John McKenzie, CEO of the TMX, says Ottawa's share buyback tax unfairly punishes smaller Canadian companies.Fred Lum/the Globe and Mail
The Trudeau government keeps picking on public companies.
After slapping large banks and insurance companies with a special levy and a discriminatory surtax on their profits, Liberal legislators are concocting a new cash grab that targets a larger swath of our capital markets.
Ottawa plans to impose a 2-per-cent tax on share buybacks by public companies starting on Jan. 1, 2024. Problem is, the move is a cynical attempt to micromanage corporations’ payouts to their shareholders.
A stock buyback occurs when a publicly-traded company uses its cash to repurchase its own shares from the market. Buybacks generally have the effect of boosting a company’s stock price because they reduce the number of shares available in the public float.
Share buybacks are popular because they are a means for public companies to return excess capital to their shareholders. Companies benefit and so do their investors. So, naturally our parliamentarians have taken it upon themselves to champion a solution in search of a problem.
The government says it wants to dissuade share buybacks to encourage publicly traded companies to invest more of their profits. But instead of incentivizing them to allocate more capital for business reinvestment, Ottawa prefers to meddle with how those corporations manage their balance sheets. It’s overreach.
“This is a bad policy,” said John McKenzie, chief executive officer of TMX Group Ltd., Canada’s largest stock exchange operator. He made those remarks on Wednesday during an event organized by the Canadian Club Toronto.
“I can understand why governments would introduce a policy like this because it has a populist element to it and because there was a similar one in the U.S. But a stock buyback tax has an unnecessary impact on a company’s ability to manage their capital structure.”
The proposed tax measure, which was unveiled earlier this month as part of the government’s fall economic statement, was indeed inspired by a 1-per-cent tax on corporate share buybacks recently imposed by the Biden administration.
But as Mr. McKenzie points out, the Canadian version of the tax is shaping up to be more punitive because our capital markets are different from those that exist south of the border.
“We have over 3,000 listed companies. Two-thirds of them are small and medium enterprises. They are not big U.S. companies,” Mr. McKenzie said. “And why would we ever want to take away a balance sheet and capital management tool from small-cap companies that are still trying to build their business?”
Public companies are constantly assessing how much excess capital they should retain, reinvest and return to shareholders in the form of buybacks or dividends. But as Mr. McKenzie explained, it is more difficult for some companies to permanently raise dividends than to pursue share buybacks.
Moreover, the proposed measure won’t achieve Ottawa’s other purported objective of ensuring that businesses pay their fair share of taxes because it would only apply to public companies.
The government has estimated the new tax would add $2.1-billion to federal coffers over five years, starting in 2023-24. But analysts are already suggesting the government is unlikely to achieve its stated goals.
“The tax will only raise minimal revenues for the government, and it won’t discourage buybacks to spur investments, in our view,” reads one research report from the Bank of Nova Scotia that deemed the proposed tax a “political stunt” that targets the energy sector.
“Recent government officials blamed oil companies for not investing enough despite record profits. Honestly, it seems hard to fault those companies when barely 12 months ago, most governments were bashing them for daring to increase [capital expenditures] in new oil production,” it added.
We should also be concerned that a share buyback tax will discourage more companies from going public.
“Why would we put a tax in place that only applies to public companies?” Mr. McKenzie said. “When we do that, we add another friction point to companies being able to raise public money.”
It would be a mistake for Ottawa to ignore his warning. After all, the COVID-19 pandemic has taken a toll on entrepreneurship. Small businesses, in particular, bore the brunt of economic shutdowns.
When the entrepreneurial spirit is damaged and the economic outlook is uncertain, fewer businesses will pursue public listings.
There’s already a dearth of initial public offerings and some public companies are actively mulling privatizations.
Our legislators shouldn’t shrug off this trend. Concerns about shrinking stock markets and the thinning ranks of public-traded companies predate the pandemic.
“Sometimes I get asked: ‘Well, why do you care if a company is private or public?’” Mr. McKenzie said. “A public company is really the only vehicle where broad-based Canadian shareholders actually get to participate in the growth and success of those great Canadian names. That’s the real democratization of investment.”
Instead of engineering yet another misguided tax, our parliamentarians’ time would be better spent on encouraging entrepreneurship.
Public companies are pivotal to Canada’s prosperity. It’s puzzling that our legislators are so intent on punishing them for their success.