There are many (legal) tax strategies out there to minimize tax owed to the government.  For instance, say investor Derek is a BC resident and fortunate enough to have a large portfolio of dividend payers that provides his sole source of income of $70,000.  According to tax tables, Derek should be able to file his income tax and pay $0 to the government due to the dividend tax credit.

Sounds like a great deal, but the government still wants their cut, which is why the Alternative Minimum Tax (AMT) was created.  In this situation, both the AMT and the regular income tax must be calculated, with the higher of the two paid as income tax for the year.

How To Calculate AMT?

This is the basics of how to calculate AMT from the kpmg tax planning book for 2009,

  1. Calculate taxable income after all deductions for regular tax purposes.
  2. Add back the deductions not allowed under AMT – losses from tax shelters, losses from partnerships, interest expenses, employee relocation, 60% of amounts claimed under employee stock option deduction.
  3. Add 60% of the untaxed half of capital gains.
  4. Deduct gross up of dividends – only actual dividend amount is used for calculations, not the grossed up amount.
  5. Deduct $40,000 – The 2008 AMT exemption
  6. Multiply by 15% (federal tax) for 2008.
  7. Deduct Personal Credits – basic personal amount, age credit, disability, cpp contributions, EI premiums, tuition, education, medical and charitable.  Do not deduct, investment tax credits, spousal amount, tuition credit transferred from a child, dividend tax credit (and more).
  8. If the result is higher than your federal tax calculated normally, then AMT must be paid.
  9. Provincial AMT is then calculated by multiplying the above AMT amount by a provincial AMT rate (varies by province).

An Example of AMT

Going back to our BC investor Derek that made $70,000 from dividends, he would actually have to pay tax.  How much?

To calculate Derek’s income tax using regular rules, he would owe $0 in tax due to the dividend tax credit.  However, using the AMT calculations, he would owe:

  • $70,000 (dividend income) – $40,000 (amt exemption) = $30,000 x 15% = $4,500 – basic personal amount (~$1500) = $3,000 + the provincial AMT amount (up to 50% of federal amount).

Final Thoughts

In my example above, it showed an investor making $70,000 in dividends as their sole source of income.   In terms of taxation, the investor went from owing $0 in tax to at least $3,000 to the federal government (not including provincial government) due to Alternative Minimum Tax.   To put this in perspective though, assuming an average dividend of 4%, the portfolio size would be around $1.75 million so I’m sure the investor isn’t feeling too much pain.

There is a bright side though, because of the AMT exemption of $40,000 and basic personal amounts, most provinces will allow up to $50,000 in dividend income (as your only source) while paying very little tax (if any).

Disclaimer:  I’m not a tax pro, this post should be used for informational purposes only. Please consult your tax accountant if you think that alternative minimum tax applies to you.

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In addition to “regular” type dividends – i.e. your example that the investment portfolio would be 1.75 m, don’t forget that many small business owners also choose dividend income rather than salary. Business owners need to keep in mind AMT, though the tax bite is significantly smaller!

Thanks FT – timely post as usual.

This was a great post. I had considered dividend heavy income in retirement as a possible scenario and was not fully aware of AMT. It seems the tax paid is still minuscule compared to what you paid while building that 1.75 million dollar portfolio!

Fully agree with Steve.

$3k tax paid on $70k income. Pretty darn favorable still.

Does the taxation of dividends change if you have other large sources of income? Say you have $50k in rental, interest, and other + $70k in dividend income.

Ahhh, the joy of taxes. It’s all about implementing a FLAT TAX folks! With a flat tax, everything will be clear and simple, not to mention fair!

There’s a raging debate over at Financial Samurai.

If you have other sources of taxable income, you will likely be paying more than the 15% minimum tax on income over $40,000, so the AMT wouldn’t apply.
Do keep in mind that this only applies to higher incomes… if you are retired and have an all-dividend income on a portfolio that yields less than around $50,000 (which is probably over $1 million in investments), you’ll still probably pay $0 tax. I could retire quite comfortably on $50k/year after-tax.

Sampson – if you have a higher income then you will pay income tax on dividends. I’ve calculated that around $100k income any dividends earned on top of that will be taxed at 20% which is still pretty good.

