22 September 2000 External T.I. 2000-0023275 - GOVT ASSIST. FISHING

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Taxation of payments made by HRDC under the Fisheries Restructuring and Adjustment Program a) licence retirement and b) final cash payment.

Position: Both types of payments taxable whether the recipients were employed or self-employed.

Reasons: a) The relinquishment of a fishing license to the DFO is treated as a disposition of eligible capital property.

b) Self- employed individuals, considered to be earning income from business, in receipt of the final cash payments would be required to include such amounts in income by virtue of section 9 and/or 28 of the Income Tax Act (the "Act"). Lump sum cash payments received by individuals other than self-employed individuals, would be considered other income by virtue of subparagraph 56(1)(a)(vi) of the Act.

Mr. Lorne Anderson

A/DG, Aquaculture, Restructuring and Adjustment
Fisheries and Oceans Canada 2000-002327

200 Kent Street, 4th Floor, Room N-150 Karen Power, C.A.

Ottawa, ON (613) 957-8953
K1A 0E6

September 22, 2000

Dear Mr. Anderson:

Re: Canadian Fisheries Adjustment and Restructuring (CFAR) Measures

We are writing in reply to your letter, in which you requested clarification of the income tax treatment of licence retirement payments under the CFAR measures.

Our understanding of the facts is as follows:

1. The final cash payment ("FCP"), licence retirement and early retirement programs represent some of the measures that have been made available to assist individuals to permanently adjust out of the fishing industry.

2. Individuals who were eligible for the Atlantic Groundfish Strategy ("TAGS") on August 29, 1998 were eligible to receive a lump sum FCP. The payment was paid by Human Resources Development Canada ("HRDC") in two installments, one in September 1998, and the other in January 1999. The maximum payment an individual was entitled to was the amount of TAGS benefits the client would have received if the TAGS program had continued to its original termination date of May 1999.

3. In delivering CFAR measures, Cabinet instructed that no individual be permitted to take advantage of more than one of these measures.

4. Some individuals who applied for and received FCP were also eligible to apply for licence retirement. As a condition of CFAR, the Department of Fisheries and Oceans ("DFO") was therefore required to recover FCP payments from individuals who participated in licence retirement.

5. To ensure that individuals received payment under only one of the measures, DFO and HRDC made administrative arrangements to ensure that amounts paid out to individuals under FCP are recovered from individuals who opted to receive payments under licence retirement. In order to avoid the issuance of cheques by individuals, the gross entitlement to be paid by DFO to successful applicants under licence retirement was reduced by any FCP payments previously received from HRDC.

You have requested that we clarify the appropriate tax treatment of the above payments.

Our Comments

Taxation of FCP

In our view, FCP payments received by self-employed individuals, considered to have been earning income from business, would be included in the computation of business income by virtue of section 9 and/or 28 of the Income Tax Act (the "Act").

Section 56 of the Act requires that certain amounts be included in computing the income of a taxpayer for a taxation year. In our view, the lump sum cash payments received by individuals who were previously employed in the fishing industry, would be considered other income by virtue of subparagraph 56(1)(a)(vi) of the Act.

Taxation of Licence Retirement

A fishing licence held in connection with a fishing business is an eligible capital property in respect of the fishing business. The proceeds from the license retirement will be treated as the proceeds from the disposition of eligible capital property. This treatment is consistent with license retirement programs delivered under the Northern Cod Adjustment and Recovery Program ("NCARP") and TAGS.

The cumulative eligible capital for a business is, in effect, an expenditure pool relating to the eligible capital property of the business. The pool is increased by 3/4 of each eligible capital expenditure and decreased by each 3/4 of the proceeds received on the disposition of an eligible capital property. A deduction is allowed under paragraph 20(1)(b) of any positive balance in the pool, and generally a negative balance in the pool will result in a business income inclusion as provided under subsection 14(1) of the Act.

Specifically, once an individual has relinquished his fishing licence directly to the DFO, the proceeds received should be included as income from his fishing business under paragraph 14(1)(a)(v), to the extent that such proceeds results in an "excess" amount as defined in subsection 14(1). Prior to the repeal in 1994 of the $100,000 capital gains exemption found in subsection 110.6(3) of the Act, an individual taxpayer could have claimed a capital gains exemption in respect of such excess amount, as paragraph 14(1)(a)(v), as it then read, deemed the excess amount in subsection 14(1) to be a taxable capital gain. As the $100,000 capital gains exemption is no longer available, paragraph 14(1)(a)(v) was amended for fiscal periods ending after February 22, 1994. As a consequence of these amendments, such "excess" amount arising on the direct relinquishment of the fishing licence to DFO will be taxable as income from a fishing business, rather than deemed to be a capital gain. We understand that the amendments to the deeming provision have led to some confusion over the tax treatment of licence retirements.

In addition, some individuals may have filed a capital gains election under subsection 110.6(19) of the Act, in respect of their fishing business. In such a situation, the taxable capital gain resulting from the election was credited to a special account which is defined in subsection 14(5) as the individual's "exempt gains balance". This exempt gains balance can be used by the individual to reduce the business income inclusion otherwise determined under the current subparagraph 14(1)(a)(v) of the Act. Individuals who have filed the capital gains election may wish to seek assistance when filing their personal tax returns.

Repayment of FCP

In our view, recipients of payments under the licence retirement program should report the gross amount of their entitlement as a disposition of eligible capital property in the year payments are received. In addition, the repayment of the FCP amount, which was netted out in the licence retirement cheque, may be claimed as a deduction, as discussed below, in the return of income which includes the licence retirement payment.

Individuals who were previously employed in the fishing industry and had received FCP, which were considered taxable under subparagraph 56(1)(a)(vi) and which was subsequently repaid, would be entitled to a deduction equal to the value of FCP repaid under subparagraph 60(n)(ii.1) of the Act.

Self-employed individuals, considered to have been earning income from business and who had received FCP which were included in the computation of business income by virtue of section 9 and/or 28 of the Act, would be entitled to deduct the amount of the repayment as a business expense.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 4 -