Preserving the Independence of the Inshore Fleet in Canada's Atlantic Fisheries

Public Consultations - St. John's, NL - January 20, 2004 Draft Summary

Overall Summary of the Session

• Strong FFAW representation who are supportive of the ideas in the discussion document and are seeking a regulation that enshrines owner-operator and fleet separation policies and intertwines legal title and beneficial use. They are also seeking a licence condition to prohibit trust agreements. Additionally they are calling on CCRA to make changes to tax rules to treat fishermen more like farmers. FFAW is also advocating the use of a “professional corporation” for inshore fish harvesters and they are supporting some flexibility in the owner-operator and fleet separation policies but no “opting out”.
• Others, (accountants and lawyers, not fishers) advocated the continuation of trust agreements and noted that the only way to secure financing on risky loans would be to pledge licence rights. They advocated moving to a more BC-like situation which would better allow for retirement planning and tax advantages. They contend that less than 50% of the vessels between 35’ and 65’ are adhering to owner-operator and fleet separation policies.
• Some others focused their comments on treating fishers in a more business-like way and finding means to help fishers legitimately incorporate and have the licences held by fishers’ corporations. They stated this would be beneficial for the following reasons: it acknowledges the commercial reality, gives fishers a degree of financial independence and contributes to economic viability, it allows for succession planning and it minimizes uncertainty.
• Strong contingent of fishers <35’ who believe that trust agreements are harming the industry and that owner operator and fleet separation should be preserved at all cost.
• Many people called for better cooperation between DFO and CCRA and many had positive comments on DFO's policy on combining licences.
• Intergenerational transfers were a major concern of many fishers.

