A Challenging Fall for the Government jam can be broken. Meanwhile, with decisions coming out of the International Trade Commission on softwood lumber and hearings underway on Boeing’s filing against Bombardier, irritants continue to define the Canada-U.S. trade relationship. Time is passing and informed observers believe that the impending Mexican presidential election on July 1 will force a hard stop to the NAFTA talks at some point in April.

With the future of NAFTA in doubt, the obvious trade policy for Canada is to pursue diversification towards emerging Asian markets, but here too, the way forward has proven to be uphill. At the Asia-Pacific meetings in Vietnam in November, the government advanced its “progressive trade It’s been an “up and down” and often difficult fall for the agenda” and initially telegraphed support for the now Trudeau Government on the policy and issues management renamed Comprehensive and Progressive Agreement for the front. Trans-Pacific Partnership (CPTTP) to other countries, then The details of the small business tax changes signaled in developed cold feet at the last minute. The result was a Budget 2017 were unveiled in mid-July and were quickly miffed Japanese Prime Minister and some highly overtaken by a backlash of criticism from scores of undiplomatic language directed at Canada by other Asia- stakeholders that ultimately caused the government to Pacific leaders. More recently in Beijing, Canada had raised backtrack and recalibrate. The issue became more expectations that the PM’s meetings with the Chinese complicated by a series of disclosures that Finance Minister leadership would yield a kick-off to free trade talks between Morneau had not put all of his private holdings into a blind the two countries, only to return without a formal launch. trust, as well as several alleged conflicts of interest. By the The federal government’s challenges with the ill-fated end of the session last week, Mr. Morneau’s reputation had Phoenix pay system, if anything, worsened instead of been tarnished. improving throughout the fall, with thousands more public On the trade file, the NAFTA renegotiation has now servants unable to be paid promptly or accurately. The proceeded through five inconclusive sessions, with Canada Canadian Revenue Agency contributed several nasty finding five of the U.S. demands to be non-starters. In headlines, being caught attempting to start taxing employee Ottawa, rumours persist that with his tax reform now virtually benefits, denying the disability tax credit to thousands of assured, President Trump may attempt to withdraw the U.S. taxpayers with Type 1 diabetes who had previously qualified, from the agreement, but there remains much debate in the and refusing to believe that separated people were actually U.S. as to whether Congress could override that move. separated. In several cases, the agency denied the various allegations and was then forced to admit publicly that it made The Trudeau government has acknowledged that it is now a mistake. And Minister of Sport and Persons with Disabilities deeply into NAFTA contingency planning, but in the most Kent Hehr was accused of being insensitive to several federal recent bargaining session in Washington, Canadian stakeholders and groups. negotiators did begin to discuss the possibility of presenting counter-offers on the five “poison pills.” All eyes will be on the Montreal round of talks January 23-28 to see if the log-

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On the positive side, the government can point to some solid 19.1 percent, Greens at 5.7 per cent and the BQ at 3.4 per accomplishments over the fall: cent.

• The Canadian economy continues to be buoyant, creating The Prime Minister also retains an even stronger lead as the 390,000 jobs over the past 12 months, the best job preferred choice as PM at 46.8 per cent of , creation record in the G-7, and dropping unemployment followed by Andrew Scheer (21.9%), Jagmeet Singh (8.2%) to 5.9 per cent in December, the lowest rate since and Elizabeth May (5.9%). Sixteen per cent of Canadians were February 2008. unsure who they preferred. Two additional variables almost • Canada’s first-ever National Housing Strategy was always correlate strongly with voting intention: “Which released in November, promising a $40 billion party/leader do you trust most?” and “Which party/leader investment over ten years and marking a major re- holds values closest to your own?” Based on the most recent engagement by the federal government in housing. The polling results, it appears that despite their recent challenges, initiative has received solid reviews from all sides. the Liberals still enjoy the trust of a plurality of voters and continue to be viewed as the party most aligned with the • The Prime Minister made a well-received apology to the values of mainstream Canada. LGBTQ2 community for the federal government's past treatment of its members, with praise from all sides of This view is borne out by the results of several by-elections the House. over the fall. Both the Liberals and Conservatives won the seats where they were prohibitive favourites, but in Lac-Saint- • The government is moving ahead with its splitting of the Jean in Québec and South Surrey-White Rock in B.C., the former Department of Indigenous and Northern Affairs Liberals were victorious, taking Conservative seats previously into two new departments, Indigenous Services and held by narrow margins. For the NDP, their vote counts Crown-Indigenous Relations and Northern Affairs. This plummeted in all the by-elections held this fall. move is being received positively inside and outside the government, though stakeholders are waiting cautiously None of this is good news for Andrew Scheer or Jagmeet for results. Singh, who assumed the leadership of their respective parties in 2017, but neither leader should be pushing the panic • While much remains to be done, the government began button yet. New leaders at the federal level usually take a to attack its backlog of long-overdue Order-in-Council year or two to find their feet and begin to resonate with appointments, with highly praised picks for the Supreme voters. We are also at that point in the four-year election Court—Judge as Chief Justice and cycle where opposition leaders need more to put in the judge Sheilah Martin—and solid choices for window than simple criticism of the government. Both Governor-General, the Lobbying Commissioner, Official parties have policy conventions slated for 2018, the NDP in Languages Commissioner and Senate Ethics Officer. February in Ottawa and the Conservatives in August in The polls, by-elections and the opposition Halifax, so that need will begin to be addressed in 2018.

