Written By Jared Mackey and Spencer Brown
The federal government's 2022 Fall Economic Statement (Economic Statement), released on November 3, 2022, introduced a new tax on share buybacks by public corporations in Canada. Under the proposal, which would come into force on January 1, 2024, a two percent corporate-level tax would apply on the "net value" of a corporation's share buybacks. Share buyback programs are a means of returning value to shareholders and are initiated by companies for a variety of reasons. Particularly for companies who believe their stock is undervalued, the repurchase and cancellation of shares reduces supply, increases demand and can result in an increased share price.
There are few details available on the proposed tax, pending the 2023 federal budget. The government does state that the tax will be "… similar to a recent measure introduced in the United States". In August 2022, President Joe Biden signed the Inflation Reduction Act into law, which included a one percent tax on the market value of net public company shares repurchased, starting in 2023. The extent to which Canada's proposed share buyback tax will parallel its U.S. counterpart remains unclear. The U.S. version contains a number of exclusions and it remains to be seen whether Canada will offer similar relief.
The policy impetus for enacting a share buyback tax in Canada is not readily apparent. The Economic Statement framed the tax as a disincentive for corporations who may use buybacks to "… divert corporate resources away from making investments in their workers and businesses in Canada". For tax purposes, share buybacks by Canadian public companies through normal-course issuer bids are generally a more tax-efficient means of distributing profits to shareholders relative to dividends. Canadian shareholders who participate in a buyback program are taxed at a favourable 50 percent capital gains inclusion rate while non-resident shareholders are generally not taxable. Shareholders who continue to hold their shares pay no tax as a result of the buyback program until they dispose of their shares—whether through a sale or as a result of deeming rules in the Income Tax Act. Canada's proposed buyback tax could be viewed as a means of limiting these tax efficiencies and levelling the playing field.
The government predicts the proposed share buyback tax would increase federal revenues by $2.1 billion over five years. Until the federal government releases further details, Canadian businesses should give careful consideration to the timing of share buybacks and stock issuances.
We will follow these developments and are available to discuss how the proposed tax may affect your company. If you have any questions about the proposed tax on share buybacks, please reach out to the Bennett Jones Tax group.