Industry Consultations on Issuing Licences to Companies, Cooperatives and Partnerships

Proceedings Report
November 17-18, 2008
Halifax, Nova

Day 1 – Monday, November 17

1. Opening Remarks

Nadia Bouffard opened the meeting by welcoming the industry participants; thanking them for being present at the meeting to provide their input and then reviewed the objectives for meeting (the list of participants can be found under Annex A of this report).

She then alluded to the numerous discussions DFO has had over the years with regard to the subject of whether to issue fishing licences in the inshore sector of Atlantic Canada to companies and other types of business models such as cooperatives and partnerships:

• From the Atlantic Fisheries Policy Review (AFPR)
• To the John Hanlon process; and
• The announcement by former Minister Hearn in April 2007 on PIIFCAF and other measures

She mentioned the series of meetings focused on this subject, which took place in:

• Moncton, in December 2007, and then followed with;
• St. Johns in January 2008, and the Magdalen Islands in February 2008 (for those who could not make it to the Moncton meeting due to the snow storm);
• Halifax (meeting of experts) in January 2008; and
• Halifax in March 2008

Meeting participants were then provided with a summary of the concerns they have expressed over time with regard for the need for DFO to ensure that licence holders maintain control over any decisions that concern their fishing licenses; those that hold the licence and the fishing enterprise actually operate the business and the fishing vessel; and that measures be put in place to ensure that the inshore harvesting sector maintains an independence from the processing sector. She reminded them that in April 2007, DFO put in place measures with a view to eliminate trust agreements, and help restore and preserve the independence of the inshore fish harvesters, and that the meeting objectives did NOT include a review of these measures.

Nadia then provided meeting participants with an update on the Saulnier decision, which was rendered on October 24th, as follows:

• It confirmed that the Minister of Fisheries and Oceans continues to hold her absolute discretionary authority to issue fishing licenses under the Fisheries Act and that the licence holder enjoys some interests that flow from holding the licence.
• For the purpose of the 2 pieces of legislation before it, these interests that flow from holding the licence can be considered as property.
• As a result, the Court determined that the trustee and receivers – under these 2 pieces of legislation - held the fishing licences with the same advantages and conditions than the original license holder.
• DFO lawyers are currently reviewing the decision to determine the full impact of the decision – in particular as it may relate to DFO’s policies and programs.

Nadia then went over the meeting agenda and objectives to inform and then seek views of license holders on whether DFO policies should be revised to allow for the issuance of fishing licenses to companies, cooperatives and partnerships in the inshore sector of Atlantic Canada.

Nadia concluded her opening remarks by stating her commitment to meeting participants that she will reflect and present their views to the Minister when options are proposed to her on this matter and by informing them that she values what everyone will bring to the table for this meeting.

A full copy of these opening remarks can be found under Annex B of this report.

2. Overview of the Agenda

Karen Henley, meeting facilitator, provided an overview of the agenda for the next two days.

3. Overview of Owner-Operator, Fleet Separation and PIIFCAF Policies

Annette Rumbolt, Staff Officer, Licensing, DFO, Newfoundland & Labrador, Region, provided an overview of the Owner-Operator, Fleet Separation and PIIFCAF policies.

No questions were asked following the presentation.

4. Basics of Companies

Gina Sinclair, A/Director, Fisheries Renewal, DFO, presented an overview deck on the basics of companies, prepared by Michael Bartlett of the Department of Justice, Canada.

No questions were asked following the presentation.

5. Presentation on Hypothetical Scenarios (Individual vs Company Structure)

Julius Kiesekamp, CA, TEP, Price Waterhouse Coopers (Halifax Office) presented a deck on hypothetical scenarios involving tax and succession planning for individuals and company structures).

The following comments and questions were raised:

Comment

There is no advantage to losing money in your fishing enterprise to go work in Fort McMurray. This is one of the advantages that are always missed. While you have a debt load, the principal payment is not tax deductible but the interest is. You have more money in a corporate structure to make payments on your principal.

Questions and Answers

Question 1 – What is the advantage of having the licence part of the company instead of having your licence aside?

