The Trudeau government has proposed a 2% tax on corporate share buybacks that is intended to push companies towards spending more on workers rather than seeking to inflate value for shareholders. This proposal was inspired by a similar tax change in the US that now imposes a 1% tax on share buybacks under the Inflation Reduction Act since August. Finance minister, Chrystia Freeland, has termed the proposal a smart tax and said it would incentivise companies to do the right thing.
Share buybacks typically occur when companies have made huge profits and use part of the cash to buy their own stocks back from existing shareholders. By reducing the number of shares held, the return value for the remaining shareholders is boosted. Though the action is considered a reward to shareholders, it is however often criticised as it diverts company resources that could be used to invest in workers and other areas of the business.
The new 2% tax would be applied to the net value of all types of share buybacks done by public corporations. The details of the tax change are expected to be revealed in Budget 2023, with the tax expected to go into effect by January 2024. The Trudeau government is expecting that once instituted, the tax would boost federal revenues by $2.1 billion over the next five years. It is also expected to encourage more corporations to favour investment in their workers and businesses.
Though the plan has political support, financial experts are doubtful that it will have the desired effect. Professor Rick Robertson of Western University’s Ivey School of Business said that he did not feel the tax would increase corporate investment and that companies could just as easily reward shareholders by boosting dividends instead. He recommended using investment tax credits as a more effective way to induce investment.
Senior economist at the Canadian Centre for Policy Alternatives, David Macdonald, also said that the tax would likely result in a shift from share buybacks to dividends. He advised also imposing a similar tax on one-time dividends. He has also advocated for windfall taxes to be applied to corporations that make exceptionally high profits.
Partner and senior portfolio manager at Ninepoint Partners, Eric Nuttall, has highlighted that the oil and gas sector will be paying around $50 billion in royalties and taxes this year. He said that this amounted to paying their fair share, with the proposed change likely to induce them to carry out a mind-blowing level of share buybacks before the new tax takes effect.
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