Summary of formal written presentations

• As rules for residency and training impose restrictions on the ability of individuals to hold particular fishing licences, it has become necessary for licence holders and those desiring to acquire fishing licences to find alternative means to accomplish their commercial objectives. Advisors to fishers have created the means for various commercial objectives to be met by drafting what have become known as trust agreements to allow the acquisition of licences to take place while ensuring compliance with DFO licensing policies relating to residency and training.
• These trust agreements are not the sole purview of non-fishers who are interested in investing in licenses fishing enterprises, they are used as much or more by fishers who own and operate their enterprises and wish to accomplish any number of objectives.
• Many millions of dollars have been invested by fishers and non-fishers alike in the acquisition of licensing rights over the past decade or so. In the years since the ability to obtain new licences has become restricted in every significant commercial fishery, DFO has approved hundreds, if not thousands of licence transfers pursuant to policies formed by DFO.
• DFO has stood silently by while the Courts have given legal effect to commercial agreements, including trust agreements, that were created to allow the transfer of fishing privileges. DFO has known that individuals were using these means to various ends and that the Courts were prepared to give legal effect to these legitimate transactions.
• For the legitimacy of these agreements and their legal effect to be denied, is unfair to the many people who have relied on the Courts’ enforcement of, DFO’s silent acquiescence to, and CCRA’s acknowledgement and approval of these transfers. Vested rights should not be impacted and notice of any intended change is needed prior to implementation. If not, fisher and non-fisher alike who have invested in those rights will be detrimentally affected by their legitimate reliance on existing judicial interpretations of these agreements and the acknowledgement by DFO and CCRA that these licence ownership practices exist.
• Before any changes take place, careful thought must be given to the consequences of making changes. The practice in place has developed in part as a result of the desire of non-qualified parties to participate in the fish business. But it has also occurred to allow fishers who own and operate their enterprises to become more efficient in carrying on or expanding their businesses.
• For example, there are fishers who control more than one <65 foot enterprise. In many cases, this was a result of the need to involve more of their second or third generation family members in the business. Given the rules on limited entry and residency that exist, this might necessitate going outside their qualified zone to find a second enterprise. It might also occur within a zone with a sibling who does not have core status but otherwise has a desire and need to be involved in the business but further harvesting rights are needed to make for a viable fishing plan. What purpose is served by preventing those worthwhile goals from being accomplished?
• Commercial prospects in the large inshore boat fishery are reasonably good right now. This is solely related to the high price and abundance of snow crab. Ten years ago things were not so good – banks were not making loans to fishers and financing was a huge problem. The only people who were advancing significant resources to finance operations were processors. And, they are not foolhardy – they rightfully demanded security for the high risk loans they made.
• Boats are not the only valuable part of a fishing enterprise; the licence often comprises as much or more value available for security. Traditional funding sources have not been prepared to loan on the value of licences but processors will.
• There are a number of newer, modern vessels in use in today’s inshore fishing fleet – how much of the investment required for the renewal of this fleet would have occurred without the ability to draw on the commercial value of a fishing licence. Without being able to pledge licence rights, in tough times fishers may find no source of capital available to them to finance continuing operations in the fish business. The pledging of harvesting rights are critical to high risk loans being made to fledgling or struggling enterprises.
• Fair and open consideration should be given to allowing corporate entities to hold licences, as is the case in the Pacific fishery and in the >65 foot fleet on the Atlantic coast. This would allow far more efficient retirement and succession planning for fishers and encourage tax effective operations for enterprise owners. Unless we operate efficiently using modern business and tax planning models we will continue to struggle to survive and prosper.
• Licence holders and processors can work well together if trust and good faith are present on both sides.
• Less than 50% of the enterprises going to sea today have at the helm core fishers qualified to hold licences. In most cases, the enterprise owner is too busy conducting other aspects of the business to take the time to actually harvest the fish.
• The operation of harvesting enterprises should be restricted to only skilled and properly trained individuals but there is no reason for the restriction of harvesting licence rights to core qualified individuals resident in a particular place. If the rules are changed, there will not be fewer people working on individual vessels making their living from the sea. The operation of the vessel requires the crews to participate as they do now, without change in wages and benefits, regardless of who owns the enterprise.
• Implementation of changes that would cause more revenue to flow out of the enterprise to CCRA poses more of a threat to the economic viability of fishing enterprises and to employment in the fishery than simply treating fishers like other business people under the income tax act.
• The fish business is a “tough slog” at the best of times. Inventive operators have found effective means within the rules to operate fishing enterprises profitably.
• If changes are to be considered, we have to acknowledge current practice and what led to it; to ignore history will result in us repeating mistakes. Recent times for owners and operators have been some of the most financially rewarding, we should not seek to limit that success by restricting options available.

