Ottawa plans to introduce a 2 per cent tax on share buybacks to encourage companies to increase spending on employees – and potentially take a share of the economic windfall enjoyed by the oil and gas sector.
The federal Liberals said Thursday the change will also encourage companies to reinvest their profits back into workers and Canada more broadly. The new tax mirrors a similar move in the United States, which imposed a 1 percent tax on stock buybacks in August as part of the Biden administration’s anti-inflation law.
While the details of the corporate tax will be announced in the 2023 budget, it will apply to share buybacks of all types of public companies in Canada starting January 1, 2024, according to the government’s Fall Economic Update. Ottawa estimates the measure will drop more than $2.1 billion into the federal coffers over five years.
Freeland economic update warns of 2023 recession, announces new tax on corporate share buybacks
A share buyback occurs when a company buys back its own shares from existing shareholders.
Finance Minister Chrystia Freeland called the new measure a “smart tax”.
“It raises money for Canada, which is a good thing,” he said. “But perhaps more importantly, it creates the right incentives for companies to do the right things.”
The Autumn Economic Update also claimed it would ensure big business “pays its fair share”.
Eric Nuttall, a partner and senior portfolio manager at asset management firm Ninepoint Partners, called Ottawa’s reasoning for the new tax “comic.”
The oil and gas sector is set to pay about $50 billion in royalties and taxes this year, he said, “and so I would say they’re certainly paying their fair share. In fact, how much more can we ask them to pay?”
And he said the new measure will only result in energy companies carrying out a “shocking number of share buybacks in 2023” before the new tax takes effect.
“We are finally in a situation where the industry has recovered from the worst bear market in history – negative oil prices and debt. … Investors are rewarded precisely for their patience and that soul-sucking experience, and now the government comes out and says, “You’re not paying enough, we’re going to tax you more,” he said in an interview.
The use of share buybacks in Canada has exploded in recent years.
Five years ago, members of the S&P/TSX 60 index — some of Canada’s largest companies — spent nearly twice as much money paying dividends to shareholders as buying back their stock. Now the share buybacks exceed the dividend payment.
According to S&P Global Market Intelligence, TSX 60 companies spent $67.1 billion in the past 12 months to repurchase their common stock. It was $26.1 billion five years ago.
On the other hand, dividend payments to shareholders have not increased nearly as much. According to S&P Global Market Intelligence, TSX 60 companies paid out $59.4 billion in dividends over the past 12 months. It was $45.8 billion five years ago.
The oil and gas industry is no different.
Companies have directed billions of dollars in windfall profits back to investors through share buybacks in 2022, following years of low commodity prices and industry consolidation.
Take Houston-based ConocoPhillips, a major player in Alberta’s oil sands. On Thursday, it announced a major boost to its existing share buyback program, raising it by $20 billion. The company announced that it distributed $4.3 billion to shareholders in the third quarter of 2022 in dividends and buybacks.
Suncor Energy Inc. also said it has returned $4.4 billion in share buybacks to investors so far in 2022. It expects to increase that level by early 2023, depending on commodity prices.
And on Wednesday, Cenovus Energy Inc. said it delivered $659 million to shareholders in share buybacks in the third quarter of 2022 and announced a $219 million variable dividend.
“From our perspective, we like buybacks — all things being equal — over variable dividends when we’re trading below intrinsic value,” Cenovus CEO Alex Pourbaix said on an investor call Wednesday.
Canadian Natural Resources Ltd. reported on Thursday $5.2 billion in adjusted assets in the third quarter of 2022 and an 11 percent increase in dividends last quarter.
Canadian Natural president Tim McKay said in an interview that share buybacks are an essential part of managing financial commitments in the cyclical nature of commodity markets.
“When share buybacks were quite low because commodity prices were low, [investors] I didn’t expect you to buy back shares. When prices are a little more leveraged, they expect you to give them back, he said.
With a report by David Milstead
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