Answer 1: It is simpler to keep all assets in the company. If separated, it may be not as easy to do dividend sharing because the fish harvester would have to take a certain amount of income because he holds the licence. Licences tend to grow in value. If they are held in companies, it is easier to share the growth in value with family and potentially multiply use of capital gains exemption by sharing capital gains with family members. It also would appear to make sense from a marketability perspective, as it would likely be easier to sell a fishing business if all of the assets were held in a company as opposed to some being held in the company and some by the fish harvester.

Question 2 – One of the reasons we are looking at this is because of a CRA decision that it may not be legal to do this. Is there a disadvantage to transfer beneficial interest of a licence to the company?

Answer 2: CRA indicated a few years ago that it may not be legal due to DFO legislation that requires inshore fishing licenses in Atlantic Canada to be held by individuals. The key advantage of being able to transfer the beneficial ownership interest in a fishing license to a company is that it permits fish harvesters to conduct their business affairs and their tax planning like most other small business owners in Canada. There are potential advantages available from operating a fishing business through a corporation, including the ability to split income with family members, potential multiple access to the capital gains exemption and the ability to take advantage of the very low corporate tax rates on the first $400,000 of business income. I do not see any disadvantages to transferring the beneficial ownership of a license to a company.

Question 3 – Is there a disadvantage or advantage to have your licence in your own name to growing your business?

Answer 3 – Potentially a disadvantage to owning the license personally vs corporately as a corporation gives fish harvesters access to lower income tax rates than the rates they pay as individual business owners on their income. If the license is in a corporation, more income will be earned in the corporation where it will be subject to the lower corporate income tax rates. The lower corporate tax rates can result in more after-tax cash being available to grow the business and repay debt. The comment was made that banks may be more inclined to lend money to corporations than individuals.

Question 4 - What benefit would be for a company to transfer assets as opposed to an individual. How would the individual be affected?

Answer 4: The individual is out of the picture in a situation where a company holds the license and other fishing assets. If the company owns the assets, the income arising from the sale of the assets is taxed in the company. The individual in such a situation is affected in that the value of their shares in the company would be affected by the sale of the assets by the company. Where a company owns the fishing assets, the individual is only directly affected by a sale of the fishing business if he/she sells the shares of the company, as opposed to the company selling the assets of the business. The gain arising from the sale of a license by a company would be subject to tax at the low corporate income tax rates and normally, only 50% of the gain is taxed. A license sold by an individual would likely be eligible for the capital gains exemption. However, in most cases it would appear to be more beneficial to sell the license and other fishing assets by having them owned by a corporation and selling the shares of the company, as the shares can qualify for the capital gains exemption and ownership of a company can often be structured so that the capital gain arising from the sale of the shares can be shared with family members.

6. Presentation of Risk and Benefit Analysis for Companies (Wholly-Owned and Two Fish Harvesters) in Relation to DFO Policies and Objectives

Nancy MacNeil, Regional Manager-Licensing & Transition, DFO, Maritimes Region, presented a risk and benefit analysis (overview deck) on the issuance of licences to companies (wholly-owned and two fish harvesters) in relation to DFO policies and objectives.

The following comments and questions were raised:

Questions and Answers

Question 1 – Suppose the licence would be issued to ABC Company, in the issue of 2 fish harvesters who would be on the licence?

Answer 1: The license would be held by ABC Company and both fish harvesters would be identified as shareholders.

Question 2 – Could this be looked into so that a competitive and ITQ can buy each others licences?

Answer 2: This is a discussion that needs to be taken at the advisory table in the context of flexible measures to allow for restructuring and self-adjustment. Not a question for here today.

Question 3 – What will the Minister do if there are administrative measures where there are verifications and how do we know that they will be more efficient than what was done in the past? The Minister was aware that there were controlling agreements out there and took a long time to address them.

Answer 3: In 2007, the Minister did take measures to protect the Owner-Operator policy through PIIFCAF. Ten years ago, we did not have the technology to support what we outlined today. We are asking to give us verification to start with and we would need to enter into arrangements with other government departments to obtain the information that was not available to us ten years ago. PIIFCAF proves that we are prepared to support the Owner-Operator and Fleet Separation policies.

Question 4 – I have great fear there is not going to be enough enforcement. We need enforcement that will have teeth. I need assurance that CRA audits will be a mechanism that will police and enforce legal certification. How much assurance can we get from a legal certification? I do not have a comfort level at this point.

