By Roger Conrad
  December 19, 2006
  Maple Leaf Memo

By Roger Conrad & David Dittman

Liberal Party Leader Stephane Dion said Monday he won’t support a Bloc Quebecois threat to introduce a motion of nonconfidence if Prime Minister Stephen Harper doesn’t overhaul Canada’s military mission in Afghanistan. The Bloc is looking for an excuse to provoke a quick election before Liberals can get organized, according to Dion.

Despite leading by healthy margins in recent national polls, Dion is in no rush to go before Canadian voters. In naming Liberal leadership rival Michael Ignatieff as his chief deputy and promising to name other vanquished former foes to top jobs, he seemed to put in motion preparations for a quick election. The first move: establishing a broad intra-party base by placating supporters of other leadership candidates.

But a post-leadership election bounce isn’t rare in Canadian political history. Nor are the stories of leaders who failed shortly after similarly memorable honeymoons. Some cracked under campaign pressure; others fumbled election victories shortly after riding into power.

At some point, Dion will have to consolidate his authority around a real message. Rather than pick up the pieces bare-handed if Bloc Quebecois broke the government over Afghanistan, Dion wants to have his gloves, broom and dustpan.

Bloc leader Gilles Duceppe would have injured the Conservatives and put them out of the game, but the Liberals could have gotten hurt in the pile-up. Canada’s involvement in Afghanistan began under one Liberal prime minister and was endorsed by his successor. Jean Chrétien and then Paul Martin made Afghanistan a military and aid priority. And the prime minister outmaneuvered them earlier this year when, on the threat of forcing another election, parliament approved extending the mission until 2009.

This isn’t a winner-take-all horse race. They have real, live third–and even fourth–parties up north; they like to participate in government, and a decent number of voters are happy that they do. Simple rules of power apply to even the little players, too, though: They want more.

Duceppe may have hoped to force the Liberals and Dion to take an “aye or nay” stance on the war in Central Asia, trigger an election and pick up more parliamentary seats. Of the candidates for the Liberal leadership, Dion was the least popular in Quebec.

Or it could simply be a matter of wanting to embarrass and further discredit a chief rival for votes before he has time to turn around those poll numbers.

But Dion won’t play, not yet at least, and not according to Duceppe’s rules.

“We’ll prepare for an election, but it doesn’t seem to me that Canadians want an election in the middle of winter,” Dion said. The Liberals and the Bloc do battle in Quebec. Dion was born in Quebec City, and since 1996, he’s been the Member of Parliament for the riding (think congressional district) of Saint-Laurent-Cartierville in Montreal.

When Dion speaks of being prepared for an election, he means he wants to be in a position to win a majority. In the drive to 50 percent, plus one, his home province will be a key battleground; he’s not popular there now, but he can only go up.

The Conservative government may survive a possible Afghan motion, but it can face confidence tests almost any time once Parliament returns from its Christmas break on January 29. It will have to win support for its annual budget, and opposition parties can introduce confidence motions on any topic throughout the session.

Time Is (Still) On My Side

In the Parliament of Canada, as in all legislative assemblies based on the British model, there’s a clearly defined method for enacting legislation. A bill must go through a number of specific stages in the House of Commons and the Senate before it becomes law:

All bills must go through the same stages of the legislative process, but they don’t necessarily follow the same route. Three possible avenues now exist for the adoption of legislation:

• After appropriate notice, a minister or a member may introduce a bill, which will be given first reading immediately. The bill is then debated generally at the second reading stage and sent to a committee for clause-by-clause study.
• A minister may move that a bill be referred to a committee for study before second reading.
• A minister or a member may propose a motion that a committee be instructed to prepare a bill. A bill will be presented by the committee and carried through the second reading stage without debate or amendment.

Regardless of the avenue that the sponsor decides to take, the bill will then have to go through report stage, be read a third time and sent to the Senate for passage before receiving Royal Assent. At the start of a new session, a government public bill may be reinstated at the stage it had reached at the time of prorogation, if the House agrees. Private members’ bills are automatically reinstated at the same stage.

A bill can become law only once the same text has been approved by the Houses of Parliament and received Royal Assent.

