The federal government wants Canadian businesses to spend more of their own money to invest in their businesses and help the economy grow, so if businesses don’t use their profits for anything other than increasing their earnings. has introduced a new tax on corporations.
in the Autumn economic statement released Thursdaythe government announced plans to introduce a new tax of 2% on share buybacks.
A share buyback, as the name suggests, is when a publicly traded company buys back a portion of its stock at the market price.
Share buybacks do not improve or expand a company’s underlying business, but they do have the effect of boosting the stock price and improving various profitability measures by reducing the number of shares in the company. Investors tend to welcome these benefits, but in recent years the sheer volume of share buybacks has begun to raise concerns.
US companies in the S&P 500 spent $881 billion on share buybacks last yearan increase of about 70% from the previous year’s level, and about 10% higher than the previous annual record set in 2018.
That’s billions of dollars that help investors and the company’s books, but it doesn’t boost economic output.
Canada isn’t the only country cracking down. US President Joe Biden’s recently passed inflation-reducing legislation also included a tax on share buybacks. US taxes will increase to 1% starting next year. This is a concession from his 2% that congressional Democrats originally wanted.
Expected to raise $420 million annually
The bipartisan tax policy center US Buyback Tax Will Bring About $124 Billion Over the next decade, or about $12 billion annually in government coffers.
This goes far beyond what Ottawa’s federal government expects from its actions.
“This action is estimated to increase federal revenue by $2.1 billion over five years,” said the government’s economic update.
This equates to about $420 million a year, which, given a 2% tax, means that the government believes Canadian companies spend about $21 billion a year on share buybacks. increase.
Precise data on how much Canadian companies have spent on share buybacks this year is not readily available, but anecdotal evidence suggests the figure significantly understates Canada’s buyback bonanza. I’m here.
Just this week, Canada’s largest oil company Suncor has announced that it has spent $1 billion to repurchase its shares. It was announced last quarter and earlier this year by RBC, Canada’s largest bank. spent $1.3 billion on buybacks last quarter. Oil giant Cenovus spent $659 million on buybacks this quarter. All in all, in just three months, he’s had about $3 billion in buybacks from three companies.
If the actual revenues from the buyback tax aren’t that much, that might be fine for the government, but that would likely mean companies chose to put that cash to work elsewhere. .
New measures from 1 January 2024
“Share buybacks are one legitimate way companies can return value to shareholders, but they can also divert corporate resources away from investing in Canadian workers and businesses,” the government said.
Kim Forrest, founder of Bokeh Capital Partners, a Pittsburgh-based money manager, said such taxes could slow down stock buyback jackpots because they aren’t big enough to significantly affect spending intentions. said to be low.
“It’s so small that it doesn’t really matter,” she said in an interview. She said, “It’s just an attempt to tax companies, not actually get them to change their behavior.”
The new measures will be part of the federal budget to be announced next spring and will come into force on January 1, 2024, according to the government.
Finance Minister Chrystia Freeland said trying to force companies to invest in their businesses is a major part of the government’s plan to begin “tackling the productivity challenge that is the Achilles heel of the Canadian economy”. Said there was.
‘Terrible, terrible idea,’ says investment firm CEO
But to one of Bay Street’s wealth managers, the move feels like it’s unnecessarily trampling on the Canadian investment community.
Dennis Mitchell, CEO of Toronto-based money manager Starlight Capital, told CBC News in an interview, “This is a horrible idea and the premise behind it is flawed. So I think buybacks are a bad thing,” he said.
“It’s a poor idea because it limits a company’s ability to properly allocate capital. Capital is not just money, it includes employees,” he said.
“Routinely misallocating capital leaves less capital available for payroll, benefits, hiring, etc.”