Reinvest or Repurchase? Canada Passes Buyback Tax to Nudge Companies to Reinvest

Blair Gable/REUTERS

By Trevor Rowars, 2L

On November 3rd, 2022, Canada announced a 2% tax on all share buybacks by public corporations in Canada. This 2% buyback tax will become effective on January 1st, 2024. Canada’s government projects that this will raise 2.1 billion Canadian dollars ($1.5 billion US dollars) over the course of five years. Canada believes that this buyback tax will cause corporations to reinvest in their workers, businesses, and in the implementation of clean energy instead of engaging in share buybacks, which benefit the investors of businesses rather than the businesses and their workers.

A company will engage in share buybacks to increase its earnings per share and to return cash to investors. It is beneficial to the investor for a company to engage in a share buyback instead of distributing a dividend to investors given that the differences in tax rates between dividends and capital gains are significant for wealthy Canadians.

There is strong evidence to suggest that this tax was implemented to specifically target the oil and gas industry. On October 27th, 2022, Environment Minister Steven Guilbeault explained through Twitter “as Canadians see those profits, we need to see investment into cleaner energy, instead of share buybacks” when referring to the oil and gas companies’ record-breaking profits. According to the Canadian Imperial Bank of Commerce, Canadian energy companies have been the most active in buying back shares of any sector during the past year.

Naturally, there are people against this buyback tax, and there are those in favor of it. There are many different reasons why people are against this 2% tax. The Canadian Association of Petroleum Producers and the Explorers and Producers Association of Canada both believe that this tax puts Canadian energy companies at a competitive disadvantage having “the unintended effect of discouraging investment into Canadian-run businesses while putting the shareholder returns of Canadian investors at risk.” The next crowd of people believes that a 2% tax won’t prevent companies from engaging in buybacks if their stock is cheap. Others believe that this tax will not induce oil and gas companies to reinvest their profits at all and that this is just another way to gain additional governmental revenue. Those in favor of the 2% tax believe that it is a step in the right direction because this tax will influence companies to reinvest profits into the reduction of carbon emissions instead of allocating the profits to engage in share buybacks.

In summary, Canada has announced a 2% tax on all share buybacks by public corporations in Canada, which will take effect on January 1st, 2024. This tax most likely targets Canada’s oil and energy sector. The purpose of this tax is to encourage corporations to reinvest in their businesses instead of focusing on their investors, but many people do not believe that this tax will lead to reinvestment.

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