Effective April 1, 2011, the Government of Canada Department of Fisheries and Oceans (DFO) instituted a change in its licensing policy for Atlantic Canada's inshore fishery. Eligible licence holders may now voluntarily apply to have some or all of their licences re-issued to a wholly-owned company. A wholly-owned company is defined as a private Canadian corporation where all the voting and nonvoting shares are issued to one individual (in this case, the current licence holder).
To transfer an eligible licence to a wholly-owned company the transfer request must be made in writing, and must include the following:
- A copy of the Certificate of Incorporation of the company which shows the company's registration number and its official name;
- A certificate from legal counsel or a registered professional accountant that verifies all voting and non-voting shares have been issued to (and are controlled by) the current licence holder (this may also take the form of a sworn affidavit);
- A declaration by the individual who holds 100 per cent of the shares of the company which states that the company has not entered into a controlling agreement as defined by DFO's policy on Preserving the Independence of the Inshore Fleet in Canada's Atlantic Fisheries (PIIFCAF). A controlling agreement is defined as an agreement between the licence holder and another person or entity that would influence the licence holder's decision to request a licence transfer. This declaration must be signed by the individual, in his or her capacity as a corporate officer, at a DFO office and witnessed by a DFO employee.
- The 100 per cent controlling shareholder must meet the independent core eligibility criteria as defined by PIIFCAF. Once the licence holder brings the above information to their local area licensing administrator, it will take approximately 30 days for DFO to process the transfer request. DFO has stated that privileges currently available to independent core fishers (such as buddying-up or a stacking agreement) will also be available to the wholly-owned company.
It is important to note that the wholly-owned company will be subject to DFO's owner operator policy and the fleet separation policies. The owner operator policy states that the owner of the company being issued the licence(s) will be required to fi sh the licence(s) personally. Under the fleet separation policies, in order to be issued an inshore licence, the company must be a private corporation within the meaning of Canadian law, and all voting and non-voting shares must be issued to an individual who meets the Independent Core criteria in PIIFCAF.
This new policy has many potential benefits for inshore fish harvesters. The Supreme Court of Canada decision in Saulnier (Receiver of) v. Royal Bank of Canada, 2008 SCC 58, states that a fishing licence is property for certain purposes. Taken together, the Saulnier decision and this new policy resolved much of the uncertainty surrounding tax issues for corporate owned fishing licences. Further, in July 2011, Canada Revenue Agency (CRA) issued guidelines for the income tax treatment of transactions involving the transfer of inshore licences. Essentially, for licences sold on or before May 1, 2006, the sale is taxable as a capital gain or eligible capital property, depending on use by the purchaser. For licences sold after May 1, 2006, the sale is taxable as eligible capital property.
Thus, inshore harvesters in Atlantic Canada who transferred their licences to family-owned companies before April 1, 2011 should seek professional advice as to whether or not the transaction would result in significant tax liabilities. CRA will permit you to un wind an offending transaction, but there may be implications for doing so.
Inshore harvesters in Atlantic Canada who have yet to transfer their licences to wholly owned companies and who have not fully utilized their capital gains exemptions should seek professional advice as to how they might access the exemptions.
An additional benefit to holding inshore licences in a company is that it is easier to sell a fishing enterprise if all the enterprise assets (including the licence(s)) are held in a company. Another key benefit relates to tax rates. As a corporation, the fish harvester can access low corporate tax rates on the first $400,000 of business income. Still, another advantage may be the ability to raise more capital through a corporation, rather than as an individual. This structure may also be more appealing in situations where there is significant debt financing such as financing the acquisition of a licence.
A major criticism of the new policy is that it only allows for transfers to the specific corporate structure of a wholly-owned company. As a wholly-owned company, other family members would not be shareholders, and this could have a negative impact on estate planning and income splitting.
The new policy also raises questions relating to the validity of existing trust arrangements where the corporation is not wholly-owned by the independent core licence holder. Further, any change in the ownership structure of the company could impact upon eligibility to hold a licence. Since all the voting and non-voting shares are issued to one individual, if he or she plans to transfer the business or alter the corporate structure, it is important that the harvester obtain professional advice to ensure that the company will remain eligible to hold licences after the transfer or restructuring.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.