Proceedings of the Standing Senate Committee on
National Finance

Issue 12 - Evidence - June 22, 2010 - Afternoon Meeting


OTTAWA, Tuesday, June 22, 2010

The Standing Senate Committee on National Finance, to which was referred Bill C-9, An Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010 and other measures, met this day at 3:01 p.m. to give consideration to the bill (topics: Part 18 and Part 1 — amendments to the Income Tax Act).

Senator Joseph A. Day (Chair) in the chair.

[English]

The Chair: I call the meeting of the Standing Senate Committee on National Finance to order. Before we go to our panel, I would like to discuss our report on Supplementary Estimates (A) which has been circulated. If there is to be any discussion on the details of the report, we would have to go in camera. I would not propose to do that at this stage, but if there is a motion forthcoming to adopt the report as circulated, subject to any typographical errors or imaginations or anything that can be done by the clerk, then I would be prepared to receive that motion at this time.

Senator Ringuette: Chair, I have read the report and find that it reflects the reality of our meetings and the discussions we had with our witnesses, so I propose the adoption of that report.

The Chair: Thank you. It has been moved that the report, as circulated, be adopted. All those in favour signify by saying, "yea."

Some Hon. Senators: Yea.

The Chair: Contrary minded, if any? Motion carried. May I have consensus, once it is put in proper form for filing, that I file the report at the earliest opportunity? Thank you. That is carried.

I will now formally call this meeting to order, honourable senators.

[Translation]

This is the eleventh meeting on Bill C-9, An Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010.

[English]

Over nine previous meetings, this committee heard from the Minister of Finance, as well as departmental officials who explained the provisions of each of the 24 parts of this bill, which has 900 pages. This morning, we began hearing from outside parties on aspects of the importance within the bill.

Our focus this morning was Atomic Energy of Canada Limited, which is addressed in Part 18 of the bill, and that will continue to be our focus for the panel this afternoon.

We welcome for this panel Christopher Hughes, President, Laker Energy Products Limited; David Novog, Associate Professor, Department of Engineering Physics, McMaster University; Duane Bratt, Associate Professor, Mount Royal University, Calgary.

[Translation]

Guy Marleau, Associate Professor, Department of Engineering Physics, École Polytechnique de Montréal, and finally, Patrick Lamarre, Executive Vice-President, SNC-Lavalin Group Inc.

[English]

We only have a little over one hour for this particular session. Each of you would like to make introductory remarks. We will begin with Mount Royal University.

Duane Bratt, Associate Professor, Mount Royal University: I am an associate professor in the Department of Policy Studies at Mount Royal University. I have been studying Canadian nuclear policy for two decades, published two books: The Politics of CANDU Exports and Canada and the Global Nuclear Revival. I would like to thank the Standing Senate Committee on National Finance for inviting me to speak about the provisions related to the restructuring of Atomic Energy of Canada Limited, AECL, that has been embedded in the government's budget bill.

I must say off the top as a political scientist that I am disappointed with the government which has adopted the worst aspect of the American legislative process by attaching so many riders unrelated to the bill in question. The omnibus budget bill contains so many riders that it does resemble the infamous Christmas tree.

Getting back to AECL, the government seeks to enshrine in the Minister of Natural Resources the sole responsibility of restructuring AECL. The minister also has the ability to determine what aspects of any restructuring, in particular, the privatization in part or whole of the reactor division of AECL and whether that can be publicly disclosed to the Canadian people.

I have three comments on this matter. First, I strongly support the privatization of AECL. It desperately requires a major cash infusion, and I have provided a table I prepared to illustrate the differences between the major competitors — Westinghouse, Toshiba, AREVA, GE Hitachi and Rosatom. It also needs to adopt private sector management practices and a private sector culture. AECL, unlike its major competitors, is not an integrated company, either vertically across the nuclear fuel cycle or horizontally with other nuclear firms. AECL is instead a reactor-designed company with some engineering services, but it lacks assets both upstream and downstream of the nuclear cycle.

As a Crown corporation, AECL is prevented from borrowing money, forming strategic alliances. Finally, AECL is not part of a large, multinational, industrial company with global supply networks that can also provide conventional energy products and services. To my mind, whether the new owner is a foreign partner with access to global markets or a Canadian consortium that would give it some vertical alignment, the fact is the deal needs to be done.

Second, this privatization needs to happen sooner rather than later. The world is undergoing a nuclear revival; 56 reactors are being constructed at this moment and over 100 are in various stages of planning. The uncertainty over AECL's future has greatly handicapped its efforts to participate in this revival both globally but also in Canada. Its competitors have been at the forefront in China, India and elsewhere while AECL is on the sidelines. Domestically, the Ontario government suspended its proposal to build two reactors in large part because of the inability of the federal government to clarify the future ownership of AECL. Efforts at new builds in New Brunswick, Saskatchewan and Alberta are similarly in a holding pattern.

Third, and despite what I have just said in the previous two points, I do disagree with the government's proposal to give the Minister of Natural Resources the exclusive power to determine AECL's fate and bypass Parliament. The desire to expedite the restructuring of AECL should not trump Canada's parliamentary process. Previous Crown corporations — Petro-Canada, Air Canada, Eldorado Nuclear — were all privatized without granting exceptional powers to the relevant minister.

More importantly, in my view, is the lack of transparency. When the restructuring is completed, will Canadians be allowed to see the entire contract? What was the selling price? What conditions were attached to the transaction with regard to jobs and investment in research and development? Did the federal government promise to provide loan guarantees, or allocate funds to the new entity to acquire new build contracts either in other provinces or other parts of the world? What legacy costs were kept off the books and assumed by government? We will not know if this goes through.

In short, I am open to answering any questions you may have.

The Chair: Thank you. Your position is very clear and there may well be some questions that flow from the points you have made, but first we will hear from your colleagues, beginning with David Novog, McMaster University.

David Novog, Associate Professor, Department of Engineering Physics, McMaster University: I also wish to thank the Senate committee for the invitation to participate in these important hearings. It is my hope as an academic and researcher in this field to impart to the Senate that the conditions of the divestiture of portions of AECL be done in an open and timely manner, and with public input or debate where possible. It is my opinion that the specific conditions will be critical in maximizing the long-term benefits to Canadian.

McMaster University has one of the most respected nuclear science and nuclear engineering programs in Canada. We operate the largest university research reactor in Canada and are heavily involved in the training of highly qualified and skilled personnel for the nuclear science, nuclear engineering and medical fields. We are a founding member of the University Network of Excellence in Nuclear Engineering, which is globally recognized as a leader in the training of highly skilled nuclear engineers.

The nuclear industry in Canada has had significant positive impacts on the energy sector, the environment, medical and cancer treatments, and on education. The investments made by Canadians in nuclear energy and nuclear technologies have led to an industry which contributes over $5 billion annually to the Canadian GDP, gross domestic product, and employs over 70,000 people, many of them in the high tech and manufacturing sectors which are so important.

CANDU reactors have been a reliable and important source of energy in Ontario for 40 years and produced over half the electricity in this province last year, so every second light, every second air conditioning unit is powered by CANDU reactors here in Ontario.

Each year, CANDU technology prevents the carbon emissions equivalent to 17 million automobiles on the road. Imagine that, without this technology, we would be inputting fossil, fuel-based carbon dioxide emissions into the environment equivalent to an additional 17 million vehicles. As well, CANDU technology avoids the burning of millions of tonnes of coal. In fact, I did a calculation which shows you would have to fill the Senate chamber to a height of around 1,000 CN Towers of coal to equal what we would have had to burn if we had not had CANDU technologies to rely on.

As my colleague pointed out, globally, we are on the cusp of a renaissance in nuclear power, and projections show hundreds of reactors planned or under construction over the next 20 years. Canada, from my perspective, is well poised to be a knowledge leader in this expanding nuclear field due to our expertise, training and R&D capacity. It is important, however, that any decision related to the divestiture of AECL be done in a timely manner, because the world is going on with this renaissance with or without us, and if we want our young people and knowledge-based economy to participate, we need to move forward.

Since its establishment in the 1950s, AECL has maintained close ties with many of the universities in Canada. AECL funds direct, fundamental research, as well as applied CANDU research, at our universities. It is important that any decision or any of the conditions of sale consider the impacts of the divestiture of AECL on our ability to continue to be a global knowledge leader in this area. One of the most fulfilling experiences for me is that, when I travel internationally to conferences, Canadians are at the top and are the most respected in this field.

