09/30/2011 04:00 EDT | Updated 11/29/2011 05:12 EST

Ottawa and Quebec to announce long-awaited $2.2-billion tax deal

QUEBEC - The federal government has made good on its longstanding promise to turn over $2.2 billion to Quebec as part of a tax-harmonization deal that is similar — but not identical — to those struck with other provinces.

It was a pledge originally made months ago, in the hurly-burly of a minority Parliament with a federal election looming.

It has been kept after an election in which the Harper Conservatives won a majority government with minimal support in Quebec.

The move comes after a summer in which Quebec's chattering classes had begun speculating that the post-majority Harper era would be marked by indifference or even hostility toward their province.

But there was a smiling Prime Minister Stephen Harper, making the announcement Friday at a formal press conference at the Quebec legislature alongside Premier Jean Charest.

Both men hailed the agreement as an example of that quintessentially Canadian political value: flexibility.

"This is a fine example of federalism working as it should," Harper said.

"Quebec wanted a harmonization agreement, we worked together to make it happen, and it is now in place."

It was Harper's first meeting with Charest in months. In the interim period, his government lost half its seats in Quebec and had taken several steps that raised eyebrows in the province.

There was the refusal to let the army help with flood cleanup near Montreal. The appointment of a Torontonian who doesn't speak French as his communications director. The rebranding of the Department of Foreign Affairs and the Canadian Forces with references to royalty. The end of the long-gun registry. And the rebalancing of seats in the House of Commons, which will weaken Quebec's representation.

But, on Friday, the Quebec premier was singing the prime minister's praises. Charest lauded the agreement as an example of open federalism.

"I want to thank you, in the name of all Quebecers, for having kept the promise you made," Charest told Harper during the news conference.

Quebec will get $733 million in January 2013 and another $1.47 billion one year later. Charest made it clear that, unlike the last big federal cash transfer several years ago, this one would not be used to offer Quebecers tax cuts.

"The money will help reduce the ($3.8 billion) deficit," Charest said.

"There's no question, for us, of taking the money and spending it left and right. We're in a period of global economic turbulence."

The deal is by no means a replica of those struck with Ontario, B.C., Nova Scotia, Newfoundland and New Brunswick.

As well as allowing Quebec to keep collecting the revenues from its separate provincial levy, it permits discrepancies between the list of products taxed by Ottawa and those taxed by the province.

Quebec will continue to exempt books and diapers from its provincial levy.

When asked about that special treatment, Harper offered reporters a bit of a history lesson.

He said he understood why Quebec might have felt — "with justification" and with "some frustration" — that it had never received compensation, like other provinces had.

The prime minister noted that, nearly two decades ago, Quebec was the first province to introduce a tax similar to the federal GST. Then, more recently, deals with Ontario and B.C. required Ottawa to offer similar compensation to provinces that had already signed on.

Harper said it was important that all provinces be offered the same deal.

He said Friday's agreement was similar in most ways to those signed with other provinces. And, if any province wants the exact same arrangement as Quebec's, Harper suggested the offer is open.

But he's not holding his breath.

"Quebec has had a unique joint administration-collection agreement for a very long time, predating this agreement," Harper said.

"I would not expect that (other provinces want the same). But if some province wanted to do that, the federal government would be prepared to deal with them on the same terms."

Ontario and British Columbia received federal transfer payments for implementing the HST.

British Columbia has to return the $1.6 billion in transition funding after voters killed the province's HST in an August referendum. Ontario received $4.3 billion from Ottawa after moving to the HST in 2010.

The Tories promised during the federal election campaign last spring to settle the matter with Quebec by mid-September.

But the deadline was later extended until the end of the month to work out technical details.

One potential sticking point was whether Quebec could be compensated for harmonizing its provincial sales tax with the federal GST, while still collecting the tax itself.

The failure to reach a deal was a political lightning rod for Quebec sovereigntists over the years, with the Parti Quebecois and the Bloc Quebecois constantly berating their federalist foes.

The sovereigntists continued criticizing the deal after reading the fine print Friday.

They estimated that one of its provisions will eventually cost Quebec $635 million per year in tax revenue, by 2020. That means the benefits of the deal would be erased over just three years.

They were referring to a stipulation that would exempt Quebec manufacturers from a value-added tax that generates roughly that amount each year.

But the Quebec government says that, in order to stay competitive, it would have had to make that switch anyway because Ontario is already headed in that direction.

The deal also sets a maximum difference of five percentage points between the federal and provincial sales-tax rates.

It ends some tax exemptions on purchases by financial institutions. And it forbids the current "tax-on-tax" policy, where the provincial levy is calculated after the GST has already been added.