Tax Cuts Bad for Corporate Canada

Tax Cuts Bad for Corporate Canada

The announcement from Canada's telecom regulator that it would end unlimited-use INTERNET plans unleashed a populist uprising that swept the nation. Hundreds of thousands of irate Web surfers signed an online petition opposing the decision, and the issue was blogged, shared and tweeted to no end. Amidst all that seething, though, only one opinion really mattered. "I will be reviewing CRTC decision forthwith with a view to protecting Canadians & promoting choice," federal Industry Minister Tony Clement declared via his Twitter account. And with that, a 98-character missive threw the $60-billion TELECOMMUNICATIONS sector into chaos.

As the weather vane of public opinion swings, so do Canada's policies toward business. Over the past two years, there have been repeated cases where Ottawa has stunned investors with populist decisions that took precedence over sound policy. The moves raise the question: is the supposedly laissez-faire government of Prime Minister Stephen HARPER actually hurting Canada's reputation as a stable and open market for business and investment? "No one likes risk and these interventions add yet another source of uncertainty when it comes to investing in Canada," says Stephen Gordon, a professor of economics at Université Laval. "Clearly we're not Russia, but then again, we're not the Canada we used to be, either."

But while critics like Gordon may be concerned, corporate Canada is mostly silent. With tax cuts on the table, instability is a price executives seem willing to pay. Besides, with federal politicians deep into the business of picking winners and losers, companies are keen to stay on the winning side.

No issue has sparked as much public fury as Internet download limits. In its ruling, the Canadian Radio-television and Telecommunications Commission ordered that major telecoms, which are required to sell Internet capacity to smaller independent providers, can now charge for usage above certain limits. As it is now, the big providers, Telus, Bell Canada, Shaw and Rogers (which owns Maclean's) all impose download limits, while independents have been free to offer unlimited access. In response to Clement's knee-jerk statement, the CRTC has delayed the changes for 60 days while it reviews its decision.

It wasn't the first time Clement intervened in the name of consumers. At the end of 2009, he overturned another regulatory ruling that barred an Egyptian-owned wireless company, Globalive, from setting up shop. In rejecting that decision, Clement said his edict would "enhance competition for the benefit of consumers ... by giving more choice at better prices and higher quality."

The move seemed to send a loud message to the business world: all you coddled industries reaping huge profits thanks to long-established oligopolies, watch out - this is a government willing to stick up for the little guy. So when Emirates Airlines, the flag carrier for the United Arab Emirates, pressed for the right to fly more planes between Toronto and Dubai, Air Canada might have been in trouble. Not so. Instead, the Tories went to the mat for the airline, which claimed Emirates would undercut it with cheap fares. In other words, intense competition from Emirates, an airline regularly ranked among the top 10 in the world for customer service, would give consumers more choice at better prices and higher quality.

In short, it's impossible to tell which way the Tories will come down on big issues, says Gordon. "The government should announce what the Prime Minister had for breakfast each day, because it's probably the best predictor of what the government will decide on a given file," he says.

The hit-and-run approach to economic policy has left chaos in its wake. Fourteen months after the arbitrary decision to open Canada's doors to Globalive, that industry and others that are heavily regulated, such as airlines and financial services, remain in the dark as to what the country's stance on foreign ownership is. Just last week the Federal Court ruled the government's Globalive decision was "based on errors of law," throwing the industry even deeper into confusion.

It's possible the Conservatives' decision on download limits will face a similar court challenge, creating even more long-term uncertainty. "It's always difficult for businesses to operate when you're in a policy vacuum and these ad hoc policies aren't clearly telling anyone what's going on," says Adam Fremeth, a professor at the Richard Ivey School of Business. "There has to be a clearly understood framework so if you make an investment, you know how it's going to be treated for the long term, and that is missing."

Nowhere is that more apparent than in Canada's relatively slapdash approach to foreign investment. Many were stunned when the bid from Australia's BHP Billiton to buy Potash Corp. was rejected, especially since the same government previously allowed companies such as Inco, Falconbridge and Stelco to fall into foreign hands. But after Saskatchewan Premier Brad Wall whipped up opposition to the deal on the grounds Potash is a "strategic asset," Ottawa put its foot down. The rejection followed a 2008 move in which MacDonald, Dettwiler and Associates was blocked from selling its space division to a U.S. buyer. Lawmakers voted in November to review the Investment Canada Act, but for now, it's not clear how the government would respond to a high-profile U.S.- or Chinese-led corporate takeover. In a recent report, UBS Investment Research warned of the dangers should Canada become a "political economy." Foreign investors "may begin to perceive Canada as not 'open for business,' which could potentially have adverse implications for the valuation of Canadian stocks."

Other businesses could find themselves in Ottawa's crosshairs. Recent policy changes have broadcast a clear message: gripe loud enough and Ottawa will swing into action. "The more the government reflexively reacts to public pressure by stepping in to placate the disappointed, the more it incents future stakeholders to induce such pressure, thus establishing a political dynamic that will feed on itself," wrote Richard French, a former vice-chairman of the CRTC and a professor at the University of Ottawa.

The retail sector, for one, appears ripe for a populist revolt. Many consumers are convinced stores in Canada haven't lowered their prices to reflect the soaring loonie. Finance Minister Jim Flaherty has chastised retailers for their higher prices. Could Facebook groups - such as "Make Retailers Lower Their Prices in Canada and Stop Ripping Us Off!" - spur the next uprising?

A puzzle in all of this is the silence from Canada's business community. One might expect business groups, such as the Canadian Council of Chief Executives or the Chamber of Commerce, to take a dim view of the corporate activism coming out of Ottawa. Economic policy by Twitter is a recipe for chaos, no? One reason for their muted reaction is that the Tories have positioned themselves as the champions of further corporate tax cuts in the upcoming budget, while the Liberals and NDP have come out against them. Business leaders also generally like what they've seen from the Conservatives on issues of free trade with Europe and India, as well as the perimeter agreement with Washington. And with the Conservatives in a minority government, populist gambits are seen as an unfortunate inevitability, so long as an election is always just right around the corner.

But above all, some companies stand to benefit from an activist Ottawa, which invariably translates into more taxpayer money flowing their way. It's a fallacy that business reflexively opposes government intervention in the economy. Any time politicians pick winners and losers, companies will try to insert themselves into the winning group. And that entails keeping mum.

Observers, however, say the Harper government should tackle uncompetitive industries at the source - by unravelling decades of outdated foreign ownership controls that led to so many entrenched oligopolies in the first place. It should start by dismantling the CRTC, says Herbert Grubel, a senior fellow at the Fraser Institute. "It's a fatal deceit to think anybody, Tony Clement or the CRTC, knows what's best for individuals," he says.

For what it's worth, renegade Tory MP Maxime Bernier let slip on a Halifax radio show that the Conservative government plans to table legislation to let foreign companies into Canada's telecom market. Shortly thereafter, Clement's office said only the industry minister is authorized to speak on the file, and he has nothing to say on the matter.

Should that change, just watch Twitter.

APR 2008

The sale of MDA's space division to a U.S. firm is blocked

DEC 2009

A CRTC decision that says Globalive violates foreign ownership rules is overturned

NOV 2010

Australia's BHP is prevented from buying Potash Corp. - a 'strategic asset'

FEB 2011

The CRTC's decision on Internet download limits for independent ISPs is overturned

FEB 2011

A Federal Court rules government action on Globalive is null and void

Maclean's February 21, 2011