Federal government announces tax on share buybacks

On November 3, 2022 the Federal Government’s 2022 Fall Economic Statement (the “2022 Fall Statement”) was released, in which the government announced its intention to implement a two percent tax on share buybacks by public corporations (the “Buyback Tax”).

Details on the Buyback Tax will be released in the 2023 Federal Budget, and the tax is expected to come into force on January 1, 2024. The Buyback Tax will apply to the net value of all types of share buybacks by public companies in Canada. The 2022 Fall Statement forecasts that this measure will raise an estimated $2.1 billion for the federal government over a five-year period.

Why announce the Buyback Tax now?

The move to implement the Buyback Tax comes after record levels of share buybacks in both United States and Canadian markets. In recent years, share buybacks have outpaced dividends as corporations’ preferred method to generate shareholder value.

Share buybacks improve shareholder value by reducing the amount of issued shares, which typically increases the share price, and improves profitability metrics in the company. However, the Government’s position is that the use of funds in this manner does little to improve a company’s underlying performance, nor does it contribute much to boosting Canadian economic activity. The Buyback Tax is intended to incentivise companies to invest those profits into their business and employees as opposed to their shareholder base, translating to a net positive effect on the Canadian economy.

The Buyback Tax has not been proposed in a vacuum; the 2022 Fall Statement mentions the passing of the Inflation Reduction Act in the United States as a motivating factor for the development of two new Canadian tax credits to support investment into clean technologies and clean hydrogen production. Included in the Inflation Reduction Act  is a one percent tax on share buybacks by US public companies.

Potential impact on Canadian capital markets

The Buyback Tax is likely to have a cooling effect on corporate buyback programs in Canada which may be mirrored in the United States by the Inflation Reduction Act’s similar tax. However, a two percent tax on share buybacks may not be significant enough to discourage businesses from pursuing share repurchase plans. Moreover, companies have plenty of warning ahead of the planned January 1, 2024 implementation of the Buyback Tax and, as a result, many may choose to push through large share buybacks throughout 2023.

Canada’s oil and gas sector is likely to be the most significantly impacted by the Buyback Tax given its record levels of profit and share buybacks in recent years. Oil and gas companies can expect to pay large sums to the Buyback Tax if repurchase programs continue at their current strength into 2024.

A further update on the Buyback Tax will follow as more information on its details are released. For further information, please contact Kevin Fritz (tax), Robbie Grossman (capital markets), Jenny Du (tax), Thomas Prentice (capital markets) or any other member of our Tax or Capital Markets groups.