• In the discussion document, the “Message from the Minister” identifies the key issue when he refers to not undermining the spirit of the Commercial Fisheries Licensing Policy for Eastern Canada, 1996.
• The discussion document is very clear in confirming that so-called trust agreements between fish harvesters and processing companies (or other third parties) do in fact undermine the spirit and intent of licensing policy. The discussion document is clear why the owner-operator and fleet separation policies were adopted in the first place – to protect the independence of the inshore fleet from control by other interests, such as processing companies.
• Strong support for the owner-operator and fleet separation policies. However, they need to be strengthened to secure the position of existing owner-operators as well as supplementing with additional measures to pave the way for an orderly transition to the next generation of fishing licence holders.
• DFO should move immediately to provide a regulatory solution to the problem of trust agreements by incorporating the owner-operator and fleet separation policies into the General Regulations of the Fisheries Act.
• The new regulation should include specific provisions clearly stating that the legal title to a fishing licence is inseparable from its beneficial use and that control over the beneficial use rests with the licence holder, i.e. the fish harvester.
• DFO should also enact administrative measures such as conditions of licence that would prohibit the use of trust agreements designed to undermine the owner-operator and fleet separation policies.
• The above are consistent with DFO’s conservation mandate. The Commercial Fisheries Licensing Policy for Eastern Canada, 1996, established the independent owner-operator fleet as the cornerstone of the <65 foot fishery. In Newfoundland and Labrador, owner-operators have to meet the requirements of the Professional Fish Harvesters Certification Board. The Board is self-regulating and sets out occupational standards as well as a Code of Ethics for fish harvesters.
• The recommendations above would ensure that control of the beneficial use of fishing licences rests with those who comply with the Certification Board’s standards and the Code of Ethics – the people whom DFO’s licensing policy has identified as the key participants in the inshore fleet of Atlantic Canada.
• There is a propensity for fishing families in Atlantic Canada to transfer fishing enterprises from generation to generation. Many current owner-operators are fifth or sixth generation (or more) skippers who have every intention of passing on their enterprise to the next generation in their family. Who has a greater stake in conservation than someone who relies on healthy fish stocks not only for his own livelihood today, but also for that of his son or daughter tomorrow?
• The generation to generation tradition associated with inshore fishing enterprises in Atlantic Canada is now under serious threat because of the demographics of the industry, the escalating cost of licences – fuelled in part by the intervention of fish processors determined to circumvent the intent of the fleet separation policy – and the tax implications associated with the transfer of fishing licences.
• In many cases, licence holders wish to pass on their enterprise to a son or daughter only to find that the tax burden associated with deemed fair market value is more than they can manage.
• Under Phase II of the Atlantic Fisheries Policy Review, DFO should develop, in consultation with fish harvester organizations, measures that could be enacted by the Government of Canada with a view to providing fish harvesters with more equitable tax treatment and thereby facilitating inter-generational transfers of licences. These measures should be designed to provide inshore owner-operators similar provisions to those in Section 70, subsection 9 and Section 73, subsection 3 of the Income Tax Act, allowing a farmer or a farmer’s estate to transfer farm property to a child at a value between costs and fair market value.
• The federal government should also extend to inshore owner-operators provisions equivalent to those in Section 110.6, subsection 1 of the Income Tax Act which defines farm property eligible for a $500K capital gains exemption, including so-called “qualified property” such as milk and egg quotas as well as “real” property, such as land.
• The issue of whether or not corporations should be able to hold inshore licences has come under close scrutiny recently because of the issuance of a draft CCRA directive that would rule out the use by an inshore licence holder of any tax benefits associated with holding his licence(s) in the name of a corporation.
• Some interests sought to exploit this development to make the case for elimination of the fleet separation policy, but the two are quite separate issues. The taxation issue could readily be resolved without jeopardizing the fleet separation policy. The kind of regime that allows professionals such as lawyers and dentists to establish “professional corporations” and to benefit from the tax advantages associated with incorporation has promise and would be a good fit for the self-regulating professional board governing the registration of fish harvesters.
• DFO should work with CCRA and fish harvester organizations to examine options such as professional corporations as a vehicle for ensuring fair tax treatment of inshore licence holders.
• Regulations should make a clear distinction between a corporation owned and controlled by a professional fish harvester and one owned by a fish processor or other third party. A properly structured set of rules should be developed in consultation with fish harvester organizations to allow fish harvester-owned and controlled corporations to hold fishing licences while excluding those owned by fish processing companies and other non-fishermen.
• A clear distinction has to be made between genuine flexibility in the rules if a broad consensus exists for it, and some kind of opt-out provision for those who oppose the intent of the owner-operator and fleet separation policies. ‘Flexibility’ should not be code for ‘loophole’.
• Flexibility should be incorporated into the owner-operator and fleet separation policies only if (a) there is broad consensus among affected owner-operators and (b) the flexibility reinforces the basic intent of the policies. Opting out of the owner-operator and fleet separation rules should not be permitted.
• DFO should move swiftly to stop the erosion of the fleet separation policy that is taking place on a daily basis. A clear public statement of the Department’s intent to put an end to trust agreements, together with the publication of draft regulatory changes would put the public on notice that any subsequent trust agreements might not provide the protection for the interests of the third party that the third party intended.
• DFO should not wait until the details of the Atlantic Fisheries Policy Review process or the full results of the consultations aimed at preserving the independence of the inshore fleet are completed to clarify its intent to prohibit the use of trust agreements that undermine the owner-operator and fleet separation policies. A statement of this intent should be issued immediately.
• In addition to dealing with the current generation of owner-operators, any changes as a result of these consultations will help determine the type of fishery that will be passed on to the next generation.
   