Answer 4: Let us not lose sight of the fact that what we are proposing to do is transposing the current eligibility into a company structure. The shareholders would hold decision in the company. There are three options for control mechanisms: legal certification, our data management tracking system – any transfers would be verified (the minister still has authority over transfers), and audits. We have not concluded arrangements with Audit Canada and CRA because we do not know what options will be picked if any.

Question 5 – There cannot be comfort level whatsoever. Loopholes will be found. With regard to a company that has 2 Owners-Operators, if 2 brothers want to form a company and both have a licence, can a company have 2 lobster licences?

Answer 5: We are going to open the floor tomorrow to what the industry thinks about the concept of two Owners-Operators. As for holding 2 same species licenses, this will depend on measures adopted at the fleet level for restructuring and self-adjustments.

Question 6 – Will DFO have a policy on who owns the company?

Answer 6: DFO could have a policy on who owns voting shares or controls the company in order to protect DFO’s policies on Owner-Operator and Fleet Separation.

Comment: I could have a processor as a preferred shares owner if they are non-voting and still have strong influence over the company decision. There could be a lot of loopholes found.

Question 7 – Preferred shares could have voting rights in certain circumstances, so how would you protect PIIFCAF and all other policies?

Answer 7: You could have to submit legal documentation. DFO cannot tell you how you structure your company, but we could ask you to provide a legal description.

Question 8 – Every region has a different policy. When I get too old to go fishing, I need some sort of control over my son when I hand over my enterprise because it is my retirement. Are we looking at who is going to operate?

Answer 8: We did not look at this as having more constraints than the current Substitute Operator Policy.

7. Panel Discussion with Atlantic Inshore Fish Harvesters on Companies

Panel members were asked to express their views on the following:

What are their views on fish harvesters having the choice to have their licences issued to their company entities, in the context of the following current and future challenges in the inshore fishing industry:

• Intergenerational transfers/Succession planning
• Access to Capital - Challenges facing industry
• Prosperity and viability

Panel members (in order of presenters) were as follows: Earle McCurdy, Fish Food and Allied Workers (FFAW-CAW); Mr. Hasse Lindblad, Maritime Fishermen's Union (MFU); Daniel Landry, Association des pêcheurs professionnels membres d'équipages (APPME); Doug Fraser, Prince Edward Island Fishermen's Association (PEIFA); O’Neil Cloutier, Alliance des pêcheurs professionnels du Québec (APPQ) and Gordon MacDonald, LFA 30 CFA 23.

Report - Panel Leader 1 - Earle McCurdy

• Important that things be consistent with DFO policies. Fears that the proposed options may jeopardize the policies.
• Strongly supports the Owner-Operator and Fleet Separation policies and feels that these policies must be enshrined in regulations.
• Believes that a lot of the problems with what we have now are related to ITQs.
• The Owner-Operator and Fleet Separation policies were implemented in the late 1970s. In 1994, the Fisheries Council of Canada came up with a so-called “vision statement” to deregulate the fishery. Round table in 1995 fought back the challenge. Fishers fought hard to keep the Owner-Operator and Fleet Separation policies. The PIIFCAF exercise was set up at the time. FFAW conducted 2 surveys which identified the protection of the Owner-Operator policy and the PIIFCAF policy (protect policies, benefits go to fish harvesters and better tax advantage).
• How do we improve the tax regimes? The wholly-owned corporation would offer tax benefits without jeopardizing core enterprises. Believes that beyond that, it would be a problem for DFO policies.
• Areas of concern identified were the protection of the Owner-Operator and Fleet Separation policies and benefits of rationalization (concerns about rent extraction).
• In the event of something more complex than wholly-owned corporations, does not believe that DFO can ensure compliance with DFO policies.

Report – Panel Leader 2 - Hasse Lindblad

• Strong support for the Owner-Operator policy.
• Dangerous part of a trust agreement is that people other than the license holder have so much control that they bring the prices down. Nova Scotia is seeing two prices, one for the Owner-Operator and one for those with trust agreements.
• People got into a trust agreement to become viable. Does not believe that DFO can tell people that they cannot have them.
• Strongly believes that something has to be done about industry viability.

