Harper takes a hit

Although his income trust decision was the right thing to do, the PM looks like just another politician breaking his promise

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The Gazette, Friday, November 3, 2006

The prime minister's job is to uphold what Stephen Harper has called "the long-term interests of the country," even at political cost in the short term.

Harper's flip-flop on income trusts is a prime example. As opposition leader a year ago, he hounded the Liberal government practically on a daily basis for halting tax rulings on companies converting to high-yield income trusts, demanding Paul Martin assure investors that trusts "are here to stay."

Relentless pressure from the Conservatives, along with an investor revolt on both Bay St. and Main St., forced the Liberals to relent, days before their defeat in the House. The leak of the botched announcement led to the holiday headline, "RCMP criminal probe" that sealed the Liberals' fate in the campaign.

In his campaign platform, Harper specifically pledged to "preserve income trusts by not imposing any new taxes on them."

Seldom has a campaign promise been so spectacularly broken as this one was after the close of markets on Tuesday, when Finance Minister Jim Flaherty announced a tax on distributions at the front end to recoup lost corporate tax revenues due to lower retained earnings.

On Wednesday, the Toronto Stock Exchange had its worst day in two years. The income- trust index lost $23 billion in market value in a single day. Bell Canada Enterprises, which had recently announced its intention to convert to a trust, lost $3.5 billion in market value. (The markets, however, bounced back a bit yesterday.)

Bell's recent announcement it was converting to a trust structure, following the lead of Telus, was clearly the tipping point. Both Flaherty and Harper said at the time they were following the situation closely. No one then realized just how closely.

In the long-term interest of the country, Harper did the right thing, levelling the playing field between corporations and trusts, and ensuring a higher proportion of earnings is reinvested, particularly in R&D.

In the short-term political interest of his minority government, the Harper brand has taken a major hit on integrity. His entire positioning was that he was new and different, that he would do what he said he would.

Well, he's not new and different anymore. He's just another politician, breaking a promise.

And he broke it with two core Conservative constituencies, senior citizens and the financial community. Retirees, who count on monthly distributions to supplement their pensions, took a huge hit on the value of their investments. Some might have gone into income trusts on the specifics of Harper's broken promise.

As for the markets, there's only one thing they hate more than uncertainty, and that's the rules changing in the middle of the game. It would have been one thing if Flaherty had allowed Bell and Telus to go ahead by grandfathering them out of the new tax rules, as even the NDP was suggesting. It's quite another to tell them that although they played by the rules, the rules were changing retroactively.

This isn't really about tax treatment - Ottawa's revenue leakage was in the hundreds of millions of dollars in a fiscal framework flush with billions in surplus cash. It's about the country's two largest phone companies, in the R&D intensive telco sector, joining the rush to what was becoming, in Flaherty's alarmist turn of phrase, "an income-trust economy."

With a major oil company and a bank rumoured to be joining the trend to trust conversion, Harper and Flaherty evidently decided after the Bell announcement that the time had come for Ottawa to step in.

In process terms, the secrecy held, and no one in the markets saw it coming. It was a very professional job. In packaging terms, the Tories spun the announcement as making corporations pay their share of taxes rather than putting additional demands on the shoulders of working Canadians. For good measure, they threw in income splitting for seniors. In political terms, in the House, the Conservatives carried the day, with the NDP and Bloc Quebecois supporting the move. Only the Liberals, who can't claim the moral high ground on this, shouted about "black Wednesday" and a "day of infamy." And Flaherty, in his best Jimmy Cagney manner, blew them off.

But the larger political question is whether Harper has lost the trust of voters who took him at his word on income trusts.

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