AECL is a founding member of the University Network of Excellence in Nuclear Engineering, UNENE. This network's objectives are to perform university R&D and generate highly qualified personnel who can become the future global leaders. In the short time since its inception, UNENE has trained or is training over 100 highly skilled personnel — Master's- and doctorate-level engineers and scientists — and is recognized throughout the globe as a leader in nuclear education.

Coupled with this, AECL provides direct expertise in terms of training graduate students through on-site internships, mentoring, direct R & D supervision and funding. It is important that the structure of the sale be made such that young Canadians will maintain their access to these experts and facilities.

Other AECL university research is focusing on how CANDU technology can be used to recycle and reuse spent uranium from other reactor designs globally. Currently, many of my graduate students, Master's and PhD students, are working in that field.

In a recent informal poll of my graduate students — and this is perhaps the most telling piece of information — all said that, without a strong nuclear technology sector in Canada, they would consider moving outside of Canada for employment. I also asked them what their opinion would have been three or four years ago, and they said they would not have considered moving. It is important to realize that we do not want to create a situation where there is a brain drain from an area where we are already globally respected and global leaders.

I would like to close by saying that, due to the complexity and impacts on Canadian technology, energy, research and education, it is important that the conditions of divestiture be made open and transparent to ensure that we continue to be a global leader and globally recognized in this very important field.

The Chair: Mr. Novog, thank you for your comments.

[Translation]

Guy Marleau, Associate Professor, Department of Engineering Physics, École Polytechnique de Montréal: Mr. Chair, I would first like to thank you for inviting me to appear before this committee.

I am the Director of the Institute of Nuclear Engineering at the École Polytechnique de Montréal. I am also the recipient of the W.B. Lewis Medal awarded by the Canadian Nuclear Association and the Canadian Nuclear Society.

I have been conducting research on reactor physics for almost 27 years at the École Polytechnique. I have also had some students under my guidance who are now working in the Canadian nuclear industry.

I will start by introducing the Institute of Nuclear Engineering to you. The Institute of Nuclear Engineering of the École Polytechnique was established 40 years ago, in 1970. Its goal was to support research related to nuclear reactors in Quebec and in Canada.

Seven professors from various departments of the École are involved with the institute. Two of the departments have industrial research chairs; one has a Hydro-Québec industrial research chair in nuclear engineering, and the second has an AECL-Babcock & Wilcox/NSERC industrial research chair.

Most of the professors and students cooperate with all stakeholders in the Canadian nuclear industry, including NRCan, AECL, Hydro-Québec, CANDU Owners Group, OPG, NB Power and Bruce Power.

Over the years, we have also managed to forge many ties abroad.

We train nuclear engineers at the graduate level and, on average, we have had 25 students registered in the program each year over the last 40 years.

We currently have 40 students at the graduate level, 40 per cent of whom are Canadians. About 30 per cent are French, while the remaining 30 per cent hail from other countries.

At the École Polytechnique, we also operate a nuclear reactor, a SLOWPOKE reactor, which was designed by AECL and has been running since 1976.

It is the only Canadian reactor of this kind to receive funding from NSERC for the quality of research conducted. The reactor's highly enriched uranium fuel was replaced in 1997.

The professors of the École Polytechnique have also contributed to the advancement of nuclear engineering knowledge in Canada. The software we have developed is now part of the industrial tools required to test all nuclear reactors in Canada. That software is also used in France and in the major American labs because of its quality. The development of that software is largely the result of our collaborative efforts with Hydro-Québec and AECL.

I mentioned cooperation between Hydro-Québec and AECL. These collaborative efforts have been ongoing for more than 40 years and, while numerous, they go beyond scientific exchanges with the Chalk River Laboratories. They also include the engineering division of CANDU Operations, based in Mississauga, Ontario, but with offices in Montreal as well. The engineering division uses our expertise and software to test reactors that are currently on line. We are also involved in developing new reactors, such as the advanced CANDU reactor and generation IV SCWR reactors.

AECL is also a key partner in the operation of our SLOWPOKE reactor. The reactor cannot operate without the support of AECL engineers, who are the only ones qualified to carry out maintenance operations.

Finally, AECL is a prospective employer for our student researchers who contribute to Canada's wealth and national visibility.

This is how AECL is seen by the Institute of Nuclear Engineering. I believe AECL is an investment for Canada, expensive perhaps, but essential for its prosperity.

Most governments from industrialized countries have come to the same conclusion and have maintained national infrastructures linked to nuclear issues. In the United States, there are national labs; France has AREVA and the Commissariat à l'énergie atomique [Atomic Energy Commission]; and similar national labs are found in the various countries in which we operate or develop reactors.

Chalk River Laboratories was long considered internationally as one of the most competitive research centres in the world. A researcher from AECL even received a Nobel Prize. I should also mention that this reputation has slowly declined over the last 20 years, further to the repeated cuts the lab has experienced. It is not too late yet to reinvest in Chalk River Laboratories so that it can regain its international standing.

AECL was also the creator of a ground-breaking technology, the CANDU. That reactor has proven its worth over the last 30 years. It has performed at over 90 per cent capacity and has shown flexibility in operation, robustness, and some versatility in the use of various types of fuels.

AECL must absolutely continue to provide the CANDU owners with support in engineering and research and development so that they can continue to operate their reactors safely.

AECL also offers support to the Canadian industry as a whole in the development of leading-edge nuclear technology, such as food irradiation, neutron radiography, detection of radioactive material and national security, radioisotopes and radiation protection. Canada must not withdraw from these fields and become entirely dependent on external resources to meet its nuclear technology needs.

I also believe that AECL and its employees make a direct and significant contribution to the Canadian economy. They also contribute to the prosperity of all Canadians.

Here is what I see as potential consequences of privatization and especially of the break-up of AECL.

First, the brain drain: the proof is that, when the Whiteshell laboratory was dismantled, in the 90s, a high proportion of researchers emigrated abroad or switched their field of expertise. The same thing could certainly happen again.

There is also the loss of a proven technology, the CANDU, and the interruption in the advancement of knowledge, which means that we would no longer be able to perceive the new reactors as important tools for the future that provide a significant source of energy. Canada would go back to just being a producer of natural resources, of uranium, with no value added, as in the case of the forestry industry.

The sale of CANDU reactors in Canada and abroad would be completely compromised without clear support from the government. That is why, as I told you, the government of Japan created a consortium of private companies and government-backed research centres to ensure the distribution of Japanese nuclear technology internationally.

I see two potential consequences. We can deny our responsibilities outside Canada. Canada is responsible for low- level radioactive waste management and irradiated fuel. We are responsible for the operation of CANDU nuclear reactors. We are also responsible for reducing greenhouse gas emissions and for national security.

If we go down this road, we are also denying our international responsibilities; the production of radioisotopes that Canada insists it will no longer be able to ensure if Canada decides to close the NRU reactor or not build a new reactor at Chalk River to meet our international responsibilities.

Canada has also sold SLOWPOKE reactors in a number of countries, and those countries, a little less fortunate than us, look to what Canada and Chalk River Laboratories have done to monitor the operation of their reactors.

And finally, many developing countries want to go nuclear in order to free themselves from their dependency on oil. One of our responsibilities is to make sure that they have access to nuclear energy in a consistent, intelligent and precise manner.

In my opinion, the main problems with Bill C-9 are the possibility of liquidating Canadians' assets without consulting with them, and the government having all options open with no promise of maintaining control of Canadians' hard-earned national assets. There is no promise of continuing to support the CANDU reactors in operation in Canada or elsewhere in the world, no promise of keeping nuclear expertise in Canada, not even a national lab; that goes against everything that is being accomplished in the rest of the world.

In conclusion, the bill, as it stands, allows the government to squander the hard-earned assets of Canadians, while taxpayers have no say in the matter.

[English]

Christopher Hughes, President, Laker Energy Products Limited: The disadvantage of going fourth is that I will be repeating some of the topics my colleagues have hit here.

Thank you for having me. I am the president and owner of a manufacturing company. We manufacture components for the heart of the CANDU reactor. I speak to you today as the owner of a manufacturing company having a focus on the CANDU nuclear power industry. I started my business because I had a strong belief that nuclear power will play a key role in a cleaner energy future, and that CANDU technology, in particular, is best suited to reaching this goal.

