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OTTAWA (Reuters) - Canada's minority Conservative government is working on a possible tax deal with the influential province of Quebec that could help Prime Minister Stephen Harper stay in power longer than expected.
Finance Minister Jim Flaherty confirmed on Friday he was in talks with Quebec over federal compensation for tax changes the province introduced almost 20 years ago, something the separatist Bloc Quebecois has long demanded.
The Bloc indicated that if the tax measure were in the minority Conservative government's next budget in early 2011, it might vote in favor and thereby head off an early election.
"If the (budget) is generally bad for Quebec, we'll vote 'No'. If it's generally good for Quebec, we'll vote 'Yes'," senior Bloc legislator Pierre Paquette told reporters, saying it was "a bit early" to predict what the party would do.
The Conservatives need the support of at least one opposition party to stay in power. Many political observers had predicted that all three opposition parties would unite early next year to reject the budget and force a new election.
A "yes" vote from the Bloc would prevent that and keep the government in power.
The Bloc, which seeks independence for the French-speaking province of Quebec, has voted for budgets presented by the Conservatives on two occasions, arguing that the spending plans were in Quebec's best interests.
Paquette urged Ottawa to launch a "blitz of negotiations so we can reach agreement before Christmas" on a tax deal.
Polls show the Conservatives would lose seats if a federal election took place now and could have trouble creating a stable minority government. But no other party has a realistic chance of winning power.
Quebec wants around C$2.6 billion ($2.5 billion) from Ottawa to compensate it for harmonizing its sales tax with federal taxes. Federal governments have refused that in the past, arguing that Quebec had not fully harmonized the tax.
Flaherty told the House of Commons that he had made progress in his talks with Quebec's provincial government, but some challenges remained.
Ottawa has already compensated other provinces for harmonizing their taxes.
Reporting by David Ljunggren; editing by Janet Guttsman