• DFO licensing rules should be expanded to include an option for individual core fishers to use a Canadian controlled private corporation to own their fishing enterprise. This is an important step in the evolution of the Atlantic fishery.
• Any law which denies a fishing enterprise’s ability to operate with all the rights and privileges afforded other entrepreneurs, demonstrates a significant misunderstanding by DFO of how the right to incorporate serves to stabilize the financial viability of Atlantic fishing enterprises.
• While many older fishers still view fishing as a “way of life”, far more fishers are realizing it has become serious business. The nature of fishing has changed, requiring significant investment in licences, vessels and related technology.
• Young fishers seeking to acquire an enterprise of their own and/or any fisher seeking to upgrade their vessel will quickly realize the financial commitments are significant and, in order to achieve their goals, they must operate as any other business person, and adopt the tools and business practices of other entrepreneurs, including the use of a corporation. A corporation is used because it receives a far more attractive taxation rate than an individual.
• A basic tax principle is the entity shall own or have a beneficial interest in all rights essential to its core business assets, which, in this situation, would include a fishing licence. Many tax rules are based on tests determined in references to all or substantially all of a business’ core assets and so the small business tax rate relief can be matched with/enjoyed by the owner of the key income earning assets.
• A corporation holding its capital asset or eligible capital expenditure, such as a licence, may avail itself of the tax depreciation, which further enhances the amount of after-tax cash retained by the commercial fishing enterprise to make payments on its debt obligations.
• Many fishers have already come to the realization that incorporation is essential for their enterprises. These fishers have developed a variety of ways to use corporations and related tools, such as bare trusts. What DFO should do is develop clear rules to make this a simpler exercise which will be more cost effective for fishers to set up and easier for DFO to govern.
• Most commercial lenders require loans to be paid off much faster than current tax law provides depreciation write-offs. Since loan principle payments are not tax deductible the difference in banking and taxation principles cause cash flow problems. These difficulties can be substantially reduced where the loans are being paid down by a corporation.
• When a fisher is not incorporated, much more of the cash flow from his catch goes to payment of taxation instead of debt reduction. This creates a need for fishers to do supplemental borrowing. Fish processors are often a key source of obtaining the initial capital to acquire a new vessel or licence, the faster a fisherman can pay off the bank and the processor, the faster the fisher becomes in control of his own destiny and removes his dependency on the processor.
• Without changes to clearly allow the incorporation of core enterprises, DFO is forcing fishers to hold these rights personally and pay for significant assets out of profits taxed at the highest personal rate. This would significantly impair and dramatically increase the repayment time and would also become a barrier and deterrent to new persons entering the fishery.
• Any deterrent to new persons entering the fishery would create an adverse impact on the market price of licences and vessels, which could create financial loss to parties who have already made significant investments in licences and vessels.
• The current restrictions on a fisher’s ability to transfer the beneficial interest in licences to a corporation also represent a significant impediment to succession planning for fishers.
• Certain key tax laws do not provide fishers with the tax relief afforded other primary industries, in particular agriculture. Currently agriculture receives two significant advantages not afforded fishers – the farm property capital gains exemption and relief for farm corporation shares.
• Existing enterprises have invested personal and borrowed funds to acquire assets and have entered into contractual obligations with lenders. Lenders and tax authorities have already developed an understanding of the bare trust relationship a fisher may have with his/her own corporation. These fishers and lenders need to understand what will happen to those entities and legal contracts – DFO needs to collaborate with CCRA.
• Until July 2003, CCRA was willing to recognize bare trust as a tool for placing beneficial ownership of a licence with a fisher’s corporate enterprise. CCRA did not find such a structure offensive from a tax policy perspective. Under their new directive, this will change. CCRA needs to indicate what their position will be with respect to agreements in existence before July 2003.
• Throughout the 1990s through to 2003, the commercial marketplace has increasingly recognized the significant value represented by the right to fish and designate the next holder of the licence. A market exists for these licences and DFO has been a significant participant in this market by acquiring licences for the native fishery. These actions by DFO have added credibility to the market and, consequently, other commercial practices were developed around this market. Depending on the quota and authorized fishing zone, some licences attract hundreds of thousands of dollars for the rights represented by the licence. The market is forging ahead and will create a mechanism to achieve its goals. Fishers regularly come to professional advisors requesting advice on incorporation for the tax relief it provides.

