Finance Minister Chrystia Freeland plans to introduce a 2% tax on share buybacks. But what is it? And what is the goal of the federal government?
When a company makes a profit, it has two options: invest this money by financing projects or “reward” its shareholders – through the payment of dividends or via the repurchase of shares.
However, Ottawa intends to soon impose a corporate tax of 2% “which would apply to the net value of all types of share buybacks by public corporations in Canada”, details one in the economic statement. of autumn.
Details are pending. They will appear in the next budget, which will be presented in the spring of 2023. The tax would come into force on 1er January 2024. The government estimates that this measure would generate revenue of $2.1 billion over five years, starting from its introduction.
“Although this practice [de rachat d’actions] is a legitimate way to optimize the return for shareholders”, recognizes the government in its economic statement, Ottawa wishes to encourage companies to consider the other option instead: that is to say, to reinvest their capital to finance projects . “We want to encourage the improvement of productivity, as well as research and development,” explained a senior official to the media.
“I’m not sure we’re sending the right signal with a new corporate tax, even if it’s only symbolic at 2%,” said Robert Asselin, senior vice-president in charge of public policy at the Business Council of Canada. . “Companies will continue to opt for share buybacks, it would be naive to think otherwise,” he adds.
An opinion shared by Raphaël Duguay, assistant professor at the Yale University School of Management and researcher affiliated with CIRANO.
“It is not necessarily desirable for a company to reinvest its profits rather than distribute them to shareholders. Many mature companies are running out of profitable investment opportunities. The latter have every interest in distributing their profits to the shareholders. Shareholders can then reinvest in new companies which themselves have profitable investment projects,” he believes.
Asked whether such a tax could harm the competitiveness of businesses, Chrystia Freeland replied that this would not be the case, recalling that the United States adopted a similar measure recently.
1% in the United States
Indeed, in the United States too, the government has opted for a tax on the redemption of shares. If the American Congress had first considered a 2% tax, it is rather a rate of 1% which was adopted this summer within the framework of the Inflation Reduction Act.
Many US CFOs surveyed by the CNBC media channel said a 2% tax would affect their decision-making. More than half (55%) said such a move would cause their company to repurchase fewer of their own shares, while 40% said it would have “no impact” on their recovery plans. redemption.