Report – Panel Leader 3 - Daniel Landry

• Strong support for the protection of the Owner-Operator and Fleet Separation policies. Is hopeful that each option proposed protects these policies.
• Supports the initiative proposed by DFO. Believes that certain fleets could benefit from proposed options, while others may not.
• There is no succession planning as fleets are not viable and there is a lack of interest from the younger generation to become fish harvesters. Up until recently, his fleets have not been able to obtain a loan by using a licence as security. This is an issue particularly for crew members wanting to enter the fishery, with little capital to invest.
• As fleets are not viable, we need to find solutions other than Controlling Agreements. We need new mechanisms geared toward the future, such as being able to hold a company/fishing licence through co-ownership.

Report – Panel Leader 4 - Doug Fraser

• Mentioned that most fish harvesters around the table are getting older and that it is time that the industry in the Gulf started looking at how to move forward within the next five to ten years.
• Supportive of company-related businesses as long as tax implications are considered and policy requirements are met.

Report – Panel Leader 5 - O’Neil Cloutier

• Strongly supports the Owner-Operator and Fleet Separation policies as a means to maintain the heritage and culture in communities. Fearful that allowing inshore licence holders to incorporate may lead to corporate concentration.
• Does not believe that incorporation will have an impact on intergenerational transfers as fleets are not yet viable.
• Feels that the Capital Gains Exemption is a more useful tool for his fleets.
• Does not feel that companies (incorporation) will help his fleets. Rather feels that loans will help them. An inshore fish harvester who does not make much money will not have the opportunity to have access to capital in a company.
• Agrees that some fleets could benefit from incorporation, but only a very small percentage (only 5% of inshore fish harvesters in the Québec and Gulf Region would benefit).

Report – Panel Leader 6 - Gordon MacDonald

• Fairly clear that there is a real support for the Owner-Operator and Fleet Separation policies, but the problem is that it has removed the possibility for fishers to operate like all other enterprise in Canada under a corporation.
• Easier to do intergenerational transfers with a company. Access to capital has been done through intergenerational transfers historically. That is when the trust agreement is between families.
• We have to find a mechanism to allow us to operate as a business without having a controlling interest.
• Have to find a way to have trust agreement without throwing the other business model away.

Following the panel discussion, the following questions were asked and the following comments were made:

Questions and Answers

Question 1 - Why are you opposed to trust agreements?

Answer 1 - The nature of the trust agreements in place at the time was really undermining the Owner-Operator and Fleet Separation policies (stated during the 19 meetings across Atlantic Canada). The measures that came under PIIFCAF did a good job of getting rid of these agreements.

Comments

• What I understood from your region and the West Coast was not closing the loopholes where the trust agreements were allowed. So people are saying keep the trust agreements but build a frame around it.
• We need to protect viability and the concentration of licences in one hand. We could have a box at the bottom of the licence where it would say that the licence is held in a company’s name and accompanied by a legal paper that says it still meets the Owner-Operator and Fleet Separation policies.
• Agree with protecting Owner-Operator and Fleet Separation policies. In Newfoundland, there is no access to capital and fish harvesters have to go to fish processors. The government has to have a large amount of money to have available to fish harvesters so they do not have to go see fish processors.

Nadia reminded participants that the options that were put on the table this morning, were not proposed by DFO but rather recommended by industry for review and that industry had asked that DFO provide the facts regarding these options and provide some analysis in relation to DFO policies. They were further reminded that they would have the opportunity to express their views on these options during the next day.

8. Basics of Cooperatives and Partnerships

Gina Sinclair, A/Director, Fisheries Renewal, DFO, presented an overview deck on the basics of cooperatives and partnerships, prepared by Michael Bartlett of the Department of Justice, Canada.

No questions were asked following the presentation.

9. Presentation of Hypothetical Scenarios (Cooperatives and Partnerships) – Julius Kiesekamp

Julius Kiesekamp, CA, TEP, Price Waterhouse Coopers (Halifax Office) presented a deck on hypothetical scenarios (cooperatives and partnerships).

The following comments and questions were raised:

Questions and Answers

Question 1: If you form a partnership, does it contravene the PIIFCAF rules?

