Osler tax lawyer Colena Der says the draft tax proposals show Ottawa following the US's lead
The draft tax legislation the federal government released last month includes a new tax for share-buybacks and tax credits for clean technology and investment in carbon capture, utilization, and storage (CCUS).
On the tax credits aimed at boosting the clean-energy sector, clients are happy that the government has followed the US’s lead and recognized that financial support is necessary to meet Ottawa’s net-zero ambitions, says Colena Der, a tax lawyer and partner at Osler Hoskin & Harcourt LLP in Calgary.
But she says there has also been feedback from stakeholders that the government should reconsider the proposals to better align with the US and so that they are more effective at meeting the goals for which they are being introduced. Some of the feedback has focused on widening the scope of the credit and adjusting the eligibility criteria to ensure that the credits work with common investment and holding structures. “The credits can be better aligned with commercial realities,” says Der.
The clean technology investment tax credit covers 30 percent of the cost of new machinery and equipment used for clean technologies, such as zero-emission electricity generation and storage systems or critical mineral extraction, processing, and recycling.
“It's significant because it’s one of the key financial supports that the federal government is putting in place to support the development of renewable energy projects in Canada,” says Der.
Ottawa has also proposed a CCUS investment tax credit to support the investment in technologies that capture, transport, store, and sequester carbon. The credit for CCUS is up to 60 percent for some types of equipment, and expenditures made after 2021 are eligible.
In the draft legislation, the proposed share-buyback tax is two percent of the difference between the value of the shares that a public company buys back and the value of shares that they issue over a year. There are exceptions concerning what counts as a buy-back and what is treated as a credit, and, overall, the formula for computing the credit is complicated, nuanced, and includes exceptions, says Der.
“But the heart of it is that the government's trying to levy taxes where a public issuer has, on a net basis, bought back more shares than what they've issued,” she says. “It's getting some interest because a lot of large companies do regularly buy back their shares in the market.”
Der notes that the feds levy the tax on the corporation buying back the share, not the shareholders whose shares are repurchased.
“At this stage, it's too early to say whether or not this tax on share buybacks and the cost to the corporation is going to change the behaviour of the company in terms of how much and how frequently they buy back their shares,” she says.
