Overview

It is not uncommon for reporting issuers to purchase their own shares on the open market whether through an ordinary course issuer bid or a substantial issuer bid. The motivation to do so – rather than, for instance, paying a dividend – can be several-fold, including management’s belief the market is undervaluing the shares, e.g., where the market attaches little value to what may be viewed as excessive cash reserves. Given that it has the effect of reducing supply, the hope is typically that share buybacks should result in an increased share price. Corporations with large cash reserves can’t always redeploy those reserves in their businesses within a timeframe that is acceptable to shareholders and, as a result, will often use excess cash for share buybacks.

In its Fall Economic Statement released on November 3, 2022, the Department of Finance announced its intention to implement a 2% tax on share buybacks, applicable from January 1, 2024. This was ostensibly motivated by a desire “to make sure that large corporations pay their fair share, and to encourage them to reinvest their profits in workers and in Canada.”  While this is a laudable goal, it is unclear whether it adequately takes into account the motivations behind proceeding with such share buybacks and the negative impact the tax may have on the ability of Canadian reporting issuers to use this tool to prop up their stock prices.  Effectively, an issuer will pay a 2% toll charge if it wants to use this tool to influence its stock price.

Budget 2023 provides certain details regarding the proposed share buyback tax.

Who will this affect?

This will affect public corporations, being Canadian resident corporations whose shares are listed on a designated stock exchange, other than mutual fund corporations. Similar rules will apply to real estate investment trusts, specified investment flow-through (SIFT) trusts and SIFT partnerships, and to publicly traded entities that would be SIFT trusts or SIFT partnerships if their assets were located in Canada.

Key elements

The 2% share buyback tax would apply to the net value, for a taxation year, of an issuer’s repurchases of equity. Effectively, repurchases of equity would be netted against issuances of equity from treasury, and the tax would apply to the net amount. Repurchases and issuances of debt-like equity with fixed dividend and redemption entitlement would be excluded from the calculation, as will the issuance and cancellation of shares or units in certain corporate reorganizations and acquisitions.

A de minimis exception would apply where the gross repurchase of equity is less than $1 million in a given taxation year, prorated for short taxation years.

Subject to certain exceptions for repurchases to facilitate equity compensation arrangements or by registered securities dealers in the ordinary course of business, purchases of equity by certain affiliates would be deemed a repurchase of equity by the issuer.

These rules are proposed to apply to repurchases and issuances of equity that occur on or after January 1, 2024.

How can we help?

Reporting issuers listed on a designated stock exchange will need to consider the impact of the proposed share buyback tax in the implementation of any normal course or substantial issuer bid. Reporting issuers who are in the course of or are currently considering proceeding with a normal course or substantial issuer bid should consider acting quickly to achieve their objectives prior to January 1, 2024. Our team of tax and securities lawyers can assist issuers in understanding, and planning for, the impact of these new rules.

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