A major theme in the media’s year-end reviews of the government is the paradox that the more challenges the

Liberals face with their agenda and ministers getting into trouble, the stronger their apparent standing with the

Canadian public as measured in the polls and in the recent by- elections. Clearly the voting public is currently a combination of disengaged and unmoved by the battering the government has taken this fall in Question Period.

Despite a drop in support at the height of the small business tax controversy, the Liberals have rebounded and remain strongly in the lead in voter preference. The latest Nanos poll

(December 19) found the Liberals at 41.9 per cent support, followed by the Conservatives at 29.3 per cent, the NDP at 2

The Government Agenda As the finance minister prepares his budget, he will also be increasingly aware of the economic uncertainty resulting from the ongoing NAFTA saga, and Bank of Canada Governor Stephen Poloz is not the only one sounding the alarm. Recently, the Export Development Corporation released the results of its semi-annual trade confidence survey, which found almost one quarter of Canadian exporters reporting that the on-going NAFTA renegotiation was having a negative impact on their Canadian operations. Of this 23 per cent, 26 per cent (or 6% of the full sample) were considering moving operations to the United States to avoid potential border disruptions, while a similar number said they would attempt to diversify their exports or investments into markets outside of North America. The national economy Significantly, in his year-end interviews, the Prime Minister Finance Minister Morneau presented his fall economic has been talking about a sharper focus on the national update on October 24, reporting continued growth and lower economy for the government in 2018. deficit projections:

• With real GDP growth of 3.7 per cent over the past year, Small business tax reform Canada leads the G-7 economies. Private sector After several months of raucous debate over the economists expect real GDP growth to rise from 1.5 per government’s small business tax proposals, the Liberals cent in 2016 to 3.1 per cent in 2017 – significantly higher completed the second step in their backdown on December than the 2.0 per cent expected in Budget 2017, and the 13 by making public new and clarified rules to rein in income 2.2 per cent originally projected in Budget 2016. sprinkling among family members. Earlier, the government resurrected its long-forgotten promise to deliver a tax cut for • The fiscal picture is notably improved over projections small business, which blows up the $3 billion in tax revenues over Budget 2017: an improvement in the deficit outlook they set out to obtain in the first place through the new at $8.6 billion in 2017-18, $8.8 billion in 2018-19, $6.1 measures. billion in 2019-20 and $4.9 billion in each of 2020-21 and 2021-22. The centrepiece was the creation of “bright line” rules defining the criteria for eligibility for income splitting. Those • The statement revised the 2017 unemployment rate included weekly hours worked over any five-year period or a from 6.9 per cent at the time of Budget 2017, down to ten per cent minimum for share ownership. For those who 6.5 per cent. The forecast for 2018 is 6.3 per cent, and don’t qualify under these rules, there is still a 6.3 per cent in 2019. “reasonableness test” to determine partial qualification. New policy initiatives included indexation of the Canada Child These rules will be interpreted by the Canadian Revenue Benefit to the cost of living effective next July, enhancement Agency, an organization under increasing criticism on many of the Working Income Tax Credit (WITB) $500 million fronts for applying anything but reasonableness to its beginning in 2019, and the reduction in the small business tax assessment of taxpayers’ claims. Liberal MPs would be rate to 10 per cent in 2018 and nine per cent in 2019. With forgiven for feeling anxious about this prospect. the government now in the home stretch leading to Budget 2018, the finance minister has appreciably more room to The final installment of the changes to passive investment manoeuvre in meeting his colleagues spending demands, rules are expected to be tabled in Budget 2018. such as responding to the Naylor report’s call for greater investments on fundamental science and Indigenous child welfare.