AECL is the leader of our industry, and we are clearly at a turning point in its history. The direction it takes will mean the success or demise of my firm and many like it. It is of utmost importance for those deciding on the future of AECL to understand exactly what it is that we, as Canadians, are selling.

The CANDU reactor is a technological jewel. It is one of the greatest Canadian engineering achievements of the past 60 years. AECL is in the enviable position of having two reactor designs to market: The newer and larger ACR- 1000, designed to compete head to head with the AREVAs and Westinghouses of the world, and the enhanced CANDU 6 or EC6.

As it is the CANDU 6 with the long track record, please consider the following attributes of this design. A lifetime performance rating of the 11 CANDU 6 reactors built by AECL over the past 30 years is the highest of all reactor designs. The 7 CANDU 6 reactors built in the last 20 years were constructed on time and on budget.

Chinese president Hu Jintao publicly stated that the two-unit Qinshan power station was the most successful foreign-managed mega-infrastructure project in China's history.

On the technology side, the CANDU 6 uses less uranium per kilowatt hour than any other reactor design. It is the only proven reactor on the market in its 720-megawatt-size range, which is ideal for jurisdictions having smaller electrical grids. It is the only reactor design that can utilize spent fuel from pressurized water reactors as its fuel source, in effect giving a second life cycle to spent fuel otherwise destined for long-term storage. It is recognized as the reactor design best suited to use thorium rather uranium as a fuel source.

On the last two points, China, in particular, with almost no uranium but with vast reserves of thorium is excited about the unique ability of the EC6 reactor to utilize spent fuel from a PWR, pressurized water reactor, and, alternately, thorium as its fuel source.

Now to the present. If AECL is to be sold, then the transaction must be concluded quickly. The current cloud of uncertainty has been hanging over AECL for two years and it is ruining the CANDU brand name and destroying the industry. The nuclear renaissance is happening out there in the world right now and we are missing it.

In the last six months alone, two important CANDU equipment manufacturers have closed their doors. Customers considering investing several billion dollars in a power station expected to last for 60 years do not like uncertainty. They want to know who they are dealing with and they want to know that that company will be there for the life of the station.

When deciding upon the future owner of AECL, the Canadian government must look beyond the one-time sale price and focus on the true intentions of this company. There is a danger that possible suitors may be eyeing AECL only for its intellectual property and its skilled workforce. This would be disastrous for the CANDU manufacturing industry that depends on new reactor sales. It is crucial that the new owner intends to aggressively pursue new reactor business and continue to invest in R&D.

One order for a two-unit station creates 17,000 person years of high-quality employment in Canada. The economic benefits to Canada resulting from a successful and strong nuclear power industry will soon dwarf whatever the initial sale price is.

Looking to the future, and on the positive assumption that a stronger AECL emerges from an expedited restructuring process, the Canadian government must do what it, frankly, has not done over the past several years, and that is to enthusiastically support our efforts to sell reactors overseas. Regardless of the ownership of reactor vendors, multi-billion dollar reactor deals are done government-to-government. This is why the French, the Russians and the Koreans have been so successful in recent years. Their heads of state have been personally involved in the selling process.

I do not mean to get political here, but I am simply stating a fact: We used to do that. We received a successful $4 billion order in China as a direct result of Jean Chrétien's personal efforts.

In summary, we have a great opportunity to rescue our industry, but only if the restructuring process is concluded rapidly, resulting in a new owner determined to grow the new-build reactor business, strongly backed by the federal government from a marketing perspective.

The Chair: Thank you, Mr. Hughes.

Patrick Lamarre, Executive Vice-President, SNC-Lavalin Group Inc.: I wish to thank the Senate committee for the opportunity to express SNC-Lavalin's view on the nuclear industry. My comments will cover three aspects of the situation: First, a brief introduction of SNC-Lavalin, which demonstrates the strength and size of our company, as well as our commitment to developing business for Canada internationally; second, SNC-Lavalin's role in the nuclear industry in our historical 40-year involvement with AECL; and third, the need for urgent and immediate action to determine the future of AECL and, therefore, the whole Canadian nuclear industry.

SNC-Lavalin has its headquarters in Canada, with annual revenues of $7 billion and a staff of over 22,000 full-time employees. Fifty per cent of its revenues come from international operations, while sixty per cent of the work is executed in Canada, which means that we compete and win jobs internationally, and we then execute them in Canada for export.

It is one of the leading groups of engineering and construction companies in the world, as well as a global leader in the ownership and management of infrastructure. SNC-Lavalin is committed to growing high-value engineering propositions internationally to the benefit of Canada.

Annually, we manage about $26 billion of projects for various clients around the world. SNC-Lavalin provides engineering procurement, construction management, project management, and project financing services to our four major sectors of the industry: power, oil and gas, mining and metallurgy, and infrastructure. We also have extensive experience in owning and operating concessions, which we have been doing for several power plants. This business is supported by our Triple-B-plus credit rating. Our company has a multicultural network that spans every continent, including permanent offices in 35 countries and ongoing projects in 100 countries.

Next is SNC-Lavalin's involvement with the nuclear industry and AECL. SNC-Lavalin has been involved in the nuclear industry for 42 years, basically at the same time as AECL. We have undertaken responsibility for the balance of the nuclear steam plant, and the balance of conventional turbine generator and auxiliary plants for CANDU nuclear power plants in Canada and internationally.

Also, on the nuclear side, SNC-Lavalin was the first company and the only company in the world to have performed steam generator replacement, 16 of them, on CANDU reactors. This was on a fixed-price basis, on schedule and on budget, which shows our depth of experience in the refurbishment industry. SNC-Lavalin, with AECL, has delivered seven new nuclear power units on schedule and on budget in the past 20 years, which is an accomplishment that no other technologies can report to have performed successfully. These were done internationally, as you will remember, in Korea, China and Romania.

SNC-Lavalin is also involved with the Organization of CANDU Industries, OCI, representing over 150 companies based in Canada. We understand the importance of maintaining and growing the Canadian nuclear industry to ensure its success and to keep these high technology and associated jobs in Canada. Ongoing involvement in the CANDU system has led to the participation with AECL on the design and development of various reactors such as CANDU 3, CANDU 9, and the advanced CANDU reactor, ACR-1000. With international presence, experience and network, we are in an excellent position to promote the CANDU technology and ensure that it has its place as the global industry grows and Canada's position is secured. We have been playing this role over many years through our offices internationally.

I will now turn to the future of AECL and Canada's nuclear industry. AECL's future will determine the future of the nuclear industry in Canada. If Canada wants to participate in this industry, ownership must remain in Canada and with a Canadian company that has an international presence, experience and network. For clarity, when a CANDU plant is built, AECL's scope is only one component of the entire project. The vast majority of the work around the CANDU plant is done by other Canadian companies and its partners. Therefore, any decision regarding AECL is a decision that affects the entire Canadian nuclear industry.

The sale cycle for a nuclear plant can fluctuate from five to fifteen years and even more. We have been working with foreign clients for all those years and, in some of those, we are close to an agreement. While we fully support the government's review of AECL's future and its restructuring policy, we encourage the government to move as quickly as possible, as any uncertainty puts future projects in jeopardy. The Canadian nuclear industry needs a new champion. We are there and we are ready to take a leadership position in order to make the industry and the Canadian company successful.

In conclusion, Canada has a great history in the nuclear industry. We have always been an innovator and an exporter of those services. We are at the crossroads for the future of the nuclear industry for Canadian companies.

We must all remember that a decision on AECL will be a decision for all the Canadian companies — that is, 30,000 people in over 150 companies, working jointly on CANDU technology, both in Canada and exporting their services from Canada internationally.

The Chair: Thank you very much, Mr. Lamarre.

We do not have a lot of time, honourable senators, so please govern yourselves accordingly.

Senator Callbeck: Professor Bratt, I agree with you. Bill C-9 looks like a Christmas tree. It has a lot of items in it that have no bearing to the budget bill, including the item that we are discussing now.

I would like to ask questions on Table 1. On the ownership structure, the French government owns 80 per cent. Has that always been the case?

