The election and investors

I’ve been a keen observer of the Canadian political scene for 45 years, dating all the way back to 1963 when I was named as Quebec correspondent for The Gazette of Montreal. During all that time, I cannot recall an election being called for more flimsy reasons than this one.

The Conservative government was not defeated in the House of Commons and, with a little skillful manoeuvring, probably could have remained in office until the fixed election date in October 2009. The Tories have no burning national issue that requires a stamp of approval from voters before it can be implemented. The only obvious reason for a vote now is that the Conservatives are ahead in the polls and see the possibility of a majority government. And they may be right.

Obviously, investor concerns are not going to determine the outcome of this vote. However, they may tip the balance for some individuals who don’t have strong commitments to a political party. So let’s take a look at some of the investment-related issues that are likely to surface in the next few weeks.

Income trusts. There is certainly some lingering resentment over the government’s decision to tax income trusts. As things now stand, the new tax will likely kill off the sector by the 2011 implementation date.

Shortly after Finance Minister Jim Flaherty announced the move, the Liberals put forward an alternative plan that would reduce the tax rate to 10% and make it refundable to Canadians. We haven’t heard much about that option since but it will probably be a talking point during the campaign, especially among seniors.

With Canadians more focused on macro issues like the economy, it’s doubtful that income trusts will be any more than a fringe topic in the debates to come. But it might tip just enough votes in close ridings to make a difference.

Capital gains. Most voters didn’t give a hoot about the Conservative promise in the last campaign to radically change the way in which capital gains are taxed in Canada. But those few who liked the plan had high hopes that the government would follow through.

In case you’ve forgotten (as many people have), the idea was to eliminate all taxes on capital gains as long as the money was reinvested within a specific time frame (six months was the target). Such a policy could potentially be worth tens or even hundreds of thousands of dollars in some cases. For example, a family cottage that had appreciated in value over many years could be sold and the money invested in securities without attracting any tax.

But once the Conservatives gained power, the green-eyeshade folks at Finance shredded the whole idea. It would cost far more than the Tories had estimated, they said, and would be a nightmare to administer. The program died with only a few squawks of protest and it’s unlikely we’ll hear much, if anything, about capital gains taxation from any of the parties in this election.

TFSAs. The most imaginative and potentially the most rewarding investor initiative taken by the Harper government was the introduction of the tax-free savings account (TFSA). However, the Conservatives probably won’t get much credit for it on Election Day because the program isn’t in effect yet (it begins Jan. 1, 2009). So no one has actually benefitted from it yet.

In fact, there hasn’t really been much buzz about the program, which has the potential of being the most attractive government-sponsored savings plan since the introduction of RRSPs back in the days of John Diefenbaker. Things might be different if the election were taking place a year from now.

The stock market. The Conservative attacks on the Liberal Party’s controversial Green Shift started during the summer but the rhetoric is about to heat up. We’re going to hear a lot about the effect the policy could have on the price of gasoline, home heating, air fares, and everything else that is runs on petroleum-based products or is made from them. The Liberals will counter by stressing the importance of taking meaningful action on the global warming file and promising that for most people the cost of a carbon tax will be offset by reductions in personal income taxes.

What we probably won’t hear a lot about is the impact the Green Shift could have on the Canadian stock market. Quite simply, it would likely send the TSX into its deepest slump in years.

Energy stocks represent about 30% of the S&P/TSX Composite Index. When financials, the other pillar of the TSX, went into a slump as a result of the subprime mess, energy and materials stocks were just about all that kept the Index moving higher.

The impact of energy companies on the overall performance of the TSX is easy to see. When oil prices suddenly reversed course in July, the Composite Index went into a slide, losing about 1,500 points during the month. Last week, after Hurricane Gustuv turned out to be less destructive than had been feared, energy stocks fell more than 10% in three days, dragging the TSX to a loss of almost 1,000 points.

Imagine what the reaction of investors would be the morning after a Liberal victory, particularly if the improbable were to happen and they should gain a majority. The sell-off in the energy sector would be massive.

The hardest hit stocks would be those that are inter-listed in New York, such as EnCana, Petro-Canada, and Suncor. Not many Americans invest in Canada but those that do tend to have long memories. They haven’t forgotten the income trust tax or Alberta’s recent hike in oil and gas royalties. To many, the idea of a carbon tax would be just one more example of Canada’s “socialist” tendencies and a reason to dump our stocks.

I’m not suggesting this is a rational approach. But it’s the way things could play out.

Investor issues will not be centre stage in this campaign, although they could affect the outcome in a few seats. But once all the ballots are counted, we should watch closely to see how the markets react.