The Canadian federal budget presented on April 16, 2024 confirmed the government's intention to proceed with numerous previously-announced tax measures "as modified to take into account consultations, deliberations, and legislative developments, since their release". Among these measures are legislative proposals released on August 4, 2023, including "A Tax on Repurchases of Equity". This is important for Canadian corporations listed on a stock exchange which repurchase their shares, often by way of a normal course issuer bid.
The proposed 2% federal tax on share repurchases mirrors a 1% excise tax enacted in the United States as part of the Inflation Reduction Act of 2022, which generally applies to any U.S. corporation whose stock is traded on an established securities market in the United States and that repurchases more than US$1 million of stock over the course of a tax year. The rationale for the excise tax was set out in an announcement by the United States Department of the Treasury: "As the tax code has favored stock buybacks, many companies have failed to reinvest profits in their workers, growth, and innovation. The stock buyback excise tax begins to change that." Or so the theory goes.
In Canada, as announced in the 2023 federal budget on March 28, 2023, the "Tax on repurchases of equity" is a corporate-level 2% tax that would apply on the net value of shares repurchased by any corporation resident in Canada (other than a mutual fund corporation) whose shares are listed on a "designated stock exchange" (Toronto Stock Exchange, TSX Venture Exchange, Canadian Securities Exchange, Cboe Canada) at any time in the tax year. There is a de minimis exception: the 2% tax will not apply if the total fair market value of equity that is redeemed, acquired or cancelled in a tax year is less than $1 million. This exception may be applicable for smaller listed companies which repurchase shares.
Technically, the proposed 2% tax is set out in Bill C-59, An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023. Second reading of Bill C-59 was completed on March 18, 2024. If Bill C-59 is adopted in its current form, the 2% tax will apply to all share repurchases after 2023.
A simplified version of the formula for calculating the amount of tax payable set out in Bill C-59 can be summarized as follows, without taking into account the concepts of "substantive debt" and "reorganization transactions" referred to therein:
0.02 × (A – B), where,
A is the total fair market value of equity that is redeemed, acquired or cancelled in the taxation year; and
B is the total fair market value of equity that is issued in a qualifying issuance in the taxation year.
By way of example, if a Canadian corporation listed on the Toronto Stock Exchange repurchases shares in a taxation year pursuant to a normal course issuer bid in an aggregate amount of $200 million and issues shares from treasury during the same taxation year by way of public offering or private placement for proceeds of $50 million, the corporation will be required to pay a federal tax of $3 million, representing 2% of $150 million. Listed corporations and their advisors are referred to Bill C-59 for full details of the formula which, among other things, contains exceptions and carved-outs for equity that qualifies as "substantive debt" or that was redeemed, acquired or cancelled as part of a "reorganization transaction".
There have been numerous comments on the rationale for a 2% tax on share repurchases in Canada. Corporations repurchase their shares for a variety of reasons, e.g., to return excess cash to shareholders; to reduce the number of issued and outstanding shares and thereby increase earnings per share; to support the price of the stock. All of these are valid corporate measures; if Bill C-59 is adopted in its current form, share repurchases, whatever their motivation, henceforth will be taxed at a rate of 2%. As a result, Canadian corporations effecting normal course issuer bids or other share buybacks may repurchase fewer shares by setting aside 2% of the funds that otherwise would have been paid to selling shareholders; the 2% will be remitted instead to the federal government. That said, it is difficult to envisage that Canadian corporations will stop share repurchases due to a 2% tax and instead use the funds for "their workers, growth, and innovation".
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