Answer 1: If your partnership arrangement defers the control of your licence to someone else, then it is a controlling agreement.

Question 2: If you form a partnership or cooperative, how are you not in conflict with the controlling agreement rules? Who is in control?

Answer 2: The idea is that a partnership or cooperative holds the licence. So from your point of view, partnerships and cooperatives are controlling agreements.

Question 3: What is the advantage of having a partnership? I do not see it.

Answer 3: I agree in general, but some fish harvesters in certain situations may see an advantage.

Question 4: How would being in a partnership make retirement easier?

Answer 4: It might be easier to sell an ownership interest in the partnership to other existing partners than it would be for an individual to sell his or her fishing business if they were not involved in a partnership.

10. Presentation of Risk and Benefit Analysis for More than Two Fish Harvesters (Company, Cooperative and Partnership) in Relation to DFO Policies and Objectives

Leroy MacEachern, Senior Regional Advisor - Fisheries Renewal, DFO, Gulf Region, presented a risk and benefit analysis for the issuance of licences to companies, cooperatives and partnerships involving more than two fish harvesters.

The following questions were raised following the presentation:

Question 1: Why do we have to change the policy as there are a number of crab cooperatives already in the Maritimes Region?

Answer 1: The way the snow crab companies are set up (they are not cooperatives), had ministerial approval, and it was very specific.

Question 2: If the company is dissolved, could the license go back to the original owner’s name?

Answer 2: There are questions and options that should be discussed tomorrow.

Day 2 – Tuesday, November 18

1. Opening Remarks

Nadia Bouffard opened the second day of the meeting by welcoming the industry participants and informing them that concerns had been expressed after day one of the meeting, with regard to the proposed format of the eight breakout sessions proposed for day two, and that there was a suggestion to hold a plenary discussion with the whole group instead. She reminded them that DFO was present to hear their views and was open to changing the format of the meeting if this met with the majority of the views of participants.

The majority of participants agreed to change the proposed format of the meeting and to hold a plenary discussion with the entire group of license holders and representatives present. It was also decided that Marc Allain, Independent Consultant, CCPFH, and Karen Henley would co-facilitate the session.

2. Plenary Discussion

Marc Allain began the plenary discussion by informing participants the session would first address the notion of issuing licences to companies in general and then the wholly-owned option, and then address the other options, in order to get an idea concerning support for identified options.

a. Discussion on Moving Beyond the Status Quo to Allow the Issuance of Licences to Companies

The following comments were made with regard to DFO allowing the issuance of licences to companies:

• In New Brunswick, the main objective is viability. There is support for the proposed idea of holding a licence in a company as long as the following questions are adequately addressed:
  • What is the impact on EI?
  • What is the impact on rationalisation programs?
  • What is the impact on the Capital Gains Exemption?
  • Need reassurance that with the wholly-owned (1 fish harvester) company structure, non-voting shares will not be held by anyone other than the 1 fish harvester.
• As far issuing licences to companies, is somewhat in favour.
• It is necessary that we move forward as long as we protect the Owner-Operator Policy.
• You have to look around to for the best price. It does not mean that because you form a company, it will affect the price you get for your fish.
• In our area, our fleets are not viable. If we ever get viable someday we may need to put our licences in corporation. If we do that by stacking, are we going to allow more than one licence per corporation? We need to answer those questions.
• The idea of incorporating an enterprise is an option and it is important to reiterate it again. It is certain that social programs are also a big asset. Because of CRA, we see that it is important that the licence be issued in the corporation’s name.
• We are here to protect the Owner-Operator policy and make avenues for moving forward with the 100% wholly-owned corporation. We should clarify that we are not talking about big corporations today with multiple shareholders, just about a fish harvester who could form a corporation if he so wishes.
• We are shaping the fishery for the future. We are committed to protecting the Owner-Operator policy. We often put policies in place that made sense by themselves but put them together and undermined the Owner-Operator policy. We are recognizing the need for change but we have to move cautiously.
• Not so supportive of the notion of the issuance of licences to companies as concerned fleets are currently in survival mode rather than in company mode. However, does see a benefit in this option for the future. Is supportive as long as the Owner-Operator policy is strengthened and put into regulation and that DFO provides assurance that its existing programs and policies will not be negatively affected by this initiative. Support is also dependent upon CRA’s and DFO’s interpretation of the Saulnier decision on their policies.
• Supportive of initiative, but needs reassurance from DFO that the Owner-Operator policy will not be eroded.
• This must be voluntary. It boils down to CRA interpretation of who owns the licence. Fishing is a family business but it can also mean more than that. DFO should not pigeon hole it into a wholly-owned option.
• Our focus should be on growing our industry. People are talking globally. We should look at the international level. We want to protect the Owner-Operator Policy. We have to make sure that DFO is a true partner in this and that there are no loose ends.
• Supportive of initiative. Some licences are so expensive that it makes more sense to put them in a company without jeopardizing the Owner-Operator policy.

