Alternative minimum tax (AMT) is a parallel federal tax calculation that includes 100% of a capital gain — instead of the one-half fraction used for ordinary tax — so a founder’s lifetime-capital-gains-exemption-sheltered gain on closing can still generate real tax in the year of the sale.
Section 127.5 requires an individual to pay whichever is higher: ordinary tax, or the “minimum amount”. Section 127.52 sets what goes into that minimum-tax base: paragraph (1)(d) re-reads the capital gains inclusion fraction in section 38 as “1/1” instead of one-half, while paragraph (1)(h) allows a deduction of only “7/5” of whatever was claimed under section 110.6(2) or (2.1) — the lifetime capital gains exemption. Section 127.51 sets the rate itself at 20.5% of the resulting base, above a basic exemption tied to an indexed bracket amount in section 117(2)(d).
This matters most on a management buyout or a founder rollover, where the departing owner’s after-tax expectations shape the negotiated price. It also has a timing trap the fund’s counsel should flag even though it is not the fund’s own tax bill: crystallising the exemption can itself trigger AMT in the year it happens, even though no cash proceeds change hands. AMT paid above ordinary tax is not necessarily lost — the Act provides a multi-year credit mechanism under section 127.531 — but it still has to be funded out of pocket in the year of sale.
A founder disposes of QSBC shares for a $2,000,000 gain. Under ordinary rules, the taxable gain is $1,000,000 (one-half of $2,000,000), against which the $625,000 exemption can be claimed. Under AMT, the same disposition is included at 1/1 — the full $2,000,000 — and only 7/5 of the $625,000 claimed, or $875,000, is allowed back out. The AMT base on this one transaction is therefore $2,000,000 − $875,000 = $1,125,000, compared with an ordinary-tax base of $1,000,000 − $625,000 = $375,000 — a materially larger number the 20.5% rate is applied to, purely from the two fractions moving in different directions.
See also: Lifetime capital gains exemption · Crystallisation.
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