The government of Canada's Prime Minister, Justin Trudeau, took steps to settle competition rules with American companies yesterday, Thursday, as it announced a 2% tax on stock buybacks and offered 6.7 billion Canadian dollars (4.9 billion dollars) in tax exemptions for clean (environmentally friendly) technology companies over five years.

The buyback tax is scheduled to be imposed on the net value of all types of stock repurchase transactions by publicly traded companies in Canada. The tax in Canada is twice the size of the 1% excise tax on buybacks under a law signed by U.S. President Joe Biden as part of the Inflation Reduction Act announced in August.

At the same time, the stance on clean technology will provide a refundable tax exemption equal to 30% of the capital costs for investments in emission-free technologies and solutions for battery storage and clean hydrogen.

The government said in the economic fall statement: "After the adoption of the Inflation Reduction Act in the United States, the need for a competitive tax exemption for clean technology in Canada has become more important than ever."

A senior government official said Canada considers American measures as an ambitious and bold industrial policy requiring a swift response. The official clarified that the U.S. law aims to attract foreign direct investment to become a global leader in clean technologies.

The official pointed out that the tax exemption is just an initial part of Canada's response. The government statement mentioned that additional measures will be announced in next year's budget.

The 2% tax on stock buybacks will come into effect on January 1, 2024. Federal revenues are expected to increase by 2.1 billion Canadian dollars over five years.

Coll Smead, President and Portfolio Manager at Smead Capital Management, based in Phoenix, said: “I think it is a surprising decision, but I don’t think it will change the marginal allocation of capital.” His company invests in Cenovus Energy, a producer of oil sands, which spent 659 million Canadian dollars to repurchase 29 million of its shares in the third quarter.

Smead said about the tax on buybacks, which he described as targeting undistributed capital: “It is still cheaper than dividends... and it is also less than wealth tax, or excess savings tax.”

The largest six banks in Canada have spent about 9.76 billion Canadian dollars to repurchase shares since the Office of the Superintendent of Financial Institutions lifted restrictions on this practice a year ago.

As in the United States, the new tax aims to penalize companies that seek to reward shareholders through stock buybacks, and instead encourage them to reinvest the money in hiring workers and opening businesses in Canada.