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:
tax consequences arising from a purported transfer of a fishing license to a corporation
Position:
the right to fish is not transferable to corp (& if even if it were, the value of that right would be negligible) and any income earned pursuant to a fishing license is that of the license holder
Reasons:
the right to fish is not separate from the license but even if it could be transferred to a corporation, the value of the right would be negligible. Income from fishing pursuant to a fishing license is that of the license holder, whether as partnership or proprietorship income.
March 25, 1998
XXXXXXXXXX Tax Services Office HEADQUARTERS
A. Humenuk
Attention: XXXXXXXXXX 957-8953
972647
Transfer of Fishing Business to a Corporation
This is in response to your memorandum of September 29, 1997, and the memorandum of December 11, 1997 from XXXXXXXXXX Tax Services Office concerning commercial fishing by a corporation under the authority of a fishing licence granted to an individual.
XXXXXXXXXX, each of whom has been issued a fishing licence by the Department of Fisheries and Oceans ("DFO"). The licences are valid for one year from the date of issue and are usually renewed annually provided that the holder of the licence continues to qualify. Although the licences are not transferable, DFO will issue a new licence to another individual fisherman on the recommendation of a fisherman who is forfeiting a licence, thereby effectively permitting the transfer of a licence to another individual who qualifies. However, a commercial fishing licence will not be issued to a corporation subject to certain exceptions relating to aboriginal fishing rights and the renewal of licences originally issued to a corporation before 1979.
In the cases under review, each fisherman has filed a capital gains election in respect of the fair market value of his or her licence as of February 22, 1994, thereby creating an exempt gains balance. The fair market value of the licences as of February 22, 1994 is based in part on the fact that the licences are routinely renewed by DFO and that the licences can be effectively transferred to another individual. As a result of the elections, each fisherman has an exempt gains balance of approximately $XXXXXXXXXX.
Subsequent to February 22, 1994, each of these individual fishermen transferred the operation of their fishing business to a corporation wholly owned by him or her. Since the fishing licences are not transferable to a corporation either directly or in the manner discussed above for transfers to other individuals, trust indentures were created under which each individual fisherman agreed to hold the fishing licence for the exclusive use of his or her corporation. In addition, sales agreements were executed under which the assets of the fishing business, including the fishing licence, were purportedly transferred to the respective corporations. The stated purpose of the sales agreement and trust indenture was to transfer the right to use the individual's fishing licence to a corporation controlled by that individual.
1. The issue is whether the right to use an individual's fishing licence can be transferred to a corporation independently of the licence itself and if so, whether the fair market value of that right is limited to the value of the earning potential of the existing licence or whether it includes the earning potential from future renewals of the licence.
In addition, the following issues were raised by XXXXXXXXXX Tax Service Office in the above-noted memorandum:
2. If a fishing licence cannot be transferred to a corporation under the provisions of subsection 85(1) of the Act, what are the tax implications of the receipt of property (e.g. notes payable, shares) by an individual as a result of an agreement under which the licence was purportedly transferred to the corporation?
3. Given the fact that a fishing licence cannot be issued to a corporation and that the terms of the fishing licences do not permit anyone other than the licence-holder to fish under that licence, should the income earned from fishing be considered to be the individual's income rather than the corporation's?
4. Given that the definition in subsection 127(9) of the Act of "qualified property" for the purpose of the investment tax credit recognizes the possibility of a corporation carrying on a fishing business in connection with a commercial fishing licence held by the individual, is a fishing vessel property which can be transferred to a corporation under the provisions of subsection 85(1) of the Act? If so, is the investment tax credit limited to the individual fisherman who first acquired the new vessel?
5. Would our response be any different with respect to issues 3 and 4 for a purported transfer of a fishing licence and fishing vessel to a partnership?
