Canada’s proposal to tax corporate stock buybacks is unlikely to deter oil and gas companies from returning cash to shareholders and may instead put them at a competitive disadvantage, industry officials and analysts said.
Canadian energy companies have been the most active in buying back shares of any sector during the past year, according to CIBC, and also funnelled profits from high prices into dividends and debt payments, limiting new production investments. On Thursday, the Liberal government proposed a 2% tax on buybacks to encourage companies to reinvest in their workers and business.
The tax will generate an estimated C$2.1 billion ($1.6 billion) over five years and take effect on Jan. 1, 2024. The Canadian Association of Petroleum Producers (CAPP) and the Explorers and Producers Association of Canada both said the tax, double of a 1% measure in the United States, would be a competitive disadvantage.
The tax “may have the unintended effect of discouraging investment into Canadian-run businesses while putting the shareholder returns of Canadian investors at risk,” said CAPP President Lisa Baiton.
The tax could especially hurt small companies which have fewer resources, said Michael Belenkie, CEO of Advantage Energy , a 54,000-barrel-of-oil-equivalent-per-day producer. “If you take away the ability to buy back equity when times are good, then you restrict the ability and desire to issue equity when times are bad,” he said.
Canada’s four largest producers – Canadian Natural Resources Ltd, Cenovus Energy, Suncor Energy and Imperial Oil – spent C$15.8 billion combined on buybacks in 2022’s first three quarters, according to Tudor Pickering Holt (TPH).