Mr. Bratt: The percentage has fluctuated, but the French government has been the majority owner since Framatome started, which was the predecessor with AREVA. AREVA was a combination of a series of French nuclear firms all put into one package. It would be like if we took Cameco, AECL and a couple other companies and made one big company. It is the same with Rosatom in Russia.

Senator Callbeck: The government has always had major ownership?

Mr. Bratt: Right.

Senator Callbeck: Can you explain the reactor services and fuel revenue to me, please?

Mr. Bratt: Some of these companies are very large. If you are looking at Westinghouse, they tried to distinguish the nuclear component of the company from the fridge and computer components. It is the money they make on a yearly basis from selling reactors, from selling reactor services, and from selling fuel for those reactors. This was compiled in the natural resources document. I took that item from that document to give you an indication of how small AECL is compared to its competitors. When you throw in the support of the French government and companies like Toshiba, Westinghouse and GE Hitachi, those are monster companies.

Senator Callbeck: Most of the reactors under construction in different countries have been under construction for roughly how many years?

Mr. Bratt: It depends. The one that has gone on the longest has been the one in Finland that AREVA is building. Most of these are less than five years.

When you look at these numbers, there are a couple of interesting things. When you look at reactors that are operating, it shows that AECL has a fairly significant niche for a small company. It has many reactor sales not only in Canada but also outside Canada. You take away AREVA sales in France, and AECL is bigger than AREVA. You then look at reactors under construction and you see that big zero on the far end. I think that says a lot.

Senator Callbeck: Do you as witnesses know how expensive AECL is in terms of parliamentary appropriations relative to similar corporations, such as AREVA? Do you have any knowledge on that?

Mr. Bratt: I have that data somewhere else. I do not have it with me at this moment, but I have compiled that data for AECL in the past. I compared the parliamentary appropriations to AECL. This would be up to about 2005 at that point. I compared it to government appropriations for civilian reactors in the other countries in R&D to show you where that was, but I do not have that with me. It is in one of my books.

Senator Callbeck: Could you send that?

Mr. Bratt: I will do that.

[Translation]

The Chair: Do you have an answer to this question, Professor Marleau?

[English]

Mr. Marleau: There is a complement of information. You seem to think there is only AREVA in France, but you still have the Commissariat à l'énergie atomique, which is the equivalent of the Chalk River national laboratory. You must take into account that, in France, you have two entities, just like I would say AECL engineering and AECL Chalk River. In Canada, there is a single unit; in France, you have two different units, at least, Commissariat à l'énergie atomique and AREVA, who sells the reactor.

Senator Murray: I hear most of the witnesses saying that action must be immediate and urgent, et cetera. The government has a deal for you. The best way to facilitate immediate, urgent action is to pass this bill as it is. However, I hear you wanting more than that. I hear Mr. Hughes expressing some concern that possible suitors may be eyeing AECL only for its intellectual property and its skilled workforce; and I hear Mr. Lamarre expressing more than concern, expressing the strong desire that AECL remain in Canadian hands. The reason why I say, if you want quick action you can probably get it through this bill, is because this bill turns over to the cabinet the unfettered right to do whatever they like with AECL — sell it, divest it, dissolve it, merge it, partner, whatever, with no restrictions on ownership or anything else, that I can read in the bill.

The only way, I think, to address your concerns, Mr. Lamarre, and others that have been expressed, is to amend the bill. Do you have any other suggestion as to how we can try to ensure that possible suitors do not just try to grab AECL for its intellectual property and skilled workforce, or to try to ensure that it remains in Canadian hands? As of now, if we pass this bill, we, Parliament, wash our hands of this; off to the Governor-in-Council it goes.

I tried this on this morning, without success. There was an invitation for proposals of some kind some months ago. When the government witnesses were here, I asked them how many proposals they had, and they told me that was confidential, commercial information and I should not be asking such questions and, in any case, they did not intend to answer them. Do any of you have an educated guess as to how many offers might realistically be expected from potential partners or purchasers?

Mr. Lamarre: From our point of view, we understand there is a process, but we do not have any information outside perhaps the information you have been receiving on how many suitors or how many bids would be coming in.

Senator Murray: We do not know.

Mr. Lamarre: So we do not know. Coming to your second point where you highlight what should be done regarding the bill going forward, we see that the delay is causing damage to the industry and SNC-Lavalin because we are marketing and supporting AECL on international CANDU new builds; we are supporting them in Ontario and the delay is affecting us. We are saying Canada has invested a lot of money over the past 40 years. There is a lot of intellectual property in the CANDU solution, but the more we wait, the more it is difficult for Canadian or foreign buyers to commit to CANDU products. While they cannot commit, obviously, there are other suitors from other countries that are aggressively pursuing them.

We need to ensure that the intellectual property and investment is protected for Canadian taxpayers, but at the same time, as an industry, we cannot wait much longer because all international sales and marketing efforts and investments over the past five, ten or fifteen years will be lost.

Mr. Novog: Some of the comments my colleagues and I have presented is it is more than just a sale of a company that produces products. It permeates research and development and manufacturing in many provinces in this country. In that respect, it is important that any decision, while I agree it has to be timely, has to be done so that the terms and conditions of that really reflect the fact that this is not a single entity with a single product. We are talking about billions of spinoff and indirect revenue and jobs, from small companies up to the very large companies, as well as university students who have a stake in this as well. They invest years to become experts in their field and are taking it for granted that Canada will continue to be one of those leaders. For me, it is important that, whatever decision the government makes, it be done to consider all those components.

Senator Murray: Before government makes a decision, Mr. Novog, Parliament has to make a decision. The question is: Should we try to insert some terms and conditions into the bill, as we did with the privatization of other Crown corporations, or should we pass this bill and hope for the best?

Mr. Bratt: First, I know that companies have looked at it and at some of AECL's books. I do not know if they will make an offer based on that. It depends on which official you are speaking to.

Senator Murray: You are speaking in the plural, however, not the singular. That is a help.

Mr. Bratt: Yes. However, on the other point, if it was just about expediency and about letting the cabinet make a decision, I would have less of an issue with that but, when they talk about commercial interest and confidentiality, that is where I have an issue — if cabinet decides but releases the contract because there is a lot here.

There are legacy issues. Any nuclear company that precedes about 1955 has waste issues, whether in France, the United States, Britain, the Russians putting it in the Arctic. What sorts of land mines exist in there? I think we need to know that. What sorts of promises have been made about investment, maintaining of the workforce, R&D, all of those things? It is not just getting it done quickly but having some transparency as well.

Senator Murray: After the fact.

Mr. Bratt: I would still be happy with some transparency than what we are seeing here.

Mr. Hughes: You brought up a key point, Senator Murray. I will give you a couple of examples on the point of timing. About 18 months ago, Norway was looking into which reactor design to use, and they wanted to use a reactor that would utilize thorium as a fuel source. It is well recognized that the CANDU reactor is the best-suited reactor to do that. However, at that time, the federal government had announced a review of their situation with AECL and the Ontario government had announced that they were going out for international bids on reactors. What kind of a message does that send to the Norwegians? They decided for the second-best technology for the simple reason they could not understand why our governments at both levels did not, appear to be at least, supporting the industry.

I have another example. Argentina just passed a bill — it took longer than expected — through their congress in November last year to refurbish their existing CANDU reactor and also to build two new CANDU reactors. It was, so to speak, in our backyard. We had that job locked up, but they kept trying to get a signal from the Canadian government as to where they stood. If they did the restructuring, would they still be behind the business somehow? Would they still keep a piece of the company? They did not get any response, and frankly, they are fed up. Vladimir Putin was in there instantly. The Russians have been there.

Senator Murray: What is your advice to the Senate?

Mr. Hughes: My second point was obviously we need to sell it to the right company with the right motives. If we amend the bill and it takes months, then we will have nothing left to sell because the business will be gone. We will be out of the game. I understand; it is a difficult situation.

Senator Hervieux-Payette: This morning, some of our colleagues talked about the poor management and performance of AECL. In the meantime, one of you mentioned that it was lack of support by governments. Both sides of the table did not support AECL over about 10 years. What would you say is the best way to proceed? There is this bill, and I understand my colleague asking what you would suggest that parliamentarians do because you are concerned that we proceed. We represent the interests of all Canadians. We represent the shareholders of this entity, which is an industry, not a company, as far as I am concerned. We are talking about the whole industry, which touches many areas, such as health, food and the supply of energy.

