Trudeau's election gamble is suddenly reverberating in Canada's C-suites

Ottawa

CANADA'S top executives have been abruptly dragged into what had been a sleepy summer election campaign that was barely on their radar two weeks ago.

Companies from real-estate investment funds to banks and telecommunications firms have been caught in the crosshairs of politicians - from all parties - with the policy debate over the past week tilting towards business taxation and regulation.

Prime Minister Justin Trudeau's Liberals came with new pledges to raise taxes on banks and crack down on housing speculators and the real estate industry. Mr Trudeau's main rival, Conservative Leader Erin O'Toole, announced plans to force federally regulated businesses - about half of the country's 20 biggest companies - to place workers on corporate boards.

That's on top of a tightening race that not only makes the prospect of a majority victory less likely, but could tempt parties to pursue even more populist measures. The Canadian dollar had a middling performance despite a sharp rebound in oil prices - usually a big tailwind for the currency.

"There were some new policy proposals this week that were - shall we say - somewhat surprising," Doug Porter, chief economist at Bank of Montreal, said by e-mail. "While energy prices fully recovered lost ground, the Canadian dollar didn't. Some of this mismatch may be driven by election uncertainty."

It's all building up to be a disappointing turn of events for business, which worked hard in the run-up to the election campaign to make growth and productivity a priority. Instead, the two big parties appear to be taking pages from the left-leaning New Democratic Party (NDP), which promised last week to cut family mobile phone bills by C$1,000 (S$1,066) a year.

Polls suggest the Conservatives and the Liberals are statistically tied, at just over 30 per cent support each. The NDP is hovering near 20 per cent, which would be considered a strong outcome for that party. "What governments should be really obsessed with is making sure that their citizens are well-educated, that they have access to universal healthcare, and that they create the conditions for private capital to help everybody grow," Victor Dodig, chief executive officer at Canadian Imperial Bank of Commerce, said on an earnings call last Thursday. "That is where the world should be going."

Mr Trudeau may have made the biggest news.

Last Wednesday, he pledged to impose a 3 per cent surtax on earnings at Canada's big banks and insurers, along with another obscure tax called the Canada Recovery Dividend, policies that combined are expected to generate a minimum of C$2.5 billion annually for state coffers.

His argument is that the government needs funds to pay for the Liberal Party's new housing policy measures. After all, lenders were big beneficiaries from massive income support programmes that kept many of their clients solvent during the pandemic.

But to some, the sudden need to finance spending rings hollow for a government that is poised to rack up budget deficits totalling more than C$700 billion between 2019 and 2025.

"To me it looks like they're just winging it," said Martin Pelletier, managing director at Wellington-Altus Private Counsel in Calgary. "It looks like, well, everybody hates the banks because they charge so much, well we'll just put a tax on the banks."

There are also concerns that singling out one sector could distort the tax system and create other unintended consequences.

Mark Roe, a professor of corporate law at Harvard University, said that Mr Trudeau's proposal may give Canadian lenders an incentive to artificially lower taxes by financing their businesses through debt rather than equity. "We want banks to hold as much equity as possible in case something goes wrong," Prof Roe said on Friday.

David Dietze, managing principal and senior portfolio strategist for Peapack Private Wealth Management in New Jersey, warned that Canadian banks may choose to take their business to other low-tax jurisdictions. "They are likely to have more operations move out to the US, which is not going to help anyone who is trying to get a mortgage in Canada," Mr Dietze said in an interview last Wednesday.

There are plenty of sceptics of Mr O'Toole too. He's propagating an interventionist, pro-labour and big spending programme that Conservatives haven't offered up in decades. On top of putting workers on boards, for example, he wants to change the labour code to empower unions and help them organise.

The tilt left in policy was always expected in this campaign on the fiscal front. The Bank of Canada's purchases of government debt are helping to mitigate the impact of deficit spending, easing worries that all this spending will be an immediate problem.

"The fiscal die has been cast in the sense that the central banks are picking up the tab," Ed Devlin, the former head of Canadian portfolio management at Pacific Investment Management Company and founder of Devlin Capital, said by phone. "From a market moving perspective, in the short term it's hard to move the markets when the central banks are willing to write the cheques."

That could change if parties start to fiddle with corporate bottom lines. BLOOMBERG