Investment

Taxing share buybacks unlikely to boost investment, experts say

Published

2 years ago

November 8, 2022

OTTAWA — The federal government’s proposed corporate share buyback tax might resonate politically, but experts are doubtful it will encourage companies to invest more into growing their operations.

In last week’s mid-year budget update, the Liberals committed to imposing a two per cent tax on stock buybacks that would go into effect in 2024 and earn the government $2.1 billion in revenues over the next five years.

The policy takes aim at a common tactic used to reward shareholders when a company is doing well. Corporations will buy back their own stocks to reduce the number of shares available on the market, thereby increasing the value of shareholders’ stakes in the company.

Environment Minister Steven Guilbeault recently lashed out at oil companies for making very limited investments in climate action even as massive inflation-driven profits allowed them to pad the wallets of shareholders.

Oil giant Cenovus announced third-quarter profits of $1.6 billion, 192 per cent higher than the same quarter a year ago, and delivered $659 million to shareholders through share buybacks during the quarter.

On Thursday, Finance Minister Chrystia Freeland said the government wants to see Canadian companies “taking their profits and investing them in the productive capacity of Canada and investing them in their workers.”

The proposal follows in the footsteps of the U.S., which passed a one per cent tax on stock buybacks this summer. It also comes at a time of heightened scrutiny of high corporate profits and accusations of “greedflation.”

The measure, however, falls short of the windfall taxes New Democrats have advocated for. Federal NDP Leader Jagmeet Singh said in a written statement that the buyback tax “does nothing for Canadians who need relief from high prices now.”

The federal Conservatives did not respond to a request for their stance on the buyback tax.

“It’s not a bad political move, because I do not think it will offend many voters,” said Rick Robertson, professor emeritus at Western University’s Ivey School of Business.

However, Robertson isn’t convinced the tax will achieve the government’s stated goal.

“I don’t see how this is going to lead to increase corporate investment,” he said, adding that corporations can choose to reward shareholders through dividends instead.

Instead of using a “stick” approach to encourage investment, Robertson said using a “carrot,” such as offering investment tax credits, might be more effective.

Companies have until 2024 to figure it all out.

Corporate stock buybacks are sometimes favoured over dividends because they’re advantageous on the tax front. They also allow companies to send money to shareholders after posting strong profits without having to commit to giving out a higher dividend on a regular basis.

However, Robertson said imposing a tax won’t stop companies from wanting to reward shareholders, and can create a special one-time dividend during a year of strong profits.

David Macdonald, senior economist with the Canadian Centre for Policy Alternatives, agrees the new tax probably won’t spur additional investment.

“What we’ll likely see is a shift away from share buybacks towards dividends,” Macdonald said.

To address this, Macdonald said the federal government could impose a similar tax on one-time dividends, which corporations might use as an alternative to buybacks.

The economist has advocated for imposing windfall taxes on corporations with exceptionally high profits. His recent work shows after-tax corporate profits reached a historically high percentage of the total Canadian economic output in the second quarter of this year.

In contrast, Macdonald’s analysis found workers’ compensation as a share of gross domestic product trended downward, falling to the lowest level since 2006.

On the political front, however, Macdonald said the share buyback tax might be signalling a shift in the federal government’s approach toward corporations, building on other recent Liberal policies, including an increase to the corporate tax rate levied on banks and life insurers.

“It does show some increased skepticism toward the corporate sector doing the right thing.”

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Economy

Energy stocks help lift S&P/TSX composite, U.S. stock markets also up

Published

1 day ago

September 17, 2024

Anne Joseph

TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.

The S&P/TSX composite index was up 34.91 points at 23,736.98.

In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.

The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.

The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.

The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.

This report by The Canadian Press was first published Sept. 17, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX gains almost 100 points, U.S. markets also higher ahead of rate decision

Published

5 days ago

September 13, 2024

Anne Joseph

TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.

“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.

In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.

The S&P/TSX composite index closed up 93.51 points at 23,568.65.

While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.

Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.

But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.

Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.

“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.

“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.

A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.

It would also be “counter to what they’ve signaled,” he said.

More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.

“That’s going to be more important than the size of the cut itself,” he said.

In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.

“Here, the labour situation is worse than what we see in the United States,” he said.

The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.

The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.

The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.

— With files from The Associated Press

This report by The Canadian Press was first published Sept. 13, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

Published

2 weeks ago

September 6, 2024

Anne Joseph

TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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