Following presentations by registered speakers, a round table discussion of the issues raised in the discussion document was held. The following is a summary of that session.

Open Discussion – Trust Agreements

• It is clear that much of the inshore fleet, (the >35 foot boats) is financed and controlled by the processors; control of the fishery must stay with the licence holder; this would be possible if financing were made available through lending institutions.
• If the terms of financial agreements applied only to re-payment, without control of the licence, the control of the licence would remain with the licence holder.
• The policies must consider who is in control of the licence, who benefits from its use and what are the results. Processor investment in licences inflates licence value so that fishers can not afford them; this in turn leads to unlicensed individuals landing unreported fish - thousands of tons of it – which provides the processor with a supply of raw material. The more control the processors have, the more this illegal activity will continue.
• In granting licences to corporate entities, there needs to be restrictions on the kind of entities who can get licences, and who the shareholders are. Otherwise, as more sectors acquire fishing rights, it will be Industry Canada running the show, not DFO.
• Some corporations are being formed for legitimate reasons and this should be discussed in more detail.
• There needs to be a secure future for the traditional (< 35’) inshore fleet. They are the ones whose viability is most threatened. Requirements for these fishers to rationalize and combine licences, and the existence of trust agreements, have allowed the >35 foot sector and the processors to buy up licences.
• Many fishers have incorporated though arrangements acceptable to CCRA. Through our corporations, we pay taxes, EI, workers compensation, etc, and we thought we were doing things right. Now we find out the rules have changed.
• There needs to be a provision whereby the licence can be issued to a company, not to the individual fish harvester. This way the fisher’s family can become part of the company; this will facilitate the transfer of the licence to the next generation; the only other alternative for a young fisher who wants to acquire a licence is to approach processing companies to borrow money.
• The status quo is not good enough – trust agreements are essentially eliminating the owner-operator policy. We need a regulation to protect the independence of the inshore fleet. Otherwise Revenue Canada gets their way and the big fish companies will control the licences; Newfoundland and the inshore fishers will have no independence.
• The most devastating move in the fishery is the introduction of trust agreements which will ultimately destroy the fishery. These agreements do not benefit the small boat fleet as they do the bigger boats.
• If the fleet separation policy is eliminated, and trust agreements allowed to flourish, the captains and crew will suffer – they are not protected under a trust agreement, and, since the processor-owner of the companies who hold the trust agreements will want to manage an efficient operation, they will use as few vessels and crew as they have to.
• We need to have an easier means to transfer licences to sons and daughters and we need to ensure that the name on a licence is actually the operator of the vessel.
• We need a common understanding of the rules that would define the types of corporations licence holders can establish. The proposed tax directive stipulates that a licence holder is not entitled to transfer their licences or associated licence privileges to a corporation using the provisions of section 85 of the Income Tax Act. Because of this, licence holders are losing out on the ability to obtain preferable tax rates.
• Regardless of the size of the vessel, if there is an advantage to incorporating then that option should be available to all. The only restriction is that the corporation must be controlled by owner-operators.
• CCRA has indicated that licence holders cannot incorporate for the purpose of transferring licences or associated privileges and that where this has already taken place, they intend to “examine these transactions on a case-by-case basis”. That will be a huge job. There is an obvious inconsistency in DFO policy and the practice before the CCRA directive. DFO recognition of a professional corporation would remove some of the uncertainty currently being felt by resource users.
• There is DFO’s definition of “inshore” and there is the traditional definition in Newfoundland which refers to the <35 foot fleet. In the 50s and 60s DFO created the <65 foot fleet though massive subsidies and gave them privileged access to what were then considered underutilized species. The small-boat inshore fishery (<35 foot) was left behind. This trend continues today, with resource access dominated by larger vessels, so that those who have harmed the resource the least are the ones most penalized. The larger sector is a much easier sector for accountants, lawyers and policy people to deal with.
• The under 35’ is more habitat based, where fishers fish their own traditional fishing grounds, but DFO has never considered this kind of fishery a priority. DFO needs to establish policies and priorities for the traditional inshore fishery, to respond to their needs, particularly with regard to access.
• DFO has to decide if the fleet separation policy will remain in effect and, if so, they must take action to enforce it and not try to protect those who operate outside the policy. If fleet separation is retained, trust agreements must be fixed.
• The intent of these policies was one man, one licence, one enterprise, on the boat but now trust agreements and tax directives have created a lot of confusion.
• It was straightforward in the past; financing was based on ability to fish and the licence was not worth much - if you had the skills, you could get a loan. With the cost of licences right now, the young fishers are getting pushed out.
• We saw this happening, we saw fish stocks declining, we saw the offshore taking everything, and DFO turned a blind eye. The same thing is happening today. The blame rests with DFO.
• The question is how to fix it; how do we protect the ones that have trust agreements or are incorporated? The youngest person in Trinity Bay who owns a licence is 34 years old. In 10 to 15 years, there will be a lot of people looking to get out of the industry. How can they sell to anyone but a company?
• This consultation should have happened years ago; we have created a big mess; as long as we have crab we are alright but what will happen if that stock collapses.
• We definitely do not want to end up with a BC-type model but we do need a policy change to allow fishers to exit the fishery and the younger generation to enter it. A simple policy would suffice.
• The creation of these problems rests in the hands of the fishers and processors should not be blamed – they are involved but they are not alone. In large part, it was fishers who asked for these trust agreements to be created. Processors are involved but they are not the only “boogey man”. If there was no value to a licence, processors would not fund its acquisition; if secured funding is available, what difference does it make if these funds are received from a processor or a bank.
• There are linkages between these policies and vessel replacement and cubic number. DFO bends the rules for some but not all – it should be treating everyone the same.