Could you give me some of your knowledge about the poor management and poor marketing skills, which some people have mentioned? How could we bolster AECL? What type of partners should we look for? Should we divest the whole thing? Easy questions.

Mr. Lamarre: With respect to AECL, when AECL built the EC6 reactors in China, Korea and Romania, the technology was sound and proven. They have enhanced and improved it and they still are some of the top performing reactors in the world. This is where AECL has a true centre of excellence. They have great leadership, nuclear knowledge and engineers. The problems we see today relate to the retube refurbishment projects at the Bruce and Point Lepreau facilities. This involved another type of work that required AECL to step out of its comfort zone and the knowledge of nuclear technology and design of nuclear reactors. Going forward, AECL has the core expertise and knowledge to design reactors that work, are safe and have world-class performance. They need support from other companies, a group of companies or one company to provide reinforcement around project and construction management and to help sell reactors internationally.

Unfortunately, for international sales, government support is also required. Currently, the presidents of Korea, France and Russia show up before the technology provider in order to support the sale.

Senator Hervieux-Payette: As a second question in the same area, what model would you recommend? We can have an ownership partnership with some restrictions, ensuring that government has a say in all strategic decisions. Would you say that the major hurdle for AECL is lack of financing? Is it perceived by the industry that we have a clear division between research funding to AECL and operational funding? At times, I have the impression that the money invested in one area of AECL could fund the other area. You say that it is a viable operation that runs on time and on budget. For me, there is really no doubt. Our colleague mentioned this morning that there was a $400 million debt. Do you have a company that has no debt? I ask that of the two owners here. Provided you can pay your debt, you do not consider yourself in trouble just because you have a debt on your financial statement.

Mr. Hughes: That is right. Fortunately, I do not have a debt.

To your point on marketing, AECL has been fighting with their hands tied behind their backs for the past few years. I believe strongly that, as Mr. Lamarre says, if our head of state had been out in these countries supporting us for the past four or five years, we would be building more reactors, two in China and two in Argentina, almost for sure. Those are profitable jobs. That would have lessened the amount of money being requested from the government.

Senator Hervieux-Payette: Financially, are they sound or do they need more investment?

Mr. Novog: Getting back to what you mentioned, we need to consider that this is an entire industry. While the government provides support to AECL every year in its budget, look at the total revenues and GDP being generated each year by the entire nuclear industry, with AECL at its centre, the amount is in the billions of dollars. We make investments in our own households and look to see whether we get value from those investments. We get some direct and indirect value from the things we buy every day. That is the better way to look at this. We are investing in an entire industry that generates revenue from nuclear medicine to education to energy. It is important that we look at the big picture, not just at one reactor.

The Chair: Could you hold that answer and work it into another answer later? We have to move on. We are running out of time and I would like everyone on our list to have an opportunity to pose at least one question.

Senator Finley: I am beginning to feel a bit like Walter Mitty dreaming that he is Alice in Wonderland and has fallen down the hole to the push-me-pull-yous. I can agree with most things said by every person who has been before us, in particular Atomic Energy of Canada Ltd. I hear people say that we have to move quickly to save this. This is not a new problem for AECL. They have been around for 50 to 60 years. A lot of money has been poured into it and it still has a lot of debt. The average Canadian taxpayer has little confidence in AECL. We have watched Point Lepreau and the isotope deficit. We have watched them come back time and time again and watched more and more money go out to them — $960 million last fiscal year. Economists have looked at this every which way from Sunday, and they cannot make a justifiable case for it.

They need money and they need management. The Canadian taxpayer is leery about putting money into AECL. You are suggesting to do it in a hurry, but not under this bill. Oh, by the way, if we had the perfect fairy godmother who would come along and provide us with the technology and the management and financial expertise, we would bail out the money already owed and take care of liabilities from 30 or 40 years ago. We would have the marketing genius and the Prime Minister would travel everywhere that a nuclear salesman goes. That is basically what everyone has said when they have appeared before us. Take the composite: You have your point of view; others have had their points of view.

What has to give? Will it be time or treasure or what? It will not all come to pass. Senator Hervieux-Payette asked for the best restructuring option, but no one answered. You told us what you would like to see, but what is the practical answer?

The Chair: Would anyone like to try to answer?

Mr. Marleau: Is there a need to restructure AECL? That is my answer. We need the Chalk River Laboratory in Canada. We need to finance this laboratory to a correct level so they can perform and become one of the best in the world.

As for AECL engineering, which sells reactors, if there is support from the government, you do not have to be a travelling salesman to sell the reactor. What the foreign country looks at is whether there is support from AECL that will provide maintenance and technology support for the next 60 years. You do not build a reactor for 20 days or for 20 years. It is something you build that will last more than 20 years. Every country is expecting that you will support your technology. If you put a little bit of uncertainty on the support to the technology by leaving it in the air, that it may be just destroyed in five or ten years, that is a problem. If you are supporting your technology or saying you will sell it, okay, but do not leave it in the air. I think we should not necessarily sell it.

Senator Finley: That is exactly what we are doing with this bill; we are moving towards a resolution. Senator Murray has been quite clear that he does not like the bill, and Mr. Bratt has been quite clear that there are too many ornaments, et cetera.

However, this bill takes some steps to do something with AECL. If we are going to be realistic and pragmatic about this, one would imagine that the stakeholders and the CANDU team, it strikes me, would be the obvious people to show a serious interest in this. To what degree would SNC-Lavalin or Babcock & Wilcox be prepared to risk their corporate funds in this venture? That is what you are asking Canadian taxpayers to do.

Senator Neufeld: Thank you for all of your viewpoints. My numbers could be a bit out, but as I understand, we generate about 70 per cent of our electricity from clean sources right now in Canada.

Mr. Marleau: In Ontario.

Senator Neufeld: In Canada. The government's goal is 90 per cent. To get to 100 per cent, I am not sure how many megawatts that will require. An expanded AECL that competes worldwide is looking around the world for most of its growth. I worry about the liability for Canadian taxpayers who have pumped some $20 billion into AECL. I have not become comfortable that there is not a lot of liability, especially when we look within Canada at what AECL is doing now. Here at this committee, I hear them asking for $400 million or $500 million because this is not working right. We have some liabilities here and there.

I think Canadians will accept some liability across Canada — and where I come from, British Columbia — to actually fix something in Ontario or New Brunswick, but I think they will look at the situation a little differently when you start looking overseas to other countries, 20 years from now, after a plant is built. I would like you to tell me a bit about liability.

Second, if you look at the information sheet that Mr. Bratt gave us, AREVA is listed, as is Westinghouse, Toshiba, General Electric and Hitachi. I do not know whether the Japanese Prime Minister or President Obama go out ahead of all nuclear salespeople, and Russia, of course, is Russia. It is obvious to me, when I look at that, that the private sector actually does handle this kind of thing, obviously, through those large companies across the world that you have made us aware of, and they compete.

What would be wrong with having an AECL that partners with some of those companies, or someone else who wants to invest the money and take the responsibility, the liability, and continue to create those jobs within Canada?

The Chair: You will not get all these questions answered. We just do not have time. We have three minutes left and five people with questions.

Mr. Bratt: We are asking two questions. One question is how to restructure AECL. I think privatization is the answer. It is not just money; it is private-sector management. AECL did mess up Point Lepreau in the refurbishment. They have blown international opportunities. I am not part of industry, so I can say that without getting punished.

The second question is whether this is the right way, just because there is a sense of urgency. There is urgency on all sorts of matters, and we do not throw away Parliament and we do not throw away transparency.

There are two issues here. The first issue is to restructure the company and the second issue is how to go about doing it, and I do not think this is the best answer.

Senator Marshall: I know now we are stuck for time, but I did want to pick up on what you said about the privatization or the restructuring, because I agree with that. Of all the witnesses who have appeared before us, everyone has indicated that there are issues with regard to AECL and that the objective is to make them better. We are not going to make them better by maintaining the status quo, so we have to do something different.

We have all these witnesses appearing before us and there are issues with regard to ongoing requests for additional money from the government. We see this every year. Three years ago it was $322 million, then it went to $658 million two years ago and $962 million last year. They have an accumulated deficit on their books of almost $4 billion. Those issues must all be addressed and I do not think there is enough money in the public purse to be funding the financial requirements of AECL.

