19 March 1996 Internal T.I. 9529947 - FISHING LICENCES

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:

Nature of payments paid to present holder of fishing licence to have the same rights that holder has with respect to renewing licence on a yearly basis.

Position:

Eligible capital expenditure

Reasons:

It was not the licence for which the purchaser paid the $XXXXXXXXXX. The licence is acquired from DFO annually by present holder of licence. It was the right to apply for the licence for which purchaser paid. The right to fish for one season is an amount paid DFO annually- not an amount paid the Vendor. The payment was made to attain the right to renew the licence for the current and infinite future years and is, therefore capital in nature.

									March 19, 1996

	Vancouver Tax Service				HEADQUARTERS
	Jim Thatcher, Technical Advisor		A.M. Brake

(613) 957-8953

									952994

Roe Herring Licence

This is in reply to your referral of November 27, 1995, requesting our views on the treatment of the costs in respect of the acquisition of commercial roe herring licences ("Licences"). Our understanding of the facts is as follows:

Facts

1. XXXXXXXXXX

2. XXXXXXXXXX

Licences which permit commercial fishing for roe herring by seine net and are issued by the Department of Fisheries & Oceans ("DFO"). The Vendor at all material times treated the Licences as eligible capital property ("ECP").

3.By agreements dated XXXXXXXXXX the Purchaser agreed to "purchase, assume, and acquire ... all right, title and interest in and benefit of the Licence" from the Vendor for $XXXXXXXXXX each, for a total purchase price of $XXXXXXXXXX.

4.Vendor, pursuant to the agreements, executed and delivered to Purchaser a "Nomination of Roe Herring Licensee".

5.At the time of purchase, Vendor owed Purchaser approximately $XXXXXXXXXX and the $XXXXXXXXXX was credited to this account.

6.Purchaser, in the agreements, granted the Vendor certain rights as follows:

a)the right to repurchase the Licences at any time for the same $XXXXXXXXXX.

b)to first offer to lease the Licences to Vendor each year thereafter at the going market rate. The roe herring season includes the months of February, March and at times April.

c)while it was agreed that Purchaser would have the right to solicit the sale of the Licence to a third party and should Purchaser receive a bona fide third party offer for that Licence, the Vendor shall have 14 days to elect to repurchase the Licence from Purchaser (for $XXXXXXXXXX) regardless of the price set out in the bona fide third party offer. In the event that the 14 days expires without the Vendor electing to repurchase, Purchaser shall have the right to complete the sale to the third party with no further obligation to Vendor.

7.It was agreed that should Vendor not lease the Licence in any particular year, Purchaser could lease to a third party for that year.

8.The Licences were not transferred to Purchaser until 1993. Vendor did lease the Licences from Purchaser for the 1993 and 1994 seasons.

9.Licences are issued by DFO with a term of one calendar year and expire on December 31. At the expiration of the term the DFO issues a licence renewal form, and when the payment is made by the licence holder, the Licence is renewed for a further year. There is no automatic right of renewal and such renewals are at all times subject to the discretion of the Minister of Fisheries and Oceans.

Purchaser added the $XXXXXXXXXX cost of the Licences, along with another $XXXXXXXXXX paid for other licences, to its Class 14 on the T2S(8) submitted with its filed 1992 T2 Corporate Income Tax Return. Subsequently, they requested that the 1992 return be adjusted to allow the entire $XXXXXXXXXX as a current expense on the basis of the decision by the Tax Court of Canada in the case of Buston 93 DTC 1048 where it was held that the cost of a herring roe licence is deductible in the year acquired because it is not a capital expense as there is no legal right to renew after the year.

Our Comments

The Vendor had no legal right to renewal as it was at the discretion of DFO. However, the Vendor did have an expectation that, since the Licence had been issued to him year after year in the past, it would continue to be issued to him. It was this expectation and right that the Purchaser wanted to acquire. Purchaser wanted to place itself in the position of the Vendor to have that same right or expectation to enable it to apply and expect DFO to issue that same Licence to it (Purchaser) for not only the upcoming year but for infinite future years. Hence, the right to fish for one season is not what Purchaser paid for. Purchaser paid Vendor for the right to take his place to attain all rights and expectations Vendor held with respect to getting the Licence reissued year after year. This payment of $XXXXXXXXXX was made to benefit a period of much more than one year's right to fish. In our view, the $XXXXXXXXXX paid for the right to apply for the Licence in future years is an outlay made by the Purchaser with the expectation of being able to renew the Licence in future years and is, therefore, capital in nature and qualifies as an eligible capital expenditure.

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch