FISHING
LINE 143 - FISHING INCOME
There are very few differences between the way a fisherman would claim his
fishing income and the way that a businessperson would claim his income. For
tax purposes most fishermen are considered to be self-employed even though
they are issued a form T4F as a statement of fishing earnings.
The T4F is really a statement of an individual's portion of
the crew share. For unemployment insurance purposes, unlike other
self-employed persons, a fisherman pays premiums and is entitled to draw
unemployment insurance benefits with certain qualifying factors.
In preparing his statement of fishing income and expenses, a fisherman will
use the form T2042. (See example.) The income and expense categories on this
form are all quite self-explanatory. Crew shares on the expense side of the
statement are, of course, the shares which a skipper pays
to his crew and claims as an expense on his own return. The cost of food
consumed by a fisherman while at sea would qualify as a deduction from gross
income since the ocean would be considered a remote work site.
The one element that does deserve special mention is the section relating to
the loss of nets and traps. There are two ways in which this can be treated.
The first way is to treat the purchase of new nets and traps as a capital
expense subject to capital cost allowances in class 8 at 20%. The alternative
is to treat the year's purchases in this area as an acquisition of replacement
property in the manner described at the bottom of the form T2042. The
reasoning in this technique is that if you take the value of your nets and
traps at the beginning
of the year and add to this the amounts you spent in the year buying more, the
result should be how much you have on hand at the end. If what you really have
is less than this, the difference between what you have and what you should
have is the amount which you will claim on your return as a loss of nets and
traps.
You will also note that the section for this calculation has
a line for proceeds from sale and insurance of nets and traps; if you include
an amount on this line, it should not be included again in the income section
of the statement.
It is very important here to beware of claiming Capital Cost Allowance in
years with little or no income. I recently had to review a fishing return
where large amounts of `depreciation' had been claimed in 1979, 1980, and
1981. Claiming this depreciation had increased losses which were not usable
against other income. Because of ill health, the fisherman
has not been fishing in the last two years and will now be selling his boat.
He will have over $50,000 extra tax to pay because he is now `recapturing' the
depreciation claimed on the boat in 1979, 80 and 81. There is nothing he or
anyone else can do in this situation.
It was a wrong "guess" at the future.
Another problem which needs real clarification is the tax treatment of the
sale of fishing licences. It is our policy to treat these as pure capital
gains, but where someone is almost buying and selling them for a living, it is
clear that any profits would be straight income. An interesting wrinkle in
1989 was that DNR has tried to reassess one fisherman by turning down the sale
of his licence as eligible for the $100,000 capital gains tax free treatment.
Stay tuned to find
out the answer.
INCORPORATING
I have finally found a reason for incorporating a "fishing" business. If the
business is incorporated and if the boat and nets and licences are of
sufficient worth that there is a possibility of a capital gain in excess of
$100,000, then the fisherman should consider incorporating the business. As a
Canadian Controlled "PRIVATE" Corporation (CCPC)
the shares can be sold and any profit will fall within the $500,000 Capital
Gains tax free which remained for Farmers, and the shares of a CCPC. (To be
eligible the seller has to have owned the shares for at least 24 months.)
You CANNOT find a buyer, go down and incorporate, and then
sell the shares tax free.
Fish Farming is causing great consternation in the fishing industry. The
courts are treating them as farmers rather than fishermen as the following
case shows.
TAXCASE - In 1989, Paul and Maureen Durst won their right to
deduct their losses from a fish farming operation in Ontario. However, Judge
Taylor of the Tax Court of Canada ruled that they were limited to the losses
allowed by section 31(1) of the Income Tax Act and restricted the amounts to
$5,000 each per year.
TAXCASE - In 1988 Angelo Travica lost his attempt to make
his wife a partner in his fishing business. Judge Brule of the Tax Court ruled
that the business was that of the husband and not a partnership. He was unable
to refute the fact that the ship's registry showed the boat was his only. (It
could possibly be her boat for tax purposes if she had put up half the money
to buy it and the money had come from outside sources (see income splitting).
Profits were never divided, cheques were always made out to the husband only
and there was no partnership agreement.
NEW FOR 1988 and 1989 and 1990
There are new provisions for automobile expenses, office in the home, and
investment tax credits for 1988 and 1989 and 1990. See the start of the
Farmers section for these changes.