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International trade ministers, parliamentarians and premiers and informing the key players in the U.S. political system, while managing domestic expectations. The recent experiences with CPTPP and China suggest the need for similar approaches to be adopted on these fronts as well.

The innovation agenda The final decisions on the winning proposals in the superclusters competition are now likely to be announced in mid-February, or perhaps as part of Budget 2018. Proponents submitted their final proposals in mid-November, shepherded through the process by sherpas and outside experts assigned The government is deeply committed to its progressive trade by the Department of Innovation, Science and Economic agenda, which calls for stronger labour rights, tougher Development (ISED). Some of the proponents succeeded in environmental standards, gender equity and Indigenous absorbing groups whose proposals did not make the first cut; rights becoming an integral part of Canada’s future trade others did not despite the urgings of ISED. There have also relationships and agreements. With NAFTA, CPTPP and been interesting interventions by some companies to support China, this agenda is proving to be a hard sell, leading critics a variety of proposals; for instance, Microsoft has provided of the government to suggest that the agenda is “virtue free cloud services to eight of the nine proponents. signalling” designed for domestic consumption. The other major program—the Strategic Innovation Fund It’s useful to note that in the past, trade agreements have (SIF)—finds itself vastly oversubscribed at the end of the year. rarely linked such aspirational objectives to bilateral or Submissions and proposals equal at least five times as much multilateral commercial relationships. As a result, the money being requested as the SIF program had to distribute. Americans have responded with a shrug towards Canada’s The competition will obviously be fierce. requests which they see as irrelevant, and they will never move on such issues as U.S. states’ right to work laws. In the Last week, the government released the details of Innovation case of TPP, Canada came late to the table in the previous Solutions Canada, a small business program patterned after negotiations, and its progressive agenda is now an add-on to the very successful U.S. Small Business Innovation Research an agreement that the other countries thought was already Program. Announced in Budget 2017, ISC will invest $100 settled and ready for signing. million annually for five years. Government departments will list “challenges” that don’t have solutions currently in the With China, the issues are more complex. Beijing would marketplace. They will call on small Canadian businesses to prefer a narrow and traditional trade deal similar to its 2015 propose solutions and will pay for the early development and agreement with Australia, and also recognizes that a China- proof of concept phase. Ultimately, government could be the Canada agreement would set some major precedents, being buyer of the final product or service. its first with a G-7 country. China is also notably resistant to having others tell it how to manage its internal affairs. The internal review of company-facing innovation programs Canada is therefore playing the long game; in that context, within ISED and across government announced in Budget the recent failure to start the talks represents one more step 2017 continued quietly all fall. The expectation is that it will in what will likely be a lengthy and difficult process with find programs and resources to sunset, merge or reallocate to China. Although the business community is bullish on trade help fund higher-priority innovation programs. At least some with China, other quarters within Canada will require delicate of the result should be announced in the 2018 budget. balancing.

In the case of NAFTA, the Trudeau government has pursued a well-planned and comprehensive approach based on explaining Canada’s interests, leveraging a full cadre of

