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.
Subject: Incorporated Fishermen
This is in reply to your memorandum of February 13, 1991, which has been referred to our Division for a reply.
You have described a general type of situation where fishermen, who in the past carried on the business of fishing as sole proprietors, have incorporated. The fishermen have leased their fishing license and vessel to the corporation. The fishermen (and in some cases family members) became employees of the corporation and receive salary and wages. In some cases the amount of the lease fee is agreed upon after the end of the fishing season. For tax purposes the income from the fishing business is reported by the corporation.
The fishing licenses are renewable at the end of each year and are not transferable. Vessels used in commercial fishery must be registered annually in the name of the licence holder.
District Office Position
1. It is your position that we should disregard the corporation and tax the fishing business income in the hands of the individuals who control it on the basis that:
- (a) Under the terms of the licence only the holder is permitted to carry on the fishing business.
- (b) Corporations in the inshore fisheries are expressly prohibited (with the exception of those qualifying under grandfather provisions) from holding fishing licences.
- (c) The policy of the Department of Fisheries and Oceans (DFO) would be thwarted if the corporations were to be allowed to report for tax purposes the fishing business income.
- 2. Alternatively, it is your view that there may be grounds for challenging the arrangements under subsection 56(4) - to attribute the fishing business income to the individual fishermen holding the licence(s). You cited the cases of Simson-Maxwell Ltd. v. M.N.R. [29 Tax A.B.C. 169] 62 DTC 262 and The Queen v. Canadian-American Loan and Investment Corporation Ltd. [[1972] C.T.C. 2559] 74 DTC 6104, to support your position.
- 3. If it is concluded that the corporation carried on the fishing business the vessels leased by individual fishermen to the corporation should be considered "leasing property" as defined in subsection 1100(17) of the Regulations. The individual fishermen would thereby be subject to the CCA limitations under subsection 1100(15) of the Regulations.
- 4. Where an individual fisherman who has a lease arrangement with his corporation acquires a new vessel and claims investment tax credit it is your view that such acquisitions are not "qualified property" as defined in subsection 127(9) of the Act. The vessel is "prescribed machinery and equipment" as defined in paragraph 4600(2)(d) of the Regulations. In order that a lessor may claim investment tax credit in respect of prescribed machinery and equipment acquisitions the asset must be leased in the ordinary course of business by a lessor which is a corporation whose principal business is the leasing of such property. In your case the vessel is leased by a taxpayer who is an individual.
Our Views
There is considerable jurisprudence to the effect that profits from a business are income of the person who carries on the business. In each specific case it would be a question of fact as to whether the corporation or the individual fishermen carry on the fishing business. To tax the fishing income in the individual fishermens' hands it would be necessary for you to establish that they rather then the corporation carried on the fishing business.
The fact that a corporation is harvesting the fish in contravention of the law (since the licences are not transferable and only licence holders are allowed to fish) does not mean that the corporation does not carry on the fishing business or that it is not beneficially entitled to the profits therefrom. The Act does not differentiate between profits from a business carried on in accordance with the law and profits from a business carried on contrary to the law.
On the basis of the general type of situation you described it does not appear that it could invariably be concluded that the corporation does not carry on the fishing business. In each case, it would be necessary to show that the corporation is a sham.
To assist you in determining in each specific case whether it is the individual or the corporation that carries on the fishing business you might refer to the following cases (in addition to the two cases you cited): Legacy v. M.N.R. 68 DTC 5143, Agar v. The Queen [[1980] C.T.C. 397] 80 DTC 6311, Campbell v. The Queen [[1980] C.T.C. 319] 80 DTC 6239 and Shaw v. The Queen [[1989] 1 C.T.C. 386] 89 DTC 5194.
In our view subsection 56(4) of the Act would not apply. Even if the purported transfer of the right to fish could be argued to be the transfer of the right to an amount, McNair J. held, in the case of Shaw v. The Queen [[1989] 1 C.T.C. 386] 89 DTC 5194, that a lease is a transfer of property. Therefore the exclusion contained in subsection 56(4) of the Act would apply. (In passing, it should be noted that we disagree with your view that the Canadian-American Loan and Investment Corp. Ltd. case, [[1972] C.T.C. 2559] 74 DTC 6104, is support for the application of subsection 56(4) of the Act. The judge in that case expressly refrained from reaching a conclusion on that point: see page 6109.)
Although the lease may be considered a transfer of property (the right of use of the licence) it can not be considered a disposition of the property (the licence). Therefore the lease arrangements would not be considered a disposition of the licence by the individual fishermen.
As far as enforcement of the DFO licensing policy is concerned it would be their responsibility to take whatever compliance action they consider necessary. We would imagine that if there are in excess of 100 incorporated fishermen the DFO would be aware of the arrangements. Our Department's responsibility does not extend beyond compliance with the provisions of the Income Tax Act.
We agree with your views that if it is determined that the corporation operates the fishing business the vessel that the individual fishermen lease to the corporation would be considered a "leasing property" as defined in subsection 1100(17) and the CCA limitations in subsection 1100(15) of the Regulations would apply.
We also agree with your views that the vessels leased by individual fishermen to their corporation would not be considered "qualified property" as defined in paragraph 127(9) of the Act in that the vessel would be "prescribed machinery and equipment" as defined in paragraph 4600(2)(d) of the Regulations and would not meet the requirements of subparagraph 127(9)(d)(i).
We trust our comments will be of assistance to you.
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