Canada’s proposed share buyback tax
A new levy on Canadian companies that repurchase stock from their shareholders is expected to come into force on Jan. 1.
Here’s what you need to know about the proposed share buyback tax, with insights from a tax professional.
WHAT IS THE TAX?
The tax was first introduced in the 2023 federal budget and received its first reading in the House of Commons last month. It would see publicly traded Canadian companies taxed at two per cent of the value of repurchased equities over the course of one year.
The law may not be passed right away, but Jonathan Willson, partner in the Tax Group at Stikeman Elliott, told BNN Bloomberg that companies are preparing for its retroactive effects in the coming calendar year.
“In Canada, we're comfortable with retroactive legislation. So these rules apply Jan. 1, and I think investors can assume that will be exactly what happens,” he explained.
In a Thursday television interview, Willson also discussed the government’s aims with the legislation.
“The objective is to impose a bit of a toll charge when those public issuers have cash which might otherwise be available for reinvestment to leave the system,” Willson said.
The proposed tax would be levied on publicly traded corporations, Willson said, as well as REITs, and certain other publicly listed partnerships or trusts.
“It has a potentially fairly broad net, but it’s publicly traded entities, that's where it's going at,” he said in a Thursday television interview.
CHANGES TO THE PROPOSED LEGISLATION
Willson said that since it was first introduced, the legislation has been amended a number of times to ensure it’s achieving its policy objective and doesn’t punish companies that are using buybacks as a way to reinvest.
“The government wants to impose a tax on money leaving corporate solution, leaving the system. They don't want to capture an investment which is changing in its form,” he said.
Willson explained that the tax is meant to be levied on most substantial issuer bid buybacks, which is when a company makes a one-time offer to repurchase a significant number of its shares directly from shareholders and distribute the funds amongst them.
“There are other kinds of repurchase type transactions such as a corporate reorganization, a corporate spin out or something like that, and that isn't necessarily within the scope of the rules,” he said.
IMPACT ON INVESTORS
Willson said investors in mutual funds or ETFs will most likely not be impacted by the tax, and noted that levies would be paid out directly by the company, not shareholders.
He added that where investors may notice the tax is in the price offered by companies during buybacks in the future, or in the number of buybacks offered.
“You have to assume that if a company, just to use a silly example, wanted to return $20 to their shareholders, if there's a little bit of a tax toll, that's coming out of what's going into the shareholders pockets,” Willson said.
“I don't imagine companies will be increasing to cover that tax.”