Energy producers and business groups warn share buyback tax will hurt investment

Canada’s fossil fuel sector is concerned the federal government’s proposed new tax on share buybacks will undercut energy investment at a time when royalties are contributing billions of dollars to the country’s coffers.

Ottawa announced the 2-per-cent tax in its fall economic statement on Thursday. The federal Liberals said it would encourage companies to reinvest their profits in workers – and in Canada more broadly – and ensure large corporations “pay their fair share.”

But the Business Council of Alberta worries the new tax will undercut investment in the heart of Canada’s energy sector.

President Adam Legge said in an e-mail that while the fall economic statement included a lower federal deficit, “that is generally because of inflation and income generated by the energy sector, which finds itself the target of a new windfall tax in disguise.”

“It’s disappointing that Canada’s first commitment in response to the United States Inflation Reduction Act is a policy ‘stick’ rather than details around more incentives or ‘carrots’ which are what we need to get these investments moving,” he said.

“This policy will discourage investment, unduly affect Alberta businesses, and do very little to drive reinvestment into Canadian projects.”

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

That sentiment is shared by Canadian Association of Petroleum Producers, an industry group.

Lisa Baiton, CAPP’s president and chief executive officer, said in a statement the fossil fuel industry is concerned because the 2-per-cent rate is double what is being considered in the United States, “and may have the unintended effect of discouraging investment into Canadian-run businesses while putting the shareholder returns of Canadian investors at risk.”

She also pointed to an estimated $35-billion to $40-billion in domestic capital investment made by the sector this year – along with the $50-billion it’s expected to pay to governments – as evidence industry is already paying its fair share.

Most energy companies contacted by The Globe and Mail on Friday said they need time to review the details of the new tax before commenting. However, pipeline operator Enbridge Inc. said it would continue to evaluate share buybacks against putting money toward all other growth opportunities, but will take the new tax into account when doing so.

“When considering buybacks or any investment in capital, the most important thing for us is to ensure the investment will not compromise our balance sheet and maintain the financial flexibility necessary to execute on our growth strategy,” the company said in an e-mail.

For the Pembina Institute, a think tank, the new tax is a step in the right direction.

“We’ve seen the financial statements for Q3 now, and we’re still not seeing the kind of investments we would expect to see from oil and gas companies, in particular to follow up on their commitments to reduce emissions,” Jan Gorski, the director of Pembina’s oil and gas program, said in an interview Friday.

“This idea that companies aren’t ready to invest in their emissions reductions – that they’re focusing on investors – I think that’s being challenged right now.”

Suncor’s recent purchase of a larger stake in the Fort Hills oil sands facility is evidence companies are willing to invest, Mr. Gorski said, “but those investments aren’t happening in the kind of projects that we want to see, which is reducing emissions.”

The oil and gas sector has executed billions of dollars in share buybacks this year, riding high on record profits due largely to sky-high commodity prices in the wake of Russia’s invasion of Ukraine.

Other industries have also looked to the tool, including banks, retail companies and the technology sector.

Darrell Heaps, CEO of Toronto-based software company Q4 Inc., which went public in 2021, said he’s “not a fan” of governments taxing share buybacks.

The company launched its own buyback program earlier this year. Q4 was approved by the TSX in March to buy back up to 10 per cent of its float over the next year, but as of Sept. 30, it hadn’t yet bought any.

“It’s really governments putting themselves into the boardroom of companies making decisions for what’s in the best interests of their shareholders and for that business,” he said, adding the tax isn’t likely to stimulate more capital spending by corporations.

“Companies make decisions as to what they think is the best use of capital. If they believe that investing into operations is going to deliver more growth, then they will do that,” Mr. Heaps said.

With a report from Sean Silcoff