Does selling oil stocks to avoid the 66% capital gains inclusion rate make sense?

Not to me

The Executive Chairman of Cenovus recently sold $25 million in CVE stock, ostensibly to avoid the 66% inclusion rate according to the “experts” on X. If Alex Pourbaix intended to sell before the increased rate, the question is academic and his decision makes sense.

But the Twittersphere is all over me for suggesting that it might be interpeted as a view that future Cenovus performance may be less than most investors think, and most of comments claim it was to avoid the increased tax rate.

Let’s explore that logic.

Selling $25 million in stock for a capital gain of (say) $15 million at a 50% inclusion rate and a 50% margin tax rate implies taxes on the gain of 15 x .5 x .5 = $3.75 million.

Tax on the same gain at a 66% inclusion rate is 15 x .66 x .5 = $5 million.

Net net, a “saving” of $1.25 million, quite worthwhile if you are going to sell anyway.

But if you were not going to sell but for the rise in capital gains tax, the decision is a bit iffy.

First, the capital gains tax increase will not survive a new government under Pierre Poilievre if he is elected in 2025 which seems likely to me. Paying $3.75 million of taxes now versus $3.75 million of tax in a post-Trudeau government does’nt seem like it was motivated by taxes, which are in common.

After-tax, Mr. Pourbaix received $21.75 million for the stock he sold, if the above assumptions are right. I believe it likely his decision to sell reflects his earlier decision to step down as CEO and accept the role as Executive Chair with an eye on retiring from active management relatively soon. In that context, his sale makes sense.

But if he planned to remain in post for several years, and had a positive view of the outlook for Cenovus operating performance and in return dividend rates and potentially higher share prices, the decision was questionable.

I dont’ think it was bullish news for Cenovus. It is hard to come up with a narrative that suggests it was a bullish news item.

Leaving aside Cenovus. selling in June 2024 to avoid a 66% inclusion rate likely to be repealed in late 2025 or early 2026 indicates a trader mentality and a desire to realize gains, not a view that an investment is going to appreciate further in trading price or is worth holding for a long term stream of dividends.

The whole “sell to avoid the tax rise” narrative is simply lost on me in most cases.