*FOR IMMEDIATE RELEASE – MARCH 24, 2021*
INTRODUCTION
Effective November 23, 2020, changes to the Atlantic Fisheries Regulations, 1985 and the Maritime Provinces Fishery Regulations were published in the Canada Gazette. These new regulations as published by the Department of Fisheries & Oceans (“DFO”) shall become effective and in force on April 1, 2021.
Since their release, our firm has been diligently working to review and understand these new regulations so we can inform you of how they may impact the structure of your fishing enterprise. We have been in direct correspondence with DFO to aid in clarifying DFO’s intentions for the application of certain sections of the new regulations; however, a lack of clarity surrounding what is meant by “rights & privileges” remains.
Please note that this communication is intended to provide a general overview of the new regulations as well as highlight the uncertainty of their application. As a result of every fisher’s structure being tailored to their specific needs, in no way should this communication be considered advice to be acted upon.
APPLICATION
In consideration of these new regulations, it is important for all CORE fishers to understand their application, as failure to comply will result in a license not being reissued. Further, if a CORE fisher is denied reissuance of their license due to non-compliance and does not become compliant within 12 months of being denied, they shall never be eligible to hold the same type of license again in the future.
We have attached a more in depth analysis of the regulations as Appendix A, but have provided a summary compliant structures vs. potentially non-compliant structures below for ease of reference.
In consideration of these new regulations, the following license ownership structures would continue to be compliant:
You, as an independent CORE fisher, personally hold the license, you are not incorporated, and you have no agreements with any other persons / corporations (other than crew) that share in a percentage of the catch or exert any element of control over the license;
You have a single corporation that holds the license, in which you own 100% of the issued shares, and you have no agreements with any other persons / corporations (other than crew) that share in a percentage of the catch or exert any element of control over the license.
However, in the event you have any of the following, the new regulations may cause you to become non-compliant:
Multiple corporations (IE – “Fishco” for the operations & “Licenseco” to hold the license) whereby the catch is shared between them in some fashion, often via a shared catch agreement;
Your corporate structure includes a “Family Trust” or “Business Trust”;
You have agreements with any other persons / corporations (other than crew) that share in a percentage of the catch or exert any element of control over the license.
PLANNING CONSIDERATIONS
As the new regulations become effective and in force on April 1, 2021, any license
renewals processed prior to April 1, 2021 are not subject to these new regulations. As such, if you are compliant under the previous regulations and will only become non-compliant because of the new regulations, we suggest you renew any licenses that can be renewed before April 1, 2021.
OTHER COMMENTS
In consideration of the new regulations as drafted, the ability to income split between a fisher and their spouse has effectively been cancelled unless the spouse is actively engaged in the fishing business, despite the income tax legislative changes from 2018 specifically allowing for such.
Further, the new regulations provide for ownership restrictions on holding
companies (“Holdco’s”) in addition to the corporations operating the fishing enterprise, which would typically be used to invest corporate earnings not required for personal consumption or business reinvestment. The new regulations prevent a Holdco from being a beneficiary of a Family Trust / Business Trust unless the CORE fisher owns 100% of the voting shares of Holdco as well, further limiting the ability to income split as permitted under the income tax legislation.
It is our view that these disconnects between DFO regulations and income tax regulations are not justified; therefore, we are trying to persuade DFO to consider revising the regulations in such a manner that income splitting could be achieved as permitted under the income tax regulations without being non-compliant with DFO.
We previously tried to correspond with the Minister of Fisheries, Bernadette Jordan, on this matter directly; however, she has not engaged. As a result, we have been in contact with Chris d’Entremont and his team, who are actively working to push this matter to the forefront.
CONCLUSION
We understand and recognize that this communication does not provide clarity on a resolution to non-compliance under the new regulations, which is largely due to the lack of clarity we presently have from DFO. We are continuing to work with DFO to gain a better understanding of their intended application and enforcement of these new regulations, most recently including a request from DFO to comment on common structures used in the fishery.
We will provide a further update once we have further clarity from DFO on the matter, but until that time, we are unfortunately unable to provide any clear guidance.
Yours truly,
Paul Richardson, CPA, CA
Partner
Belliveau Veinotte Inc.
APPENDIX A
OVERVIEW
The revised regulations focus primarily on ensuring the license holder does not transfer the use or control of the “rights & privileges” of the license, a term that is not defined within the regulations, leaving it open to interpretation. However, it should be noted that where a specific exemption can be met (See “exemptions” below), it is acceptable to transfer the use or control of the rights & privileges of the license.
Through our correspondence with DFO directly, we received the following guidance, which is a direct copy from their communication to us:
Control means directing, managing, overseeing, restricting, influencing or using any of the rights and privileges conferred to an individual or entity under a licence issued in their name (i.e. making decisions related to the licence’s use, the catch, or earnings without departmental authorization).
Use means carrying out (in person, or through a designated, or substitute-operator) the activities authorized under the licence or making decisions related to these activities and the results of these activities (catch and earnings).
The rights and privileges conferred under the licence only exist for the term of the licence and are subject to all DFO policies and regulations unless otherwise specified. There is no future guarantee of fisheries access under a licence and all licences must be reapplied for (paying the fees and meeting licence eligibility requirements) on a yearly basis.
DFO has further stated the following in their communications to us:
Agreements such as supply, shared catch, loan or vessel-charter agreements may be acceptable, the license holder must be able to prove to DFO that they maintain complete control. They have further stated that highly complex or multifaceted agreements are more likely to raise red flags than clear & straight forward agreements.
The full proceeds (IE – 100%) of the catch must be fully realized by the license holder prior to allotting any portion to a third party, meaning only a percentage of the value can be provided to a third party, not a percentage of the physical catch itself (IE – The catch must e converted to monetary value before any allocation to a third party).
In situations where a license holder enters into an agreement with a third party to provide them with the vessel, crew and gear in exchange for a supply / shared catch agreement, it is their view that it will be very difficult to show that there is no control or influence being exercised over the license holder.
EXEMPTIONS
As noted previously, there are specific exemptions available whereby it is acceptable for the license holder to transfer the use of control of the “rights & privileges”. A summary of the primary relevant exemptions has been provided below:
The license is offered as security for a loan (either by a chartered bank or a third party, subject to limitations on what the lender can do with such security if acted upon);
A share of the catch being allocated to crew who participated in making the catch;
A share of the catch being allocated to an inshore family fishing corporation (defined below);
Quota transfers permitted under the license conditions.
DEFINITIONS
Family
Please note that for the purposes of these new regulations, any references to a CORE fisher’s family includes only the following persons in relation to the CORE fisher:
Spouses (married or common-law);
Parents, grandparents, great-grandparents, etc. (natural, adopted & in-laws);
Children, grandchildren, great-grandchildren, etc. (natural, adopted & in-laws);
Siblings (natural, adopted & in-laws);
Inshore Family Fishing Corporation
An inshore family fishing corporation is defined to be a corporation that operates the fishing enterprise in which:
100% of its voting shares are held by the CORE fisher.
The CORE fisher is the sole director; and
100% of its non-voting shares are held by:
A member of the CORE fisher’s family; or
An inshore fishing family trust (defined below)
Inshore Fishing Family Trust
An inshore fishing family trust is defined to be a trust in which:
The CORE Fisher is the sole Trustee; and
Each and every beneficiary is a member of the CORE fisher’s family or an inshore fishing company (same as an inshore family fishing corporation, except that it doesn’t operate the fishing enterprise, such as a Holding Company).