1. While we previously stated in document E9503245 that it was a question of fact as to whether or not a particular agreement resulted in the disposition of an individual's fishing rights in circumstances such as you describe, the information now available suggests that it is not possible for an individual to transfer his or her fishing rights to a corporation. XXXXXXXXXX the right to fish under the terms of a fishing licence cannot be separated from the licence which confers that right. In essence, a fishing licence issued by DFO is a right to fish according to the terms of that licence and as such, the right to fish does not exist apart from the licence. Even if such a right could be transferred apart from the licence, it is our view that the value of such a right would be negligible without the concurrent transfer of the licence since the right to fish is dependant upon the existence of a valid fishing licence. As commercial fishing licences are issued by and under the authority of DFO, XXXXXXXXXX a fishing licence cannot be transferred to another person contrary to the rules imposed by DFO in respect of those fishing licences. Since a fishing licence is not transferable to a corporation, a fisherman would have to dispose of his rights to fish in favour of another individual eligible to hold a fishing licence in order to utilize the exempt gains balance created by an election under subsection 110.6(19) of the Act in respect of his or her fishing licence.
2. In the sample documentation submitted with your request, the individuals did not receive any non-share consideration for the purported transfer of their fishing rights. However, subsection 15(1) or 84(1) of the Act may be applicable if the individual receives property from the corporation notwithstanding the ineffectiveness of the purported transfer of fishing rights. Paragraph 10 of Interpretation Bulletin IT- 291R2, "Transfer of property to a corporation under subsection 85(1)" provides an example of the application of subsection 15(1) of the Act in such a situation. In the case of a note payable, it is the terms of the note which determine whether the note is cancelled by reason of the failure to transfer the property specified in the agreement to the corporation and whether the amount of the note must be included in the individual's income by reason of the interaction of subsections 15(1) and 76(1) of the Act. However, as noted in the case of the Queen v. Chopp (98 DTC 6014), subsection 15(1) may not apply if there is no intent to confer a benefit on the shareholder and the corporation and individual take steps to reverse the benefit once the error is detected.
3. As stated in our earlier correspondence, E910574A, it is a question of fact as to whether it is the individual or his or her wholly owned corporation which is carrying on the business of fishing. As stated in the technical notes to the 1994 amendments to subsection 127(9) of the Act, there may be commercial reasons for a corporation to carry on the business of fishing, notwithstanding the fact that government fishing policy requires the individual shareholder of such corporations to hold the fishing licences personally.
4. Although the DFO policy requires a vessel used in commercial fishing in Atlantic waters to be registered to the licence-holder, it is our view that a fishing vessel is property which is capable of being transferred to a corporation or to any other legal entity. The reference in subparagraph (d)(iv) of the definition of qualified property in subsection 127(9) of the Act has no effect for the purposes of subsection 85(1) of the Act; rather the expanded definition permits an individual to claim an investment tax credit in respect of an eligible vessel notwithstanding that the vessel may be leased to a corporation controlled by that individual for the purpose of fishing in connection with a commercial fishing licence issued by the Government of Canada. However, as stated in paragraph 53 of Interpretation Bulletin IT-151R4 "Scientific Research & Experimental Development Expenditures", one of the conditions relating to qualified property is that the property must not have been acquired for use or lease or for any purpose whatever by any previous owner. Accordingly, the right to claim an investment tax credit remains with the individual.
5. Although the DFO policy is silent on the use of partnerships, except in respect of fishing for lobster, the existence of a partnership is not dependent on the holding of a fishing licence by the partnership. Although a fishing licence could not be transferred to a partnership and a partnership would not be entitled to a deduction in respect of the cost of a partner's fishing licence, the DFO policy does not appear to impose any restrictions on a licence-holder's ability to carry on a fishing business in partnership with other individuals. However, any deduction in respect of the fishing license would only be deductible by the partner who holds the licence and any investment tax credit in respect of the vessel could only be claimed by the original owner of the vessel.
P. Spice
Section Chief
Business, Property and Employment Section III
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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