Atlantic Canada Fishing Licences: Past Section 85 Transactions
Because Fisheries and Oceans Canada (DFO) now allows the transfer of Atlantic Canada fishing licences to corporations (see "Atlantic Canada Fishing Licences: New Policy Announced," Canadian Tax Focus, May 2011), the CRA has stated that such licences became eligible for transfer to a corporation under a section 85 rollover effective April 1, 2011. However, unresolved transitional issues surround corporate structures put in place before that date.
The CRA statement, "Eastern Canada Commercial Inshore Fishing Licences Administrative Guidelines," was released in June 2011. The guidelines are intended to provide direction to CRA auditors regarding inshore licences governed by Commercial Fisheries Licensing Policy for Eastern Canada 1996 (CFLPEC). The CRA guidelines consist of five parts; parts 2 to 4 discuss the CRA's position on the income tax treatment of transactions involving eastern Canada fishing licences, including section 85 rollovers.
The CRA maintains that if a taxpayer attempted to transfer a fishing licence to a corporation before April 1, 2011, the transfer was not effective because transfers to corporations were not then permitted by the DFO. For such transactions, the CRA takes the position that the corporation has received no value. Thus, where non-share consideration such as cash was taken back on the transfer, the amount received could be reassessed as a shareholder benefit under subsection 15(1), and a licence holder who transferred a licence to a corporation with a view to using the capital gains exemption could now face a significant tax liability. On the other hand, in instances where only share consideration was received, there will usually be no tax consequences if the existence of a price adjustment clause in the licence transfer agreement can be used to adjust the values of the shares downward (to follow the CRA's policy).
The tax risk with respect to licence-transfer transactions occurring prior to April 1, 2011 depends on their timing:
Transactions that occurred within the normal reassessment period (three years for a CCPC) may be subject to a subsection 15(1) reassessment.
Transactions that occurred before that period but on or after July 1, 2003 (the announcement date of the previous CRA policy) may be considered for a potential reassessment under subsection 15(1) on the basis of the misrepresentation exception in subsection 152(4), because the taxpayer ought to have known of the CRA policy.
Transactions that occurred before July 1, 2003 will not be the subject of reassessment, although reassessments could occur if there are subsequent transactions affecting the licence.
The guidelines address a number of scenarios dealing with the income tax treatment of various types of transactions, but the list is not exhaustive. Part 3 of the guidelines broadly covers the general treatment of certain section 85 rollover transactions, particularly with respect to the time when the initial transaction occurred, and it provides some insight into how the CRA will deal with subsequent transactions. However, given the volume of previous section 85 transactions and related subsequent transactions, it is unclear exactly how the CRA will apply these guidelines in a practical and reasonable manner.
The CRA has indicated that anyone who wishes to unwind offending transactions may inquire about doing so, and that inquiries will be dealt with on a case-by-case basis. Taxpayers are facing a difficult decision: do they approach the CRA about unwinding, or do they challenge any possible reassessment if and when it comes?