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Ottawa plans to introduce a 2-per-cent tax on share buybacks, in an effort to have corporations increase spending on workers – and potentially reap some of the financial windfall being enjoyed by the oil and gas sector.

The federal Liberals said Thursday that the change would also encourage companies to reinvest their profits in workers and in Canada more broadly. The new tax reflects a similar move in the United States, which imposed a 1-per-cent tax on stock buybacks in August as part of the Biden administration’s Inflation Reduction Act.

While details of the corporate tax will be announced in Budget 2023, it will apply to the net value of all types of share buybacks by public companies in Canada from Jan. 1, 2024, according to the government’s fall economic update. Ottawa estimates the measure will dump an extra $2.1-billion into federal coffers over a five-year period.

Freeland’s economic update warns of 2023 recession, announces new tax on corporate share buybacks

A share buyback occurs when a corporation buys its own stock back from existing shareholders.

Finance Minister Chrystia Freeland called the new measure “a smart tax.”

“It will raise some money for Canada, which is a good thing,” she said. “But perhaps even more importantly, it creates the right set of incentives for companies to do the right thing.”

The fall economic update also argued it would ensure that large corporations “pay their fair share.”

Eric Nuttall, a partner and senior portfolio manager at Ninepoint Partners, an asset management firm, called Ottawa’s reasoning for the new tax “comical.”

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 most definitely paying their fair share. In fact, how much more can we ask them to pay?”

And he said the new measure will only lead to energy companies executing a “mind-blowing number of share buybacks in 2023″ before the new tax kicks in.

“We’re finally at a point where industry has healed from the worst bear market in history – negative oil prices, the debt that they incurred. ... Investors are just about to be rewarded for their patience and that soul-sucking experience, and now the government is coming out and saying, ‘You’re not paying enough, we’re going to tax you more,’” he said in an interview.

The use of stock buybacks in corporate Canada has exploded over the past few years.

Five years ago, the members of the S&P/TSX 60 Index – some of Canada’s biggest companies – spent nearly twice as much cash paying dividends to shareholders as they did repurchasing their shares. Now, stock buybacks outpace dividend payments.

The TSX 60 companies spent $67.1-billion in the past 12 months repurchasing their common shares, according to S&P Global Market Intelligence. That compares to $26.1-billion five years ago.

In contrast, dividend payments to shareholders have not grown nearly as much. The TSX 60 companies paid $59.4-billion in dividends in the past 12 months, according to S&P Global Market Intelligence. That compares to $45.8-billion five years ago.

The oil and gas sector is no different.

Companies have funnelled billions of dollars of windfall profits back to investors via share buybacks in 2022, following years of depressed commodity prices and industry consolidation.

Take Houston-based ConocoPhillips, a significant player in Alberta’s oil sands. It announced a significant boost to its existing share repurchase program Thursday, increasing it by US$20-billion. The company reported it had distributed US$4.3-billion to shareholders in the third quarter of 2022 via dividends and buybacks.

Suncor Energy Inc. also reported it had returned $4.4-billion from 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. reported it had delivered $659-million to shareholders through share buybacks in the third quarter of 2022, and declared a variable dividend of $219-million.

“From our perspective, we do prefer buybacks – all things being equal – over variable dividends when we’re trading below intrinsic value,” Cenovus chief executive Alex Pourbaix told an investor call Wednesday.

Canadian Natural Resources Ltd. on Thursday reported $5.2-billion in adjusted funds flow in the third quarter of 2022, and an 11-per-cent bump in dividends over last quarter.

Canadian Natural president Tim McKay said in an interview that share buybacks are an integral part of managing financial commitments in the cyclical nature of commodity markets.

“When the share buybacks were quite low because the commodity prices were low, [investors] didn’t expect you to buy back shares. When prices are a little more levered, they expect you to give returns back to them,” he said.

With a report from David Milstead

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