General discussion – Owner-operator and Fleet Separation Policies

• The policies we make today will have big ramifications on fishers’ livelihoods. Take the issues of “pocket licences” and the 12-month leasing policy, which stopped Newfoundland fishers from fishing more than one licence on one vessel for a 12 month period, forcing them to buy new vessels. This resulted in too many active vessels.
• Many fishers operate though a company, only holding the licence in the licence holders name. If fishers could combine licences (within reason), and fish two licences from the same vessel, it would be a lot more cost effective to run one vessel.
• Going fishing is expensive and regulations should not interfere with the economic viability of an enterprise. If young fishers cannot enter the fishery, they will move on to other trades, likely out of the community.
• We had a sanctions policy in place a few years ago, helping to control overfishing – we want it back.
• DFO should be making policies that are resource-wise and business-smart.
• Many crab fishers supported the competitive quota system, and everyone with a licence had access to quota. Then, inshore permits were implemented, with non-transferable individual quotas. Today we are talking about how to apply the owner-operator and fleet separation policies.
• The primary beneficiaries of DFOs current licensing policy are the processing sector and the >35’ fleet. We must make sure the <35 foot fleet has the same right to gain access, without the restriction of rules on combining, etc. Though the < 35’ fleet is not involved with trust agreements, they are still under the control of processors, and they are still losing quota though the licencing of “Level 2 fishers”.
• If DFO considers a change to allow inshore corporations to hold licences, these corporations must be owned by fish harvesters.