Taxing corporate share buybacks unlikely to boost investment in operations: experts

The federal government’s proposed corporate share buyback tax might resonate politically, but experts are doubtful it will encourage companies to invest more into growing their operations.

In last week’s mid-year budget update, the Liberals committed to imposing a 2% tax on stock buybacks that would go into effect in 2024 and earn the government $2.1 billion in revenues over the next five years.

The policy takes aim at a common tactic used to reward shareholders when a company is doing well. Corporations will buy back their own stocks to reduce the number of shares available on the market, thereby increasing the value of shareholders’ stakes in the company.

Environment Minister Steven Guilbeault recently lashed out at oil companies for making very limited investments in climate action even as massive inflation-driven profits allowed them to pad the wallets of shareholders.

Oil giant Cenovus announced third-quarter profits of $1.6 billion, 192% higher than the same quarter a year ago, and delivered $659 million to shareholders through share buybacks during the quarter.

On Thursday, Finance Minister Chrystia Freeland said the government wants to see Canadian companies “taking their profits and investing them in the productive capacity of Canada and investing them in their workers.”

The proposal follows in the footsteps of the U.S., which passed a 1% tax on stock buybacks this summer. It also comes at a time of heightened scrutiny of high corporate profits and accusations of “greedflation.”

The measure, however, falls short of the windfall taxes New Democrats have advocated for. Federal NDP Leader Jagmeet Singh said in a written statement that the buyback tax “does nothing for Canadians who need relief from high prices now.”

The federal Conservatives did not respond to a request for their stance on the buyback tax.

“It’s not a bad political move, because I do not think it will offend many voters,” said Rick Robertson, professor emeritus at Western University’s Ivey School of Business.

However, Robertson isn’t convinced the tax will achieve the government’s stated goal.

“I don’t see how this is going to lead to increased corporate investment,” he said, adding that corporations can choose to reward shareholders through dividends instead.

Instead of using a “stick” approach to encourage investment, Robertson said using a “carrot,” such as offering investment tax credits, might be more effective.

Companies have until 2024 to figure it all out.

Corporate stock buybacks are sometimes favoured over dividends because they’re advantageous on the tax front. They also allow companies to send money to shareholders after posting strong profits without having to commit to giving out a higher dividend on a regular basis.

However, Robertson said imposing a tax won’t stop companies from wanting to reward shareholders, and can create a special one-time dividend during a year of strong profits.

David Macdonald, senior economist with the Canadian Centre for Policy Alternatives, agrees the new tax probably won’t spur additional investment.

“What we’ll likely see is a shift away from share buybacks towards dividends,” Macdonald said.

To address this, Macdonald said the federal government could impose a similar tax on one-time dividends, which corporations might use as an alternative to buybacks.

The economist has advocated for imposing windfall taxes on corporations with exceptionally high profits. His recent work shows after-tax corporate profits reached a historically high percentage of the total Canadian economic output in the second quarter of this year.

In contrast, Macdonald’s analysis found workers’ compensation as a share of gross domestic product trended downward, falling to the lowest level since 2006.

On the political front, however, Macdonald said the share buyback tax might be signalling a shift in the federal government’s approach toward corporations, building on other recent Liberal policies, including an increase to the corporate tax rate levied on banks and life insurers.

“It does show some increased skepticism toward the corporate sector doing the right thing.”