The private member's bill would have forced unions to file financial statements, making public any expenses over $5,000, along with the salaries of their employees making more than $100,000.
Now Prime Minister Stephen Harper is preparing to abandon the gutted bill and re-introduce it as government legislation, possibly in a new parliamentary session, a Conservative caucus source told The Canadian Press.
That would represent a direct a challenge to Conservative senators since they are expected to support government legislation. Votes on private member's bills don't carry such an explicit expectation.
More than a third of the Conservative caucus in the Senate helped to pass a radical amendment to the bill by Tory Senator Hugh Segal, by either voting for it or abstaining from the vote. Segal's amendment, among other measures, would have raised the threshold to $150,000 for union expenses to be made public.
That bit of defiance comes at a time when the Conservatives are already facing considerable pressure over the Senate expenses scandal from the party's own base, and are talking more aggressively about reform in the red chamber.
Harper's office issued a statement Wednesday saying that it expects the Senate to "respect the will of the House should the bill be returned to the Senate." The legislation, first put forward by MP Russ Hiebert, had strong support among Tory MPs.
One of those MPs, speaking on condition of anonymity, called the Senate opposition "intolerable."
Segal from the outset had been vocal in his opposition, arguing the bill intruded on provincial jurisdiction, violated privacy laws and would upset the balance in collective bargaining across Canada.
Although the unions would have been obliged to reveal all spending over $5,000 and the salaries of their employees making over $100,000, the private corporations they would be bargaining with would not.
Segal's amendment to the bill, supported by 15 of his colleagues, made the legislation apply only to unions with more than 50,000 members and not to locals or branches. Another six Tories abstained from the vote on his amendment. The Liberals have remained staunchly opposed to the C-377.
Segal's amendment also pointedly raised the threshold at which a union official would have to divulge his or her salary, to $444,661. That's the same amount Conservative MPs used when they amended MP Brent Rathgeber's private member's bill on the disclosure of federal public salaries.
Conservative Senate Leader Marjory LeBreton suggested the amendment was a bit of mischief by Segal.
"I think it was a little shot across the bow acknowledging some of the things that have been in the public lately, but that to me is Hugh Segal," said LeBreton.
A handful of Conservative MPs voted against the entire bill, even in its amended form. At one point, Tory Senator Pierre-Claude Nolin challenged deputy Senate Leader Claude Carignan, sitting beside him, to explain how the bill was not a direct infringement on provincial jurisdiction over labour.
Liberal Senate Leader James Cowan said what happened to the union disclosure bill was proof that the Senate can do what it's supposed to.
"It was Liberal senators, supported by a brave handful of Conservative senators, that gutted this bill and prevented it from being law today," said Cowan.
"I think the Canadians who look and wonder whether there's a role for the Senate should look and consider very carefully, because the Senate did good work today."
The NDP, which opposed the legislation in the Commons, said its message to the government on the legislation is: "I told you so."
"It was a flawed law, unfair, useless and there was no point in having it," said NDP labour critic Alexandre Boulerice.
"It was only an attack against the unions for the Conservative base, but now we can realize that there's a lot of problems with this law, and we can see that some Conservative senators are trying to fix the mess created by Mr. Hiebert."
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