Submarine project in dispute

France, Canada clash over firm’s unpaid taxes

BY PETER MOON 
The Globe and Mail [1 July 1987] 

A major diplomatic row has erupted between France and Canada after a demand for $44.2- million in unpaid taxes by the Department of National Revenue against a Canadian-French consortium that is building the world’s first commercial nuclear mini-submarine. 
The submarine, known as the SAGA 1, is a prototype that could be used for oil exploration and development in the Canadian Arctic. It is due to be launched next month for sea trials off France. 
The consortium, which includes two private Canadian companies, a French Government agency and a French company, has four shareholders. Ownership is split equally between the Canadian and French partners.
But Revenue Canada officials have declared that the SAGA 1, which has been built entirely in France on the abandoned hull of another vessel, does not qualify as a Canadian scientific research tax credit project and are claiming taxes on unqualified capital expenditures. 
Revenue Canada has begun legal action to recover the $44.2-million despite a massive diplomatic campaign by the French Government in the past year to try to get the tax assessments dropped. 
The Revenue Canada decision has enraged the French Government, which now considers the SAGA 1 project as important as the dispute between the two countries over fishing rights off the French islands of St. Pierre and Miquelon. 
“It is a serious problem,” Christopher Juillet, a scientific attaché with the French Embassy in Ottawa, said in an interview. 
The matter was brought up by French President François Mitterand during talks with Prime Minister Brian Mulroney in Ottawa in May. It is also on the agenda for talks between Mr. Mulroney and French Prime Minister Jacques Chirac during his one-day visit to Ottawa at the end of August.
Part of the French campaign has been a promise to help the Canadian Government win membership in a European research and development program known as Eureka, if Revenue Canada will drop its demand.
A prime concern of the French Government is that Revenue Canada is acting too independently of its political masters and will try to seize the submarine, on which more than $100-million has been spent, to satisfy the tax debt.
A French official in Paris, who asked for anonymity, called Revenue Canada’s actions narrow-minded, stupid and crazy, and he said they were harmful to relations between France and Canada. 
Asked if his department plans to seize the submarine, Revenue Minister Elmer McKay said: “I can’t say.” He said confidentiality provisions of the Income Tax Act prevent him form discussing the case.
The diplomatic dispute has its roots in the highly criticized, much abused and now discontinued Canadian scientific research tax credit program, which was used to provide seed money for the SAGA 1 project.
The submarine was built on a hull originally constructed by Jacques Cousteau. The hull sat on a dock in Marseilles harbor for several years because the French oceanographer ran out of money before he could finish building a submersible vessel. 
The consortium was formed in 1984 in Nova Scotia. It took advantage of the SRTC money to develop the Cousteau hull and a nuclear power plant to propel the submarine. 
The group, called International Submarine Transportation Systems Ltd., is comprised of four companies: 

The French Institute for Exploration and Exploitation of the Sea, better known as Ifremer, a wholly owned research agency of the French Government, owns 25 per cent of ISTS. Ifremer is currently mounting an expedition to salvage treasures from the wreck of the ocean liner Titanic that sank about 450 nautical miles southeast of Newfoundland in 1912.

Comex S.A., a French company that is a world leader in marine salvage and underwater offshore work, owns 25 per cent. The company is also working on the Titanic expedition with Ifremer.

International Submarine Engineering Ltd., of Port Moody, B.C., a manufacturer of miniature submersibles and underwater robotics, owns 45 per cent. The company has an international reputation and has sold its vessels and equipment to a number of companies around the world.

ECS Energy Conversion Systems Inc. of Ottawa owns 5 per cent.

