Canada's new tax on share buybacks announced by the federal government on Thursday could spur an increase in big repurchases by companies before the policy kicks in, according to CIBC Capital Markets.
The new tax measure aims to encourage Canadian firms to reinvest profits in their workers and businesses by taking a two per cent cut of all types of share repurchases by domestic corporations.
Ottawa's policy doubles the one per cent excise introduced in the United States under President Joe Biden's Inflation Reduction Act in August.
CIBC analyst Ian de Verteuil calls the timing of Canada's new tax "peculiar," in a note to clients on Thursday.
"It is supposed to be implemented in January 2024. This gives companies a material window of time to make capital deployment decisions, before the two per cent tax is accrued and collected," he wrote, adding that substantial issuer bids over 10 per cent of outstanding shares, known as SIBs, "look likely in this period."
Post-2024, de Verteuil expects companies to shift their shareholder rewards strategies from buybacks to special or variable dividends.
The federal government expects the buyback tax to generate $2.1 billion in revenue over five years, according to the Fall Economic Statement released Thursday afternoon. de Verteuil calls that figure "somewhat conservative," estimating revenue could range from $400 million per year to over a billion in a given year.
"As we are likely heading into a period of weaker economic growth, we would expect the tax take to be towards the bottom of this range over the next couple years," he wrote. "[But] there is little doubt that criticizing buybacks is politically expedient."
According to his report, financial, energy and industrial companies account for the lion's share of buybacks in Canada. In the last 10 years, CIBC found Thomson Reuters (TRI.TO), Canadian National Railway (CNR.TO), and Suncor Energy (SU.TO)(SU) topped the list.
Environment Minister Steven Guilbeault recently accused Canada's oil and gas sector of rewarding shareholders before investing to mitigate climate change as profits soared on higher commodity prices. In the third quarter of 2022, the energy sector dominated total repurchases, accounting for 29 per cent, followed by financials at 23 per cent, according to CIBC.
"Given recent initiatives to limit additional fossil fuel production in Canada, it is scarcely surprising that energy companies have historically been reluctant to reinvest," de Verteuil wrote.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.