Trudeau promises 2% tax on buyouts and increases credits for clean technologies

(Bloomberg) — Prime Minister Justin Trudeau’s government took steps to level the playing field between business and the United States on Thursday, announcing a 2% tax on stock buybacks and $6.7 billion Canadian dollars ($4.9 billion) in clean technology tax credits over five years.

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The redemption tax will be imposed on the net value of all types of share redemptions by public corporations in Canada. That’s double the 1% excise tax on redemptions that was signed into law by US President Joe Biden as part of the Cut Inflation Act unveiled in August.

The clean technology credit, meanwhile, will provide a refundable tax credit equal to 30% of the capital costs of investments in net zero technologies, battery storage solutions and clean hydrogen.

“Following the passage of the Inflation Reduction Act in the United States, the need for a competitive clean technology tax credit in Canada is greater than ever,” the government said in its Economic Statement. ‘fall.

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Canada views the U.S. measures as ambitious and aggressive industrial policy requiring a rapid response, a senior government official said. The US law aims to attract foreign direct investment and make it a global cleantech leader, the official said.

The tax credit is only the first part of Canada’s response, the official said. Additional actions will be announced in next year’s budget, according to a government statement.

The 2% stock buyback tax would come into effect on January 1, 2024. It is expected to increase federal revenues by C$2.1 billion over five years.

“I think it’s stupid, but I don’t think it’s going to change the marginal capital allocation,” said Cole Smead, president and portfolio manager of Phoenix-based Smead Capital Management Inc.. The company is a shareholder in Cenovus Energy Inc., an oil sands producer that spent C$659 million to buy back 29 million of its own shares in the third quarter.

“It’s still cheaper than a dividend,” Smead said of the redemption tax, which he described as targeting undistributed capital. “It’s nothing more than a wealth tax or a tax on excess savings,” he said.

Canada’s six largest banks have spent about C$9.76 billion buying back shares since the Office of the Superintendent of Financial Institutions lifted its restriction on the practice a year ago.

As in the United States, the new tax aims to penalize companies that aim to reward shareholders by buying back shares, encouraging them instead to reinvest funds in workers and businesses in Canada.

–With help from Kevin Orland.

(Add portfolio manager comment on redemption tax in paragraphs 8 and 9)

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