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models for television. This arose from a request from the On December 18, the federal government followed up on its Minister of Canadian Heritage in her long-awaited and badly- Budget 2017 commitment by launching the Venture Capital received September policy update. Catalyst Initiative (VCCI), a $400 million program designed to increase late-stage venture capital funding. VCCI will On the telecommunications side, the CRTC solicited comment complement other programs under the Innovation and Skills on the final terms and conditions for wholesale mobile Plan to help grow Canada’s most innovative firms, support wireless roaming service, which is the underpinning of the so- greater diversity and address gender balance in the VC called Wi-Fi First issue. The CRTC had earlier ruled that Wi-Fi community. VCCI is the follow-up to the Conservative distributors who were not facilities-based could not get government’s $400 million Venture Capital Action Plan mandated access to roaming on established networks when launched in 2013, which aimed to spur VC fund creation by they needed to switch to cell service. The ISED minister asked dedicating $1 from the government to every $2 from the the CRTC to reconsider that decision, in effect putting years of private sector. policy about facilities-based competition into doubt. Much less transparent are the ongoing departmental reviews of the Successful candidates will be required to report on the Broadcast and Telecommunications Acts announced in gender balance of the fund managers and entrepreneurs they Budget 2017. They are proceeding without fanfare or support. In addition, the government will establish a private visibility. There have been no public consultations or even a sector selection committee to evaluate incoming proposals quiet solicitation of views. and provide recommendations on selections to the Deputy Minister of ISED. If there was any doubt about the government’s determination to drive competition and lower prices, the Finally, ISED and Finance are working through the Budget reference on roaming dispelled it. Recently, the Minister 2018 response to the Naylor Fundamental Science Review praised Bell for introducing a low cost pre-paid cell service which recommended significant new money for science and once again pointed to the CRTC reference, pre-emptively research. In the fall the government announced the assuming it would foster competition. ISED has kept up the implementation of a coordinating mechanism for the granting pressure, at least rhetorically, on telecom companies to councils, the core distributors of funds for scientific research. provide low cost services. Despite pressure and intense The budget will have a sub-theme around science and lobbying from the big telephone companies, it is giving no research and set new funding levels for the granting councils sign that it will reduce the amount of the set-aside spectrum and other agencies involved in science and research. it says it will likely reserve for new entrants in next year’s spectrum auction. Broadcast and telecommunications Late in the session, debate erupted around whether there should be an independent body to assess and recommend internet blocking of sites with counterfeit content. Put forward by Bell to operate without Court oversight (a Shaw variation would require Court approval), the proposal immediately led to concerns about the possible impact on net neutrality, a fundamental government and CRTC policy. This is happening in the context of the American Federal Communications Commission having now abandoned net neutrality, pushed there by major content providers and digital distributors.

The fall session was marked more by studies and reviews of broadcast and telecommunications policy than it was by real activity. In the late fall, stakeholders submitted comments prior to hearings into future programming distribution

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Meanwhile the government was pushing ahead with the Transportation Connect to Innovate and Connecting Canadians program roll- outs. Both are $500 million programs with five year horizons. The first will fund high speed broadband backbones to connect more than 330 communities. In some cases of need, it will also fund “last mile” infrastructure. Connecting Canadians is ahead of target in providing broadband access to more than 300,00 people by 2019. Both programs, announced in Budget 2016, are taking applications and awarding funding.

In mid-December, ISED Minister Bains announced the federal government will conduct a review of the Copyright Act, promising that: “Reform measures are anticipated over the course of the next year to enable creators to get paid Despite Transport Minister Marc Garneau’s pledge to pass properly and on time and to seize new business opportunities the government’s long-awaited transportation legislation by in today’s fast-paced economic environment.” Christmas, the omnibus Transportation Modernization Act (C- 49) encountered some unexpected resistance in the Senate in On the broadcast and culture side, the fall session began mid-December. C-49 includes a host of provisions aimed at dreadfully for the Minister of Canadian Heritage and making railways more accountable and more reliable, continues that way without much relief. In late September, regulations related to air travel – including a requirement to she unveiled her revised cultural vision without having much establish an air passengers’ bill of rights – as well as new money to spend or new programs to launch. The speech additional rail safety provisions. The bill’s provisions focused heavily on a promised investment by Netflix into addressing grain transportation issues through new long-haul Canadian production. Obviously put together at the last interswitching measures, are long-awaited by Canada’s grain moment, the announcement was short on detail, had virtually sector. no French content and continued to relieve Netflix of Canadian obligations or taxes. The Minister was excoriated in Though the bill was initially introduced in the House of media, a relentless campaign that has not stopped. Commons in May, it was not referred to the Senate until An attempt last week to reset the policy in a Montreal speech November 2. When the Senate adjourned for the holidays on failed to accomplish its goal. December 14, the bill had only just been referred to the newly-constituted Senate Committee on Transport and Meanwhile the Minister has been seen to be powerless or Communications for review, contrary to the government’s indifferent in the face of continuing closures and layoffs in the hope for speedy passage through the Senate. Without the Canadian newspaper industry. And after an eight-month bill’s passing, there will be an almost two-month delay in process, the appointments to the CBC – Chair, President and addressing the expired interswiching clauses, which the Board members – are not expected until next year. government hopes to implement to avoid future grain backlogs. The Senate’s resistance to fast-track this piece of legislation in the face of government pressure, is further evidence of an Upper Chamber which is increasingly unpredictable, independent and intent on flexing its muscles.

