trust Is Exempt
Some trusts are excluded from AMT (for example, graduated rate estates and certain specialized trusts). This should be confirmed before undertaking planning.

2. Distribute Income Where Possible
Trusts that distribute their income and capital gains are less likely to trigger AMT. In contrast, AMT is more likely when income or gains are retained within the trust.

3. Reassess Whether the Trust Is Still Needed
In some cases, especially for investment-holding or income-splitting structures, the added AMT cost may outweigh the original benefit. It may be worth revisiting whether the trust still meets its intended purpose.

3. Review Borrowing and Fee Structures
Interest, investment counsel fees, and management fees are now only partly deductible for AMT purposes. Trusts using leveraged investment strategies or paying significant advisory fees may be particularly affected.

4. Time Capital Gains and Losses Carefully
AMT can arise when capital gains are realized but offset with prior-year losses, since those losses are only partly allowed. Matching gains and losses in the same year may produce a better result under AMT.

5. Consider Who Should Realize Gains
Because individuals generally benefit from the AMT exemption and trusts do not, it may be more tax-efficient in some cases for gains to be realized outside the trust.

6. Plan for AMT Recovery
If AMT is triggered, consider whether the trust is likely to generate enough regular tax within seven years to use the AMT credit. If not, the cost may be permanent.

Retroactive to 2024 returns

While there were broad amendments to the AMT regime announced in June 2024 that apply to taxation years beginning after 2023, a separate measure limiting the deductibility of investment counsel fees to 50% for AMT purposes was introduced later, in August 2024 through Bill C15. Although Bill C15 was not enacted until March 26, 2026, its provisions also apply retroactively to taxation years beginning after 2023.

Given that many tax preparation software applications did not include the August 2024 proposals in their calculations, many trusts may have filed their 2024 T3 returns without accounting for this reduced deductibility and could now face additional AMT liabilities for that year.  CPA Canada asked the CRA whether it would automatically reassess affected returns or notify trustees. The CRA has confirmed that it will not issue automatic reassessments or identification letters. Accordingly, trustees of impacted trusts must review their filings and take steps to amend their returns if required.

In Summary

The post-2023 AMT amendments were not just a rate increase.  They change how tax is calculated in a way that is less favourable for trusts.  The lack of an exemption, combined with stricter rules on gains and deductions, means many ordinary trusts will now face AMT.

In practice, planning should focus on:

  • Reducing income retained in the trust
  • Reviewing existing borrowing and fee structures
  • Managing the timing of capital transactions
  • Ensuring any AMT paid can realistically be recovered

Overall, many trusts that were previously tax-efficient may now carry a higher and sometimes permanent tax cost, especially if they retain income or rely on deductions that are limited under the new rules.