Marc Allain proceeded with a vote for general support for issuing licences to companies and moving discussion on specific options in this regard. Vote resulted in 36 being in favour, 0 being against and 7 abstaining.

b. Discussion on DFO Allowing the Issuance of Licences to Wholly-Owned Companies

There was general agreement that the definition of wholly-owned company would be defined as one person operating and holding 100% of all the shares. Even though the prevailing view was that the wholly-owned company would be defined as one fish harvester holding 100% of the shares (voting and non-voting), Nadia indicated that on a technical level, a wholly-owned company could also mean that there could be other people with non-voting shares in the company. The issue from a DFO policy perspective was who controls the decisions of the company through voting shares.

The following comments were made with regard to DFO allowing the issuance of licences to wholly-owned companies:

• High level of discomfort with regard to the idea of more than one fish harvester holding shares in a company. Not support of discretionary trusts as is fearful that it could open the door to corporate (processor) control.
• Supportive of wholly-owned option as it is believed it would deal with the CRA issue, but is more supportive of options that go beyond the wholly-owned option. Does not feel that the wholly-owned option will be capable of dealing with the succession planning issue.
• Feels that the wholly- owned option is too restrictive.
• Need for confirmation from DFO that the Owner-Operator and PIIFCAF policies will be strengthened by being put in regulation.
• The definition of wholly-owned company should be expanded.
• We need to move forward and I feel we are going back to before we were in co-management. We have to be more visionary. I don’t think we should leave today with something entrenched. We have to come out with a draft that will work for everybody. It is going to take time and a lot of work but it can be done.
• Some people may agree with wholly-owned but would not vote on it because it is not what they want. It is not enough for them.
• I would like to have the option of being able to move my licence to a corporation. We should not be dictated on how we set up our business. If you hold the control of voting shares of the company therefore you own control of the transfer of the licence. He could have preferred shares with a processor. It is his right. If we borrow money from a processor, of course they will want security. This policy should not be prescriptive.
• We had a good fleet down home – the rest is owned by corporation. We don’t want the rest of the fishery to go the rest of the way and be owned by corporation. We want the young people to get into the fishery, but how?
• There are a lot of agendas at play in this room. I don’t think we have the right to put our agenda’s in a forum like this. We cannot make decision without talking to our memberships first. We cannot separate this from everything else that is going on in the fishing industry.
• What would be wrong with family having shares? It would be dealing with the viability of each fleet.
• If you meet the requirement of PIIFCAF and the Owner-Operator policy, your company should follow them. It would give the fish harvesters more options.

Marc Allain concluded the plenary discussion by reiterating that there was general consensus for moving forward with the companies initiative, but with conditions and provided the Owner-Operator Policy is given the strength of law. He mentioned that his sense from the plenary discussion was that there was general agreement on:

• the wholly-owned company option;
• the definition of a wholly-owned company; and
• the wholly-owned option being a starting point before moving on to other corporate structures

3. Next Steps

The following suggestions were made by participants:

• DFO needs to draft a policy review document, similar to the AFPR policy review document, so that interested parties can review it and address their concerns.
• The Owner-Operator policy needs to be strengthened before we can move forward. We have not heard from DFO to move in that direction.
• The importance of the regional discussions outweighs the cost as the impact will be felt for generations. We need to go forward with the discussion. There is so much information we need to make clear decisions.

4. Update from CRA – Saulnier Decision and Impact on Income Tax Act