Share buyback tax: Definitions matter
Additional changes to the Income Tax Act are necessary to ensure that exceptions to the proposed share buyback tax are correctly implemented.
In a nutshell: A proposed tax on repurchases of equity could inadvertently impact certain acquisition transactions involving Canadian public corporations which, from a policy perspective, should not be subject to the tax. This is primarily due to technical issues with the existing definition of “reorganization transaction,” writes the Joint Committee on Taxation of the CBA and Chartered Professional Accountants of Canada.
Getting the exemption right
Under a proposed new subsection 183.3(2) of the Income Tax Act, the redemption, acquisition, or cancellation of equity of a "covered entity" could trigger a share buyback tax, where corporations repurchase their shares from existing shareholders. However, the provision includes a carve-out for situations involving a “reorganization transaction.”
In its letter, the joint committee identifies several situations that, under the current definition of “reorganization transaction,” would be subject to the share buyback tax, but shouldn’t:
- When there is no change in the ownership interest of the ultimate shareholders, nor a distribution of corporate funds to shareholders.
- In certain wind-up situations, where a target company owned shares or debt of the acquisition company prior to the wind-up.
- Also problematic are some acquisitions by way of a share exchange, where a third-party acquisition of the target company is subject to the share buyback tax simply because the transaction involves both share and non-share consideration.
Recommendation
Because the scenarios identified above do not qualify as reorganization transactions, the carve-out for the share buyback tax wouldn’t apply. Therefore, the Joint Committee proposes several amendments to the definition of “reorganized transactions” to clarify exemptions to the buyback tax.
Read the full submission.