How would this apply to me? I’m employed as a contractor in the IT field. I earned about $12,000 in salary in the early part of the year before switching to contracting (via my numbered corporation). To date this year I’ve earned approx $54,000 in income via my corporation, this should end up in the $75-80k range by the end of the year. My accountant has indicated he’d use dividends to allocate the income we use as a family, but he’s never mentioned this before. Is this something I should be concerned about? Especially going forward next year as my entire income should be coming through my corporation and will likely be higher as well. Thanks to anyone who has advice

Thanks for the info guys. Seems very unlikely that the only source of income would be dividends if you had >$1.75M in assets. In my own planning, dividends play a significant role, as does real estate, interest, and other income.

Seems the dividend route is most advantageous only if you are 100% dividend income (although as you state FP), 20% is a reasonable taxation rate for these income levels.

Hey FrugalTrader,

Do you mind doing the math on this one as it pertains to AMT? Let’s say someone makes $500,000 a year, and has $50,000 in mortgage interest deduction.

What is this person’s rough AMT? Seems like there’s just so much complication and phase out, that implementing a Flat Tax would be so much simpler.

FT, thanks for the response. However I’m withdrawing significantly more than the $30,000 you give in your examples in the tax scenarios post. Can you help me run my numbers to get a rough sense of it?

Lets say by the end of 2009 the numbers look like this:

$12,000 in Salary earned in 2 months (approx $2400 income tax paid)
$75,000 in Corporate income earned in 10 months

90% of corporate income used as personal income. We’re trying to get TFSA’s maxed out, and some debt paid off. Hopefully in future years I won’t have to withdraw every nickel from the corp, but for now that’s how it is.

In this scenario, can you help me calculate the rough taxes I would owe both in my corporation and personally?

I had no idea how AMT worked before this blog. Who knew blogs could be informative? :)

Mike – shouldn’t you be talking to an accountant? I know FT loves doing his taxes but I’m not sure about anyone else’s! :)

Hehe, true enough FP. I’m seeing my accountant next week, but I just got suddenly paranoid readiing this article. I did some rough calculations using the calculator at and by my math I should end up owing in the $14,000 range. We’ve been putting money aside for taxes since I started as a contractor, thankfully. We’ll see if the accountant agrees with my savings amount or if i need to increase it.

Actually, I realized it might work out quite a bit better than I thought. My wife and i are both directors on the corporation, but she’s a stay at home mom. I played around with dividends to both of us and I was able to get the tax calculator to come out around $5000 a year. Jeez, that would be amazing if it’s accurate. I’ve printed out the report and I’ll show it to my accountant. Now if you’ve had enough of the details of my life, I’ll return you to your regularly scheduled programming. :)

Yes, that’s exactly what may work. Thanks again.

Mike, put your mind at ease if you have a decent accountant they will find the best mix of dividends or salary to minimize your income tax. If both you and your wife own shares of your corporation (hopefully you both own separate classes) then depending on your other income your accountant should be able to determine the most beneficial amount of dividends to pay on each class of shares.

Thanks, FT, for the concise article on AMT and how it is calculated. I’m creating a complex retirement spreadsheet which includes tax considerations and calculating AMT was one of those things I hadn’t got around to including.

It was only through playing around with calculators (another reason why Walter Harding isn’t the best source for playing around) that I even saw AMT calculated.

I, too, was on the “give me dividends or give me death” rampage – and then the AMT caused me to rethink it. Looks like we need to move to BC for the best dividend income treatment…

I think people will be much more careful with their money now, I can tell because there are nearly four times more blogs relating to finances after the financial crisis. Lets hope everyone learns from their mistakes!

There is a Minimum Tax Carryover which allows you to carry forward the difference between AMT and regular tax. I believe that it is 7 years, so those people who have a lot of tax shelters in only one or two years are not penalized more heavily than they should be.

Help! We invest in a REIT and receive a monthly dividend (in addition to the lift per unit we hope to get if we ever cash in). We increased our mortgage to invest in this REIT. As per previous years, we write off part of our mortgage interest when claiming the dividend income shown on the t3. Rev Canada asked for our receipts this year. We sent all docs including our share certificate for the REIT and the mortgage docs to show interest paid. For some reason this year, Rev Canada has told us we can’t claim the interest. What can we do to convince Rev Canada that we are able to…I looked up CRA rules and it says interest paid on investments producing “income” but not capital gains is ok. Is my t3 enough?