Senators have taken particular issue with Minister Garneau’s insinuation that they are stalling the progress of the bill, noting that the Senate had only had a little over a month to

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review the proposed legislation. Senators noted they have major costs for regulation and policing of cannabis sales, as very specific concerns regarding the interswitching provisions, well as health care and education programs. the airline passenger bill of rights, foreign ownership and on employee privacy, the latter related to the proposed Military procurement: CF-18 replacement installation of cameras on locomotives. Once the Senate resumes sitting in late January, hearings on the bill at committee are expected to take up to three weeks, according to the new committee chair, David Tkachuk, (Conservative, Saskatchewan). Accordingly, Tkachuk has indicated that review and debate on the bill will likely not wrap up before the end of February 2018.

Cannabis Over the past four months, provinces and territories continued to roll out their frameworks and legislation for the legalization of cannabis, establishing rules for minimum age limits and for public and/or private retail sales. Several Ten years into the federal procurement for the replacement private sector suppliers completed deals to supply medical for the CF-18 fighter jets, the federal government hit the cannabis to pharmacy chains, provinces began announcing pause button once again in December as it announced it will supply arrangements with companies, and cannabis mergers purchase an undisclosed number of “supplemental jets” from and acquisitions picked up as companies moved to become the Australian Government. Earlier in the fall, the fully integrated in production and retail. government had cancelled its deal to acquire the same number of Super Hornet fighters from Boeing after that In November, the federal government published a detailed company successfully petitioned the U.S. Commerce Department and International Trade Commission to levy consultation paper entitled “Proposed Approach to the import tariffs on Bombardier over its alleged subsidized sale Regulation of Cannabis” to solicit public input and views on of passenger jets to Delta Airlines. In an indirect reference to the approach to the upcoming regulations. In December, Boeing, “the evaluation of bids will also include an Ralph Goodale, the Minister of Public Safety and Emergency assessment of bidders’ impact on Canada’s economic Preparedness, launched a federal drug-impaired driving interests.” public awareness campaign to communicate the risks associated with driving under the influence of cannabis and The government also announced last week the long-awaited other drugs. competition to replace the CF-18s with “88 advanced fighter aircraft.” The process is expected to lead to the selection of Also at the federal level, when Parliament returns in late the winner in 2022 with the first replacement aircraft being January, the Senate will begin debate on Bill C-45, which sets delivered in 2025. While the competition launch keeps the out the terms for legalizing cannabis use and sale, and C-46, commitment in the Liberal platform, observers remain which sets out new laws for impaired driving due to beyond puzzled as to why the government opted to purchase marijuana use. The Conservatives are threatening to delay 18 equally aged and outdated F-18s to supplement the the two bills over their concerns about drug tests for workers, existing fleet, instead of simply opening the competition for equipment and training for police forces, and the impact of the new fighters earlier. legalization on young people.

The most important development of the fall was the deal reached by Finance Minister Morneau to give the provinces and territories 75 cents of every dollar collected in excise tax levied on cannabis for the first two years. That's a significant increase from the 50-50 split the federal government had proposed earlier. The provinces, territories and municipalities had complained that they were being forced to shoulder 7