Revenue Canada has disallowed tax credits on SRTC funds paid to Comex to build the submarine in France and to ECS to develop the nuclear power plant in Ottawa.
Revenue Canada apparently does not believe the expenditures were for pure research as required under the SRTC program but were for the development of existing projects.
The diplomatic dispute began building in April, 1986, when Revenue Canada informed ISTS of its negative ruling. 
The company promptly sent a high-powered delegation to Ottawa on June 19, 1986, to meet Mr. MacKay to protest against his officials’ decision. 
“MacKay indicated his intense dislike of the SRTC program and spoke of extensive fraud and abuse of the program,” said a Telex report on the meeting to ISTS’s directors. “We indicated that we did not wish to be included with those who abused the SRTC program and our project was legitimate and fits with the (Income Tax) Act and its regulations on SRTCs. 
“The minister indicated that we would be given every opportunity to present our case and asked the Revenue Canada officials to extend us every cooperation while making it clear that the act must be complied with in every case.”
On June 25, 1986, Ralph Sultan, a Toronto investment company executive and a director of ISTS, fired off a Telex to the company’s four other directors (two Canadian, two French) and said: “If the Government of Canada wants to kill ISTS, then the suggested $42.5-million tax liability will do it very quickly. National Revenue will then come to possess two incomplete contracts (for the building of the submarine and the development of its nuclear power plant) as their principal assets of recovery.
“I doubt they will want to do that, but let us not underestimate the narrow-minded stupidities of tax collectors.”
Mr. Sultan discussed possible ways out of the impasse, including “receivership (as) a final option. Perhaps we could buy back the seized assets for a dollar, with all liabilities washed away by the receiver.” 
But more immediately, he suggested in the Telex, ISTS should enlist, through Ifremer, the help of the French Government to press the Canadian Government into getting Revenue Canada to change its mind.
In February, 1986, during his visit to Paris, Mr. Mulroney raised the possibility of Canada’s membership in the European Eureka research and development program, which involves l8 countries helping high-technology industries meet the challenge of competing with companies in the United States and Japan.
Mr. Mulroney’s overtures were rebuffed by the French, whose aid he was seeking, but Canada has not abandoned its hopes for membership. 
Yves Sillard, head of the French Government’s Ifremer research agency and a partner in ISTS, was also chairman of the Eureka program.
“What should we do?” said Mr. Sultan in his Telex. “First, and most importantly, Ifremer must continue to apply its international influence to Brian Mulroney, the Prime Minister…. Eureka project participation is tantalizing.”
The directors supported wholeheartedly Mr. Sultan’s suggestion to use Eureka membership for Canada as a pressure tool to overturn Revenue Canada’s ruling.
“I agree with Sultan that Ifremer needs to apply pressure through (External Affairs Minister) Joe Clark’s office,” James McFarlane, an ISTS director, told his fellow directors in a Telex dated June 27, 1986.
(Mr. McFarlane is also president of International Submarine Engineering, one of ISTS’s owners.) “Mulroney wants to be part of Eureka and he isn’t going to get in this way.” 
The French directors of ISTS reported to their Canadian counterparts on the progress of the French Government’s campaign to overturn the Revenue Canada decision in a Telex dated July 1, l986.
In addition to representations to Revenue Canada, the Canadian Department of Regional Industrial Expansion and the Canadian Embassy in Paris, they said: “We inform you that the SAGA project will be dealt with at the next Canadian-French economic committee in July, 1986, and that the French Government will take the future of the SAGA project into account. The SAGA project will become officially subject of Canadian-French cooperation.” 
A week later; the French directors Telexed the Canadian directors to say: “We were effectively surprised to observe that after all diplomatic efforts conducted by lfremer/Comex, there were no tangible results.” 
Two days later, a disappointed Mr. McFarlane Telexed his fellow directors to say that if the diplomatic and other pressures being exerted by ISTS did not persuade Revenue Canada to change its mind “then we move into a court case. At this point, you are looking at a four-year legal program and no amount of political pressure can change that in Canada.” 
He said a court case would result in ISTS’s bank accounts being, frozen “and ISTS shareholders will have to finance two dump trucks full of money for the various lawyers they will have to hire to fight the court case.” 
ISTS hired lawyers and tax specialists and is still disputing Revenue Canada’s position on the SRTC expenditures. But as a result of the seizure of its bank accounts, it has closed its Halifax offices. 
“This will simply kill the company,” said the French official in Paris, “It’s quite clear. It will also kill the project, which is a stupid decision.”
“They (Revenue Canada) also affect French-Canadian co-operation. We wanted to transfer that technology to a Canadian company because we think Canada has a good opportunity to exploit that.” Some Canadian sources say the French have exploited the situation to their advantage, using the project to provide employment and manufacturing. 
Moreover, senior French naval nuclear experts, including an admiral, have made several visits to Ottawa to collect valuable information about the nuclear engine development.
Others express concern that the submarine project has provided a unique chance for Canada to benefit from French oceanic expertise. If the venture fails because of Revenue Canada’s ruling, they say, the incident could set back scientific co-operation between the two countries for years. 
Meanwhile, Revenue Canada has also begun legal proceedings against another Canadian-French consortium that used SRTC funds. On March l9, income tax officials obtained a writ from the Federal Court that states International Robotics and Diving Systems inc. of Vancouver owes $18.7-million in unpaid taxes for disallowed SRTC expenditures plus $2,723,220 in interest. 
The company was involved in underwater pipeline repair using robotics and is jointly owned by International Submarine Engineering and Comex, two of the partners in ISTS. 
Mr. McFarlane, president of International Submarine Engineering, said Revenue Canada is disputing the validity of $44-million worth of underwater pipeline repair equipment purchased by International Robotics from Comex.