In your opening statement, Mr. Bratt, you said that AECL desperately requires a major cash infusion. Do you have a dollar amount on that?

Mr. Bratt: I do not have a dollar amount on that and I do not care where the cash infusion comes from. Obviously, the government will not do this, which means you have to go outside of government. Someone must have deep pockets to compete with these giants.

Senator Marshall: Do you have a magnitude? Are we talking about $100 million or $100 billion?

Mr. Bratt: Are you talking about what needs to be put into the company or what the sale of the company should be?

Senator Marshall: Everyone wants an improved version of AECL. What will it cost?

Mr. Bratt: When you look at the dollar amounts that Parliament has been appropriated, you have to start breaking those down. What was going to Chalk River does not count on this. What was going to fix up the NRU, national research universal, pull that away. I think the ACR-1000 was a mistake. That is an illustration, in my view, of some of the issues with AECL. I would pull that off the table and I would focus on the Enhanced CANDU 6, a reactor that has already been built, built on time, around the world, and there is still a great market for that.

As far as going to the larger reactors, I think we are out of that loop. The ACR-1000 is not even ready yet. I do think this will take an investment of several hundred million dollars, but not the billions we are talking about because of Chalk River.

The Chair: I apologize, honourable senators, but we are running out of time. The main reason is that there is a vote. When we arranged these panels, we did not know we would have this vote. We have another panel that will take us to voting time.

What I would like to do is make a deal with the three senators who are still on my list. You can put your question now but not get an answer, though maybe someone would like to write their answer. Alternatively, you can wait. We have two panels tomorrow on AECL, and you can wait and be at the top of the list tomorrow.

Senator Ringuette, which would you like to do?

Senator Ringuette: I certainly would like to get the expertise of our witnesses today.

The Chair: You may pose your question, and whoever feels he can answer it, we will give you the address and you can send us an email with your position.

Senator Ringuette: I will start with a comment. It is fine to say that, last year, taxpayers gave AECL $962 million, for an industry to operate for an entire year, including Chalk River and so forth, while they are spending more than that on three days of meetings.

To get to more serious things, I am concerned about the intellectual property. I understand the international potential, but I would like us to look at the national need. We have 20 CANDU reactors in Canada, and two of them are in refurbishment, thank God, because we have the technology. What happens to those CANDU reactors if we no longer have the technology because we have sold the intellectual property to a foreign entity? How much will that cost? What is the potential sovereignty danger, especially for Ontario when 50 per cent of their electricity is provided by nuclear CANDU reactors?

Senator Dickson: I have a question for Mr. Lamarre. Has your big engineering company that trades on the TSX, et cetera, done any due diligence inside AECL as to whether or not it would be a good investment for your company?

Mr. Lamarre: We have been working for AECL for the past 40 years. We have done international projects with them. We are familiar with the types of contracts they sign. We have signed contracts with them on JVs and consortia. Therefore, we are familiar with the business and how they are doing it and how to approach it. We were not teamed up with them when they did the refurbishment projects or on the MAPLE reactors. To answer the question, we did not have —

Senator Dickson: I know I am interrupting you, but as far as the restructuring, what would you pay for AECL? Would you pay anything?

The Chair: You can send us a note on this.

Mr. Lamarre: I will answer quickly.

Senator Dickson: I know you are a good contractor.

Mr. Lamarre: We would pay a fair amount for the EC-6, Enhanced CANDU 6, business and the services business, and we need to complete the present refurbishment projects right now, and it would be a profitable company going forward in which the private sector could be involved.

The Chair: Thank you. I am sorry we have to come to an end. This is a very interesting discussion. The Standing Senate Committee on National Finance appreciates each of you, Mr. Lamarre, Mr. Hughes, Mr. Marleau, Mr. Novog and Mr. Bratt, for being here. Your positions were clear. We were trying to expand on them and clarify them a little.

Honourable senators, we are now dealing with Part 1 of the bill, which made amendments to the Income Tax Act and, in particular, provisions related to venture capital or investment capital. I am pleased to welcome John Ruffolo, Chair, Tax Policy Committee, Canadian Venture Capital Association, and Stephen Hurwitz, a partner with Choate Hall & Stewart LLP. Honourable senators know time is restricted because of the deferred vote that will be taking place. We will have to leave in just under one hour. Mr. Ruffolo or Mr. Hurwitz, do you have opening remarks?

John Ruffolo, Chair, Tax Policy Committee, Canadian Venture Capital Association: Thank you very much. I have some prepared comments.

In its federal budget tabled March 4, 2010, the Canadian government announced a much-anticipated tax change that has given Canadian-based companies the advantage they need to compete on the global stage. By proposing to amend the definition of "taxable Canadian property" to exclude shares of Canadian corporations, and certain other interests, that do not derive more than 50 per cent of their value from real property situated in Canada, Canadian resource property or timber resource property, the government has significantly reduced administrative and, in some cases, economic barriers to foreign investment in Canadian-based firms. This relieving measure places Canada at the top of the list of countries to invest in globally by eliminating certain compliance obligations in respect of these types of investments, and more closely aligns domestic tax rules with Canada's tax treaties and the tax laws of Canada's major trading partners.

This proposed legislative amendment is among the most significant changes to capital gains taxation since the taxation of capital gains was introduced in 1972, and signals the arrival of a more welcoming environment for foreign investors. In the vast majority of cases, non-residents who were previously not taxable on the disposition of their investments in such shares due to Canada's extensive international tax treaty network are now also exempt from tax under domestic law without having to apply for treaty relief. As a result, they are no longer required to comply with the section 116 tax clearance certificate procedure or file a Canadian income tax return.

The change removes perceived insurmountable barriers for many venture capitalists who considered the previous administrative requirements and economic delays for each investor to be strong deterrents to investing in Canada. Many foreign venture capital funds are structured such that each of their investors, potentially numbering in the hundreds or thousands, was subject to this clearance process when the fund disposed of a Canadian investment, as if the investor held the interest directly. This delay resulted in lower returns and frequently caused direct financial loss to investors. Canadians who invest in the United States, the United Kingdom and other major global markets do not face such administrative delays. In addition, each investor was subject to tax filing requirements even in circumstances where no taxes were ultimately payable. This resulted in onerous documentation requirements in order to process a single sale.

We believe that, at a minimal cost to Canada's treasury, this amendment will have an immediate, positive and direct impact on Canada's ability to grow a robust Canadian knowledge-based industry.

By sending a clear message to international investors that Canada is "open for business", the government will make Canadian companies more attractive to foreign investors overnight. This will help Canadian companies raise the capital they need to achieve global leadership status.

A 2007 survey by Deloitte and the Canadian Venture Capital Association, CVCA, of 528 venture capital funds around the world found that 40 per cent of U.S. respondents and 28 per cent of global respondents cited Canada's unfavourable tax environment as a key reason for not investing in Canadian companies. This level of concern was five times higher than for any other country in the survey and reflected the investment crisis within Canada's venture capital industry. The survey also found that Canada was attracting the attention of just 11 per cent of U.S. venture capital funds as a primary country for expansion, behind China at 34 per cent and India at 24 per cent.

By introducing this change, the Canadian government, demonstrating its awareness of the concerns facing the financing community and an understanding of the severity of the problem, has removed the major tax barrier that had prevented the flow of critically needed international investment capital into Canada.

The Canadian Venture Capital & Private Equity Association applauds this government decision and supports the proposed change into law.

The Chair: Are you able to refer us to a section of the act? I know it is in Part 1.

Mr. Ruffolo: Yes, section 116. There might also be something in section 248(1) under a definition of taxable Canadian property.

The Chair: That may help honourable senators. Your point was clear, but it is nice to be able to read the act itself, which is what we are really dealing with, rather than sort of a promise. I have page 13 of Bill C-9, clause 22, definition, taxable Canadian property.

Mr. Ruffolo: Correct. The reference there is in section 248(1) of the Income Tax Act, which is where the proposed change will be.

The Chair: Thank you, that is helpful.

Stephen A. Hurwitz, Partner, Choate Hall & Stewart LLP: Thank you very much for inviting me to be here today. I timed my speech at about five minutes, but I will try to not overlap things that Mr. Ruffolo has said. I happen to agree with all the points that he raised.

