Oilpatch says Ottawa’s tax on stock buybacks targets energy companies

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The tax is expected to generate $2.1 billion in revenue for the federal government over five years

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Ottawa’s plan to introduce a 2% tax on corporate stock buybacks may not be a windfall tax on oil profits as the US is proposing, but the oil industry still thinks that This is a policy designed to specifically target energy companies that have made profits in shareholder returns.

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Unveiled in Ottawa’s fall economic update on Thursday — and touted as a way to encourage businesses to invest in their workers and businesses — the stock buyback tax will come into effect Jan. 1, 2024 and is expected to generate $2.1 billion in revenue for the federal government over five years.

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“It’s a dart in the energy industry’s forehead,” Canoe Financial’s Rafi Tahmazian said, reacting to the news. “The only way to get more energy is to incentivize the industry and they are doing the opposite.”

Finance Minister Chrystia Freeland said the tax would be similar to the 1% redemption tax contained in the US Inflation Act enacted earlier this year.

The announcement comes amid quarterly results from the energy sector. As energy prices fell from their 2022 highs following Russia’s invasion of Ukraine, global supplies remained tight and oil and gas companies continued to rake in strong earnings this quarter.

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Cenovus Energy Inc., Imperial Oil Ltd. and Canadian Natural Resources Ltd. all reported higher profits in the third quarter of 2022 compared to the same period last year, amounting to nearly $10 billion in profits. Each of the companies has spent heavily this year on stock buyback programs, with Imperial this week announcing a substantial $1.5 billion takeover bid to repurchase stock from investors.

Canadian oil and gas companies have emerged from a prolonged decline in energy prices in 2021 with a renewed focus on shareholder returns in an effort to attract investment, with most companies avoiding spending on new projects in favor of debt repayment, dividends and share buybacks – a pattern that has taken root as investors reward companies that care about shareholder returns, while simultaneously punishing organizations that have increased their capital expenditures .

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It is not yet clear how companies will react to the new policy, although some experts are predicting a deluge of share buybacks by the time the tax takes effect in January 2024.

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In a statement Thursday, Canadian Natural said it would wait to hear details of the new tax before commenting. “That said, ensuring energy security requires a strong oil and gas sector, which also generates substantial and positive social and economic benefits for Canadians,” the company said.

Some energy investors have predicted that companies will prioritize dividends over buyouts from 2024. Few people believe that the result of a buyout tax will be an investment in operations.

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“We’re getting mixed messages from the federal government regarding production,” said Tristan Goodman, president of the Explorers and Producers Association of Canada. “What we’ve been hearing or hearing for many years is that we’re ready to move away from increasing production, and I think that has now changed.”

Goodman said the Canadian energy industry has struggled to attract investment and has therefore focused on increasing shareholder returns to maintain investor interest in the sector – a pattern that ‘he doesn’t expect to be disrupted by the new tax.

“The industry will adapt to this, but it certainly doesn’t help or support investment in Canada,” he added.

• Email: mpotkins@postmedia.com | Twitter:

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