Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

February 15, 2023
2023-5191

US stock buyback excise tax – Potential implications for Canadian public companies

  • On 27 December 2022, the United States (US) Internal Revenue Service (IRS) released Notice 2023-2 (the Notice), which provides interim guidance on the application of the new 1% excise tax on repurchases of certain corporate stock under Internal Revenue Code Section 4501.

  • The US excise tax applies to stock repurchases made after 31 December 2022.

  • The Notice could have important implications for Canadian public companies with US affiliates. Many Canadian public companies have active share repurchase programs (including through normal course issuer bids), and those repurchases could be subject to the 1% US excise tax to the extent they are funded by their US affiliates.

On 27 December 2022, the US IRS released Notice 2023-2 (the Notice), which provides interim guidance on the application of the new 1% excise tax on repurchases of certain corporate stock under Internal Revenue Code1 Section 4501. The Notice also announces that the Treasury Department and the IRS intend to issue proposed regulations on the application of the new rules.

The US excise tax applies to stock repurchases made after 31 December 2022.

Background

While Section 4501 generally applies to stock repurchases by publicly traded US corporations, the rule also extends to repurchases of foreign corporation stock by an “applicable specified affiliate”— i.e., a domestic US subsidiary of a publicly traded foreign corporation. While that aspect of the statutory rule is conceptually reasonable in certain circumstances, the Notice introduces a very broad “funding” rule that could deem a US affiliate of a public Canadian corporation to be subject to the 1% excise tax if the affiliate “funds by any means (including through distributions, debt or capital contributions) the acquisition or repurchase” of the Canadian corporation’s stock. While the Notice also includes a “principal purpose” test as a condition to the application of the rule in this context, that aspect is deemed satisfied if the funding requirement is met and the funded Canadian entity acquires or repurchases stock within two years of the funding. The Notice provides that the funding rule applies to a funding that occurs on or after 27 December 2022.

Potential implications for Canadian public companies

The Notice could have important implications for Canadian public companies with US affiliates. Many Canadian public companies have active share repurchase programs (including through normal course issuer bids), and those repurchases could be subject to the 1% US excise tax to the extent they are funded by their US affiliates. Furthermore, in 2024, Canadian public corporations may have the same stock repurchase also be subject to the proposed 2% Canadian corporate tax on share buybacks.2

As the US regulations will be effective for stock repurchases made after 31 December 2022, Canadian public companies with share buyback programs should take steps now to limit their exposure to the 1% US excise tax. Although the precise application and scope of the “funding” requirement will not be known until the proposed US regulations are released, consideration should be given to potential options to avoid using any US affiliate funding (including employing well-known Canadian planning techniques, such as cash-damming).

See EY Global Tax Alert, US | Interim guidance on stock buyback excise tax offers mixed bag for corporate taxpayers, dated 1 February 2023 for a detailed discussion of the interim guidance provided to date with respect to the US stock buyback excise tax.

_________________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (Canada), Toronto

Ernst & Young LLP (Canada), Quebec and Atlantic Canada

Ernst & Young LLP (Canada), Prairies

Ernst & Young LLP (Canada), Vancouver


Endnotes

  1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.

  2. For more information, see EY Tax Alert 2022 Issue No. 42: Federal Fall Economic Statement 2022.

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.

 


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or ey.com. Please refer to the privacy notice/policy on these sites for more information.


Yes, I accept         Find out more