On November 28, 2023, the Department of Finance tabled a Notice of Ways and Means to introduce Bill C-59 entitled An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023. Bill C-59 completed its first reading in the House of Commons on November 30, 2023 and is currently undergoing a second reading.
Bill C-59 includes proposed changes to the equity buyback tax rules, which were initially announced in the 2022 Fall Economic Statement, followed by proposed legislation released in the 2023 Federal Budget and revised proposed legislation released on August 4, 2023.
The proposed tax is a two percent tax on equity repurchases by public corporations and other "covered entities" on the net value of equity repurchased by the entity in a taxation year (the "Repurchase Tax"), which will apply to repurchases and issuances of equity that occur on or after January 1, 2024.
Entities Subject to the Repurchase Tax
The Repurchase Tax applies to a "covered entity", which generally refers to a Canadian-resident corporation whose shares are listed on a designated stock exchange (excluding a mutual fund corporation), a mutual fund trust that is a real estate investment trust, a specified investment flow-through (SIFT) trust and a SIFT partnership, to the extent such entity has units listed on a designated stock exchange. Moreover, publicly traded entities that would be SIFT trusts or SIFT partnerships notwithstanding that their "non-portfolio property", "real, immovable or resource property" or "timber resource property" (as defined in the ITA) are located or situated outside of Canada, are also subject to the Repurchase Tax.
Calculation of the Repurchase Tax
In general terms, the Repurchase Tax is equal to two percent of the excess fair market value ("FMV") of equity that is repurchased by the entity in a taxation year over the FMV of the equity issued from treasury. More specifically, the current proposed legislation has set out the formula for calculating the Repurchase Tax as:
0.02 x (A + B – C)
Where:
Variable A: the total FMV of equity (other than "substantive debt", as summarized in general terms below) of the covered entity that is redeemed, acquired or cancelled in the taxation year other than equity that was redeemed, acquired or cancelled in a "reorganization transaction" (as summarized in general terms below) or that was acquired from a specified affiliate where certain conditions apply;
Variable B: in the event of a share exchange or an amalgamation as described in paragraphs (a) or (b) in the definitions of a "reorganization transaction", the total FMV of the portion of equity (other than substantive debt) that is redeemed, acquired or cancelled by the covered entity in exchange for non-equity consideration; and
Variable C: the total FMV of equity (other than substantive debt) that is issued by the covered entity in the taxation year.
Generally, the definition of a "reorganization transaction" for purposes of the Repurchase Tax calculation, includes: (a) a share exchange; (b) an amalgamation pursuant to subsection 87(1) of the ITA; (c) a wind-up of the covered entity; (d) a reorganization pursuant to subsection 55(3) of the ITA (commonly referred to as a butterfly transaction); (e) certain dispositions of property to a trust; (f) certain dispositions of property by a mutual fund trust; (g) certain redemptions of equity in a unit trust; and (h) an exercise of a statutory right of dissent by a holder of the equity. Repurchases of equity carried out in the context of transactions that are captured by the definition of reorganization transaction are generally excluded from the calculation of the Repurchase Tax.
The term "substantive debt" as referred to in Variables A, B and C above, pertains to equity that possesses debt-like characteristics (i.e., non-convertible, non-exchangeable, non-voting and fixed value distributions). As a result, issuances and repurchases of equity that fit within the definition of "substantive debt" are excluded from the formula for computing the Repurchase Tax.
Acquisition by Specified Affiliates
The Repurchase Tax rules also apply where the equity of a covered entity is redeemed, acquired or cancelled by a specified affiliate of the covered entity. A "specified affiliate" is a corporation, trust or partnership that (i) is controlled by the covered entity; or (ii) more than 50% of the equity of the affiliate is owned, directly or indirectly, by the covered entity. The acquisition of equity by specified affiliates of a covered entity is deemed to be acquired by the covered entity itself. Exceptions to this rule are provided to facilitate certain equity-based compensation arrangements and acquisitions made by registered securities dealers in the ordinary course of business, employee profit-sharing plans and deferred profit-sharing plans.
There is, however, an anti-avoidance rule that deems a person or partnership to be a specified affiliate where it is reasonable to consider that one of the main purposes of the transaction or series of transactions is to cause a person or partnership to acquire equity of a covered entity to avoid the Repurchase Tax otherwise payable.
Anti-Avoidance Rule
With respect to the formula for computing the Repurchase Tax, the proposed legislation contains an anti-avoidance rule that will deem certain inclusions under Variables A or B and exclusions under Variable C to occur, as the case may be, where it is reasonable to consider that the primary purpose of the transaction or series of transactions is to cause a decrease in the amount under Variables A or B or an increase in the amount under Variable C.
De Minimis Rule
A de minimis rule is provided such that the Repurchase Tax will not apply where an entity repurchases less than $1 million of equity in a taxation year (pro-rated for short taxation years), determined on a gross basis.
Filing and Payment
Entities that are subject to Repurchase Tax rules must file a tax return in prescribed form and pay any applicable tax on repurchases of equity. If the entity is a corporation, it must file the return on or before the day it is required to file its income tax return. If the entity is a trust, the return must be filed within 90 days from the end of its taxation year. If the entity is a partnership, the return must be filed before the earlier of the day that is five months after the end of the taxation year and March 31 in the calendar year immediately following the calendar year in which the taxation year ended.
If Bill C-59 passes the remaining stages of the legislative process and becomes law, the Repurchase Tax rules will apply as of January 1, 2024. The proposed legislation does not include grandfathering rules that would apply to exclude equity that is outstanding prior to the coming into force date or to repurchases that have been agreed to prior to the coming into force date but that will be implemented after 2023.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