The Chair: We are going through simultaneous translation, so do not try to speed up and get it all in because the translators have a difficult time with that.

Mr. Hurwitz: What I will do by way of background is describe the problem that this legislation is seeking to address.

In 2009, venture capital investment in Canadian companies was at its lowest level in 14 years. As you all know, if you look at Canada's federal and provincial R&D, research and development, expenditures of about $18 billion, venture capital is that dedicated form of funding which converts that R&D to products, jobs, exports, companies and tax revenues. Without venture capital, R&D is wasted — it is nothing more than ideas which eventually wither and die.

In 2009, venture capital investment in Canadian companies, thinking about that background, was at its lowest level in 14 years. In that same year, Canadian venture-backed companies were able to raise, on average, little more than one-third the amounts raised by U.S. venture-backed companies in that same year. What does that mean for Canadian companies? These undercapitalized Canadian companies must directly compete in the same North American market with these far better financed U.S. companies. That is a recipe, short term and long term, for disaster.

Hobbled by having only a fraction of the capital of their direct competitors, many Canadian companies are forced to be sold early in their life cycles, long before they obtain industry leadership. These sales are frequently to large U.S. companies and often at low prices. The result, as I mentioned, is that Canada is losing much of the benefit of its total federal and provincial $18 billion outlays each year.

Rather than ultimately benefiting Canada, this extensive R&D has become, in effect, a subsidy to U.S. businesses that acquire these promising Canadian companies cheaply and then reap the financial rewards when these companies achieve industry leadership.

How are Canada's current cross-border laws thwarting the entry of much-needed U.S. and foreign venture capital that can be brought to bear to resolve this crisis? The Canada-U.S. tax treaty provides that investors of each country, when investing in the other, will be taxed on investment gain only once in the investor's home country.

For example, a Canadian venture capitalist investing in a private U.S. company will be taxed only in Canada on its gain upon sale and not in the U.S. The U.S. automatically recognizes the Canadian investor's treaty exemption from double taxation, with no paperwork, no delay, no withholding. The Canadian VC, venture capitalist, is immediately free to take its sales proceeds back to Canada.

In sharp contrast, U.S. venture capital firms investing in Canada face nightmarish red tape and extensive delays to achieve the same reciprocal tax treaty benefit in Canada. How does that happen?

When selling shares in a private Canadian corporation, they must apply for a section 116 clearance certificate to one of 45 Canadian government offices that grant it. As Mr. Ruffolo said, this application is required for every investor in a U.S. venture capital firm. Many of these firms have dozens, or even hundreds, of investors. These investors have large numbers of investors. Every investor, every tier down, has to file this application.

One U.S. VC firm, in a single transaction, had to obtain 900 signatures in connection with a section 116 processing. There are waits of up to four to eight months — waits of one to two years are not unheard of — and 25 per cent of the gross proceeds must be withheld by the buyer until the section 116 clearance certificate is granted and the proceeds then released to the U.S. venture firm.

When those withheld proceeds are in stock of a listed public company buyer, the stock value can plummet during that four to eight months — or those two years — if, during the long wait, there is a decline in the public market which can cost U.S. investors thousands, if not millions, of dollars.

Because Canada has treaties with virtually every industrialized nation in the world from which venture capital firms come, the section 116 exercise became largely academic because there was nothing to prove, at the end of the two years, there was no tax due. There was a sense, somehow, that if that process did not occur, there might be leakage. It is speculated that the cost of enforcing section 116 may have far exceeded the amount of any taxes ultimately collected.

Because of these administrative burdens and economic risks of delay, many U.S. investors just said no to investing in Canada. That was not easy because most U.S. investors realize that Canada is a place of extraordinary technology, extraordinary talent, world-class universities and research centres. An extraordinarily highly educated population.

In short, Canada's cross-border laws were thwarting hundreds of millions of dollars in much-needed-and-sought- after foreign venture capital from entering Canada, costing Canada the potential loss of untold jobs and millions of dollars in tax revenues that successful investments can create.

There is, however, a silver lining in the problem. It can be easily fixed. The solution is contained in Bill C-9, in proposed subclause 22(1) that you just referred to, which simply defines taxable Canadian property to exclude shares of a private corporation where the shares do not derive their value principally from real property, including research property and timber property.

As Mr. Ruffolo said, the new legislation would eliminate all the current bureaucratic hurdles, making it easy for the international investment capital community to invest in Canadian technology companies. Think of this reform as the extension of free trade. Free trade stands for the proposition that the free flow of goods and services across borders benefits both economies, societies and countries. This has come to pass.

This is about the free flow of capital across borders. The view is that, when that capital flows freely, everyone will benefit. The ultimate mission of a U.S. venture capitalist, and a Canadian venture capitalist, in reverse, in investing in a Canadian company is that the success comes when that Canadian company has gigantic increases in exports to the U.S. The win-win is that, if the U.S. venture capitalist wins, his or her partner in Canada who is a venture capitalist wins, because they do these deals together, the CEO wins, and the countries win. From Canada's standpoint, exports, as we all know, lead to increased jobs and increased tax revenues.

If Canada's emerging technology company industries remain chronically underfunded, much of Canada's billions of dollars of investment in R&D could be lost, as mentioned, and its intellectual capital squandered and future growth imperilled. This change will open the gates for, in my view, over time, hundreds of millions of dollars of venture capital from the U.S. and foreign countries to flow into Canada. Investment money has no nationality and should be border- less. Canada should change its cross-border laws as provided in Bill C-9 to enable its emerging technology companies to freely access much-needed international capital.

The Chair: Thank you very much, Mr. Hurwitz. I do not have a total familiarity with all of the provisions of the Income Tax Act. That is my first admission.

Mr. Hurwitz: Nor do we.

The Chair: Could this section be broad enough to include all foreign investors that we want to attract to Canada, who then with this provision would not have to file the forms and pay the tax and get it back? We are restricting the comment to venture capital and why it would be desirable for new start-up industries and businesses to have this capital, and that we will call venture capital. However, could it not apply to all investors?

Mr. Ruffolo: That is correct. We were speaking on behalf of venture capital because the problem was more acute to venture capital. To roll back the clock a little bit, two years ago, a proposed change did occur, which was very good legislation to deal with this issue for really non-venture capitalists. I will give you an example of the acute problem for venture capitalists. A typical U.S. venture capitalist — and by the way, this applies to every country — would typically be formed as a limited partnership. The way that the rules technically work is that every member of that limited partnership is required to file under this section 116 clearance certificate process and then file a tax return. When you look at how some of these funds are structured, they are funds of funds of funds, and you could have hundreds or thousands of investors for one single technology transaction. That can cause you an unbelievable amount of red tape. This is acute in the venture capital and in the private equity world. In venture capital, you tend to see more knowledge- based industries. In private equity, it is anything. You typically see more traditional sorts of industries. This change really addressed that final change that did not occur two years ago in order to cover the full gamut.

Mr. Hurwitz: To answer your question about the investor community generally, this is about avoiding double taxation. No one can invest in Canada if they will be taxed in their home country and in Canada. There is nothing left. The treaty embodies a policy which says investing here is good. When a Canadian invests in a foreign country, they cannot be hit twice. As a general matter, the goal is to get as much investment money as you can, because if you are not taxing it, you are getting the investment money, and no one will put it into any jurisdiction if they will be taxed twice. In effect, you are putting up a sign saying, "We are not open for business in terms of investment. Keep your money back there."

The Chair: We already had a treaty with the U.S., so this is really the administrative mess catching up with the treaty that was already in existence.

Mr. Ruffolo: That is correct. In fact, the real point was that, at the end of the day, for the most part, using the U.S. example, there is really no tax leakage because they were not paying tax in the first place, largely by virtue of the Canada- U.S. tax treaty. The real question is: If there is really no tax to pay, why are we forcing them to go through this crazy compliance, and then, on top of that, to give it a kick in the shins, make them file a tax return? That was the real perception issue. We saw many of the U.S. venture capitalists just say, "This is too painful. Let us go to Israel or India or China. Canada does not seem to want our money." — even though at the end of the day most did not pay a tax.

The Chair: There was a withholding that they had to claim back.

Mr. Ruffolo: Yes. In many cases, some of them had to suffer the withholding taxes. Six or nine months go by, and they are out the interest on that. When you have a venture capital fund that is complicated, you cannot distribute those monies, so it caused some real economic damage to some of the venture capitalists.

