{"id":6492,"date":"2023-10-03T17:51:20","date_gmt":"2023-10-03T21:51:20","guid":{"rendered":"https:\/\/www.millerthomson.com\/the-proposed-new-tax-on-share-buybacks\/"},"modified":"2026-02-20T19:26:24","modified_gmt":"2026-02-21T00:26:24","slug":"the-proposed-new-tax-on-share-buybacks","status":"publish","type":"post","link":"https:\/\/www.millerthomson.com\/en\/insights\/corporate-tax\/the-proposed-new-tax-on-share-buybacks\/","title":{"rendered":"The proposed new tax on share buybacks"},"content":{"rendered":"\n

With the release of the 2022 Fall Economic Statement, the Federal Government proposed a new tax on repurchases of equity by certain entities (the \u201cBuyback Tax<\/strong>\u201d). The draft legislative proposals and explanatory notes published by the Department of Finance on August 4, 2023 shed additional light on the Buyback Tax. If enacted in its current form, the legislation would apply to transactions that occur on or after January 1, 2024.<\/p>\n\n\n\n

The Buyback Tax is forecasted to generate $2.5 billion in additional tax revenue over five years. It is part of the federal government\u2019s plan to impose additional tax on public corporations paying out record profits to shareholders through relatively efficient means like buybacks of shares. Although the tax has been presented as an encouragement to businesses to reinvest profits into the business, the focus of the tax may be less altruistic.<\/p>\n\n\n\n

What is the Buyback Tax?<\/h2>\n\n\n\n

The Buyback Tax is a new 2% tax on the net value of equity repurchased by a \u201ccovered entity\u201d during the year. The net value is determined using a formula in the draft legislation, and is generally the fair market value of the equity (other than \u201csubstantive debt\u201d) redeemed, acquired or cancelled by the covered entity in the year, less<\/em> the fair market value of equity (other than \u201csubstantive debt\u201d) of the covered entity issued in the year.<\/p>\n\n\n\n

The Buyback Tax only applies if the entity repurchasing the equity is a \u201ccovered entity.\u201d Generally speaking, a covered entity includes a Canadian public corporation, certain partnerships, and certain mutual fund trusts.<\/p>\n\n\n\n

What are the exceptions?<\/h2>\n\n\n\n

The Buyback Tax does not apply on repurchases of \u201csubstantive debt,\u201d which is described in the explanatory notes as equity that possesses \u201cdebt-like characteristics.\u201d There are several defined terms in the draft legislation and a detailed explanation of such terms is beyond the scope of this article.<\/p>\n\n\n\n

The draft legislative proposals also contain a de minimis<\/em> exception, which provides that the Buyback Tax will not apply if the fair market value of equity redeemed, acquired or cancelled by a covered entity in a year is less than $1,000,000 (pro-rated for short taxation years).<\/p>\n\n\n\n

In addition, the Buyback Tax will not apply where the equity is redeemed, acquired or cancelled through a \u201creorganization or acquisition transaction.\u201d Generally, a \u201creorganization or acquisition transaction\u201d includes (provided certain specific conditions are met), among other things:<\/p>\n\n\n\n