Military procurement: frigates and destroyers Energy Board and the Canadian Environmental Assessment At the end of November, the Request for Proposals for the Act and regulations governing the phase-out of coal-fired design/systems competition for the Canadian Surface electricity by 2030. Combatant replacement program closed. Now funded at over $60 billion, this procurement will be Canada’s largest Also on the 2018 legislation list is the clean fuel standard, a and most complicated defence project in history. While the mechanism to reduce transportation emissions by as much as government and the prime contractor/shipyard (Irving 30MT per year by 2030. The government anticipates its Shipyards Inc. - ISI) remains relatively silent, media reports legislation will further advance the already established suggest that the BAE/Lockheed Martin Canada team remains domestic renewable fuels industry, and incentivize consumers the inside navy rumoured favourite with the British BAE Type- to switch to other lower carbon-emitting fuels such as natural 26 design. gas and such alternatives as hydrogen and electricity. The government has stated that the policy will not be prescriptive Interestingly, the procurement approach chosen three years and will provide flexibility to industry. Positive results remain ago was intended to select an “off-the-shelf” existing ship, in dependent on a progressive change in consumer behaviour. order to save time, risk and costs. The favoured Type-26 has yet to have champagne broken across its bow, nor indeed has On December 14, Environment and Climate Change Minister BAE done much more than start cutting steel for the first ship McKenna unveiled details of the $1-billion low carbon at the its yard in Great Britain. leadership fund that will be divided among six provinces over the next five years to help them initiate programs to cut This fall, a French/Italian team submitted a proposal directly emissions. Most provinces intend to use the money for and publicly to the Prime Minister and key Cabinet Ministers, energy efficiency programs, though some plan to direct it to with claims of being able to deliver the same number of ships reforestation projects or to help farmers use more efficient for half the $60B price tag. The “bid” was rejected in record methods in their operations. The Minister also said that once time as not being fair to the contenders who had followed the government’s carbon ricing legislation becomes law, the rules. Military procurement remains a challenge for provinces and territories will be required to impost at least a successive governments in Canada. $10-per-tonne carbon price by the end of 2018.

Natural resources, energy the environment and Pharmaceuticals and pharmacare Debate on the possibility of a national pharmacare program climate change in Canada increased through the year as the House of Commons Standing Committee on Health heard from a wide range of witnesses, and was particularly informed by the Parliamentary Budget Office study outlining the potential benefits and costs of such a program. The committee is expected to report in the new year.

At the same time, the government released its much- anticipated proposals to change the way that the Patented Medicines Prices Review Board (PMPRB) reviews whether the prices of pharmaceuticals are excessive.

2018 is building up to be a banner year for legislation and regulation with several key pieces of the federal climate plan expected to be put in place. Included are the framework to impose carbon pricing on provinces and territories should they not adopt the federal standard on their own, the zero- emissions vehicle strategy, major overhauls of the National

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The proposed amendments to the PMPRB Regulations were • August 23-25: National Conservative Policy Conference in pre-published in the Canada Gazette in early December, Halifax calling for an updated list of comparator countries used in assessing price, proposing to remove the United States as a • September 28: New Brunswick Provincial Election comparator, and introducing health technology assessment • October 1: Quebec Provincial Election into the process. The PMPRB then issued a Scoping Paper on Guidelines to interpret the application of proposed changes • October 8: Newfoundland & Labrador Provincial election to the Regulations.

This package of changes is dramatic, going well beyond minor Conclusion tinkering with the pricing system, something that officials have been downplaying. Together, the changes indicate the We would be happy to follow up in detail on any issues extent to which the government is determined to increase covered in this report. cost containment of pharmaceuticals, much to the consternation of industry and other stakeholders who argue All of us at the Earnscliffe Strategy Group wish you a happy that the government needs to focus on value rather than holiday season and a successful and prosperous 2018. simply costs. These changes are set to come into force on January 1, 2019, but in the meantime, there will be considerable consultation with stakeholders.

Major upcoming events

• January 23, 2018: Sixth round of NAFTA Negotiations in Montreal

• January 23-28: 48th World Economic Forum Annual Meeting in Davos

• January 27: Saskatchewan Party chooses successor to Brad Wall

• January 29, 2018: Parliament returns from Christmas Break

• February 16-18: Federal NDP Convention in Ottawa

• February/March: Tabling of Federal Budget

• February/March: Announcement of the five winners for the superclusters program

• April 19-21: Liberal National Convention in Halifax

• June 7: Ontario General Election

• June 8-9: G7 Summit in Canada

• June 8/June 22: Earliest/latest possible days for the House of Commons to rise for summer break

• July 18-20: Council of the Federation meets in St. Andrews, New Brunswick

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