A new two-per-cent tax on share buybacks unveiled by Prime Minister Justin Trudeau’s government won’t be a huge deterrent to companies looking to repurchase modest quantities of shares at reasonable multiples, according to Canadian Imperial Bank of Commerce -- but it could carry a sting for others.

What’s more, because the tax doesn’t take effect until January 2024, it may actually lead to a flurry of larger buybacks between now and then, Ian de Verteuil, a managing director at the bank, wrote in a research note.  

Canada’s federal government said on Thursday it plans to impose a two-per-cent tax on the net value of all types of share repurchases, in an attempt to encourage reinvestment by public corporations. The tax is double the size of an excise tax implemented in the U.S. through August’s Inflation Reduction Act.

The impact of the tax would increase depending on the size and the price-to-earnings ratio of the shares. The “most typical buyback scenario” -- a buyback for less than 5% of outstanding shares at no more than 15 times earnings --would dilute earnings-per-share by about 1.5 per cent.

However, a 20 per cent buyback at 30 times earnings would drag down per-share profit by more than 15 per cent, de Verteuil writes.

The report also says the government’s estimate of how much the tax will swell federal revenue -- $2.1 billion over five years -- “seems to be somewhat conservative.

“Buybacks have become an increasingly important mechanism for corporates to return cash to shareholders,” de Verteuil writes, noting that the tax differential between dividend and capital gain rates is particularly significant for high income Canadians. 

“In the last 12 months, Canadian companies have repurchased close to $70 billion of their own shares.”