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
Senator Joseph A. Day (Chair) in the chair.
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.
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.
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
Guy Marleau, Associate Professor, Department of Engineering Physics, École
Polytechnique de Montréal, and finally, Patrick Lamarre, Executive
Vice-President, SNC-Lavalin Group Inc.
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
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
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
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
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
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
The Chair: Mr. Novog, thank you for your comments.
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
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
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
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
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
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
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
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.
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
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
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
The Chair: Thank you very much, Mr. Lamarre.
We do not have a lot of time, honourable senators, so please govern
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
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
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.
The Chair: Do you have an answer to this question, Professor Marleau?
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
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
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
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
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
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
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
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
Senator Ringuette, which would you like to do?
Senator Ringuette: I certainly would like to get the expertise of our
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.