Mr. Hurwitz: Invariably, the money came back. It was not that Canada was losing taxes if it did not go through the process.

The Chair: I understand.

Senator Dickson: The restructuring of AECL is provided for in Bill C-9. I think you were here when evidence was received from the previous witnesses on that topic. I would assume from your remarks that the passing of Bill C-9's major tax reform probably would create significant interest by venture capital firms that have appropriate tax treaties with Canada. Would I be right in that assumption?

Mr. Hurwitz: We were not in the room.

Senator Dickson: You are not familiar with that section.

Mr. Hurwitz: We do not have the context.

Senator Dickson: The context is that, in Bill C-9, there are broad powers for the government to restructure a Crown corporation or sell the assets, whatever corporate restructuring may involve to get the most industrial benefits for Canada, and as well the best price for the assets, if any, that are to be sold. In that context, money has to be raised. In your opinion, would passing this tax reform that you addressed in Bill C-9 create greater interest in venture capital firms investing in the nuclear industry in Canada?

Mr. Ruffolo: Admittedly, most venture capital firms that I see do not really invest in the nuclear energy industry. Where they invest quite a bit is in the clean technology industry, and nuclear is a little bit in the grey area, at least currently. They currently are heavily involved in alternative and renewable energies. Clearly, for one of the venture capitalists, whether in the U.S. or elsewhere, this would actually facilitate that investment coming into Canada as well.

Mr. Hurwitz: Certainly, if one had an inclination to want to invest in that area or think about it, this is a major inducement. In effect, NAFTA says we are one marketplace, and for capital purposes, this legislative change says we are one marketplace. It should be as easy for someone to invest in Toronto as it is Boston, and vice versa, and everyone benefits if capital finds its way to the best opportunity and the one of greatest interest. Your example could be a prime one if this one venture capitalist who was thinking of getting into that area now understands there is no more red tape or two-year withholding.

Senator Dickson: In a concrete example, in venture capital conglomerates, for instance, Hitachi may be a participant in a venture capital conglomerate. Therefore, this change in the tax reform in Canada would facilitate Hitachi.

Mr. Hurwitz: Absolutely.

Mr. Ruffolo: No question.

Senator Ringuette: You have indicated that last year saw the lowest venture capital investment in Canada, and I think that was probably due to the economic crisis. You indicated that U.S. citizens seem to be most inclined to invest in foreign venture capitalists in Canada?

Mr. Hurwitz: NAFTA allowed Canadians to access the largest customer market in the world without restriction. This legislative change allows Canadian companies to access the largest capital pool in the world without restriction. The section 116 restrictions prevented that access because U.S. VCs, or venture capitalists, did not want to invest. The risks were too great; it was too complex.

That is how I would couch the answer. There is an opportunity for Canadian companies, which are having trouble because the Canadian venture capital industry was struggling. Everyone was struggling in North America as a result of the issues, but the capital pool in the U.S. is a lot larger. It gives Canadian companies more choice in terms of where they get the capital.

Senator Ringuette: Maybe I was not clear in my question. I understood what you said. In 2009, which foreign countries invested in Canada in the venture capital market?

Mr. Ruffolo: The U.S. was the greatest source of foreign venture capital; correct.

Senator Ringuette: And then?

Mr. Ruffolo: I do not have the latest information in front of me, but likely the U.K. would follow the U.S.

Mr. Hurwitz: France may, too.

Mr. Ruffolo: Yes, France. However, there is a big drop-off after the U.S. For the rest of the countries, it actually is relatively small in comparison to the U.S.

Mr. Hurwitz: The U.S. usually is in excess of 95 per cent of all the foreign venture capital that goes into Canada.

Senator Ringuette: Ninety-five per cent of foreign?

Mr. Ruffolo: Correct.

Senator Ringuette: How would that compare with the national component of venture capital investment?

Mr. Ruffolo: Last year was a particularly poor year. You are now comparing it to the domestic issue and I do not have the statistics in front of me for last year.

This legislation really deals with the foreign capital situation. It does not deal with the domestic capital situation. There are a number of domestic issues that need to be addressed as well to ensure that the Canadian situation is healthy. As of the end of 2009, domestic venture capital was the lowest it has ever been in the last 13 years. It never was as low since the end of 1995. I do not know what the relative percentages were last year, but it significantly dropped off, by 80 per cent or 90 per cent, from the highs of 2000.

Senator Murray: Am I correct in stating that this provision takes effect as of budget day, namely, March 4, 2010?

Mr. Ruffolo: That is correct.

Senator Murray: My next question is not directly related to the bill, but I do not want to lose the opportunity to ask it, because you two people are very knowledgeable, interested and keen on foreign investment. I will ask you to bootleg in a comment as to whether you think the Investment Canada Act constitutes a serious obstacle to foreign investment. Or do you want to go there?

Mr. Ruffolo: I am obviously familiar with it. I really do not have a commentary around it, because I do not know all of the provisions of the Investment Canada Act to be honest, and to give you a credible response.

Mr. Hurwitz: Nor do I.

Senator Callbeck: In your opinion, do changes to the Income Tax Act create the possibility of new loopholes or unintended consequences?

Mr. Ruffolo: That is a fantastic question. We spent a lot of time with the Department of Finance on that very issue. We were not clear if there were any unintended consequences, but it certainly was the department's concern. I do know that they were concerned about some of the offshore trust rules — I do not know if you are familiar with that. That is, would there be an opportunity for someone who has offshore money in tax havens to take advantage of those rules by virtue of this change? That concern was raised by the Department of Finance. At some point, however, they got their heads around it. Either the unintended consequences were not there or not significant enough to offset the potential benefits of this particular rule.

Mr. Hurwitz: It is a really good question. That question also arose in connection with the free trade agreement. To some extent, everyone is making guesses. The logic was overwhelming; it was very compelling. Someone asked, "What will we lose when we take the tariffs down? Tell us about the unintended consequences." The ultimate conclusion is that we make a judgment call. In looking at the judgment call here, the present situation results in Canadian companies competing in the North American market with about one-third the capital of the direct competitors. We know that is going in meteoric speed in the wrong direction, and we know the capital pools available in the U.S. When U.S. VCs invest in Canadian companies, they do not just bring money but years of experience in the U.S. marketplace. They know the customers and the leaders of the customers. The U.S. market is different. The assumption is there is now a better chance and the U.S. now has skin in the game in Canada to do one thing that everyone is focused on, namely, the exponential increase in exports. If that does not occur, then we do not have success.

This is a fair question, but I think it is ultimately weighing knowing that it ought to work, and the present circumstance is unacceptable. If it does not work, then all of you will be busy making change. I have high confidence that it will be of benefit to both countries, just as free trade was.

Senator Gerstein: Gentlemen, as I understand it, it is great to hear that Bill C-9's major tax reform will spur the venture capital industry. However, I understood that the change is not expected to have any impact on market behaviour until actual passage and formal enactment of the change. That is, it is not retroactive. I did not quite understand that. Could you explain that?

Mr. Hurwitz: It is technically retroactive. This is splitting a hair to March 5. It was going to be the day after. What is that metaphysical thing all about? I heard — and I do not know that this is a fact — that the CRA, Canada Revenue Agency, or some organization in Canada already came out with some kind of statement saying that we will now treat it as if it is in effect. However, I do not fully understand the nuances of Canadian law.

Senator Murray: Royal Assent is irrelevant. Most of it is tax stuff and has been for years. It will come eventually, but the provisions are effective as of budget night, as I recall. There is a whole list of them here effective as of March 4, 2010.

Mr. Hurwitz: I wish I could shed light on it.

Senator Murray: Royal Assent is a sign-off for the final.

Mr. Ruffolo: CRA has given guidance, because there have been a lot of transactions and people were confused about what they should do. They confirmed to treat it as if the law were to be passed in order to get that uncertainty out of the way.

Senator Peterson: My question is about AECL.

The Chair: They will come tomorrow morning, unless you gentlemen would like to answer questions about Part 18 of a 24-part bill here. Part 18 deals with AECL.

Mr. Ruffolo: I am quite happy not to do so.

The Chair: Thank you very much, Mr. Ruffolo. We appreciate your being here and helping us.

(The committee adjourned.)