The process can be prolonged. Finance Minister Jim Flaherty said Monday that he still hopes to release a draft bill before Christmas for consultation. And then it goes into the parliamentary ringer. That clock doesn’t start until January 29.

There’s a good chance any bill Flaherty produces won’t see a vote. It may take a little more time, but income trust tax may yet fall along with the Conservatives.

Flaherty announced guidelines Friday under which existing income trusts will be allowed 100 percent growth between now and 2011.

Moreover, mergers of trusts will be allowed; trusts are free to convert to share-based corporations without facing tax consequences; and outstanding debt, as of October 31, can be replaced with new equity through a debenture conversion or another investment vehicle. Nonconvertible debt can still be issued, as long as it isn’t converted back to equity.

(For more on the implications of the new guidelines for Canadian Edge Portfolio trusts, see yesterday’s Flash Alert to subscribers.)

The guidelines say income trusts would be able to sell stock worth as much as 100 percent of their current market value during the next four years. For smaller trusts, the sale of shares for less than CD50 million in each of the four years would be exempt.

A particular trust’s market capitalization will be determined by existing units trading on the market and won’t include debt or options.

Conservative Portfolio

RioCan REIT (REI.UN, RIOCF) is entering into a cross-border joint venture with Ramco-Gershenson Properties, an owner of 81 shopping centers in the Midwest and southeastern US. Under the proposed deal, RioCan would become a 70 percent partner in eight to 13 shopping centers owned by Ramco with a value of about USD450 million. The two real estate investment trusts (REITs) plan to expand their holdings by another USD1 billion through development and redevelopment opportunities, with Ramco collecting fees for managing the portfolio. RioCan has also taken a 4.5 percent equity stake in Ramco and has warrants that allow it to double that holding within the next three years. The long-term pact could involve expansion to other parts of the US.

US operations could come to represent as much as 50 percent of RioCan’s cash flow. Such growth would seem to run afoul of new income trust tax reform measures that require REITs to hold 75 percent of their property in Canada to remain tax exempt. But the venture will take some time to grow to that size, and by then, those foreign limits could be altered. The agreement allows RioCan to bring in institutional investors if the venture becomes too big or if the Canadian government doesn’t change the proposed rules. Buy RioCan up to USD23.

Aggressive Portfolio

Fording Canadian Coal (FDG.UN, NYSE: FDG) will complete an internal reorganization on Jan. 1, 2007, in order to convert into a royalty trust. Fording changed the original terms of the reorganization (described in the management information circular dated March 31, 2006) based on the trust taxation proposal. Fording’s trustees have determined that the royalty reorganization can be completed by way of an internal reorganization in the existing trust, without requiring the trust to transfer all its assets to a new trust. Following completion of the transaction, Fording will no longer be subject to the nonresident ownership restrictions applicable to mutual fund trusts under the Income Tax Act of Canada. Fording has received a favorable tax ruling from the Canada Revenue Agency that will allow it to proceed with the reorganization. Fording is a sell.

Newalta Income Fund (NAL.UN, NALUF) boosted its annual capital budget by 25 percent for 2007 to CD148 million, an affirmation of the fund’s growth prospects. Newalta has budgeted CD28 million for maintenance and CD120 million for investments in internal growth opportunities. The fund intends to exploit what it calls relatively low-risk, high-return investments that will improve productivity and expand services as well as market coverage. Buy Newalta up to USD30.

Precision Drilling (PD.UN, NYSE: PDS) is making a special year-end payout to unitholders of 19.5 cents Canadian per unit. The special distribution, valued at about CD24.5 million in total, will be made in stock rather than cash to allow Precision Drilling to minimize debt levels and retain balance sheet strength to fund planned asset growth. The one-time payout will also ensure that 2006 distributions are equal to Precision Drilling’s taxable income for 2006, as required under its trust declaration.

After the special distribution, Precision Drilling will consolidate its units as well as Class B limited partnership units so the number of trust units outstanding won’t change as a result of the payout. Precision Drilling also said that it’s immediately suspending its distribution reinvestment plan until further notice and that the program won’t apply to distributions declared on or after December 18. The trust said it will stick to its current level of spending in 2007, with plans to invest about CD285 million to expand and perform productive capacity maintenance on its assets. Precision Drilling is a buy up to USD33.