2000 Ruling 2000-0054773 - Production Services Film

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

This ruling involves a proposed public production services film deal similar to one previously issued for the same group (file #1999-001455 [also sometimes referred to as file #993252]). The main difference in the facts is that instead of Studio hiring one company to do the Canadian labour and a 3rd party to do the non-Canadian labour production services (and then having that 3rd party hire the production partnership to do the non-Canadian labour production services), in the present instance Studio hires the production partnership to do all of the production services. The production partnership, then, in effect, sub-contracts the Canadian labour expenses out to Studio, which in turn hires a 3rd party to incur those costs.

No new issues.

Position:

Reasons:

XXXXXXXXXX 2000-005477

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX, as supplemented by your letters dated XXXXXXXXXX, and our numerous telephone conversations (XXXXXXXXXX) wherein you requested advance income tax rulings on behalf of the proposed XXXXXXXXXX production services transactions as described herein. We also acknowledge receipt of drafts of the various documents referred to in this letter.

In this letter the following definitions are used:

"ACo" means XXXXXXXXXX;

"ACo Principals" means XXXXXXXXXX;

"ACo Shareholders" means XXXXXXXXXX;

"ACo Shareholders Owners" means the respective owners of each of the ACo Shareholders (i.e., directly or indirectly, by or for the benefit of the ACo Principals and/or members of their families);

"Act" means the Income Tax Act, RSC 1985, c.1 (Fifth Supp.), as amended;

"Basic Fee" means, in the maximum, XXXXXXXXXX% of the Total NCLE incurred (for purposes of the Act) by the PLP in the year, as more fully described below in paragraph 13;

"BCo" means XXXXXXXXXX, a subsidiary of ACo, the directors and officers of which are the ACo Principals;

"Class A Units" means Class A units of limited partnership interest in the PLP;

"Class B Subscription Promissory Note" means the promissory note issued to evidence the unpaid subscription price for the Class B Units, as described below in paragraph 27;

"Class B Units" means Class B units of limited partnership interest in the PLP;

"CLE" means Canadian labour expenditure as defined in subsection 125.5(1) of the Act;

"CLE Agreement" means the production services agreement to be entered into between Studio, Creditco and PLP, in respect of the Film, as described below in paragraph 11;

"Creditco" means the corporation which Studio will incorporate or engage, as described below in paragraph 9;

"Film" means a motion picture entitled "XXXXXXXXXX";

"Initial Limited Partner" means XXXXXXXXXX;

"Investment Loan" means a full recourse loan, due on or before XXXXXXXXXX, from the Lender to an Investor, as described below in paragraph 19;

"Investor" means a Canadian resident investor who acquires any MLP Units;

"Lender" means XXXXXXXXXX;

"MLP" means XXXXXXXXXX;

"MLP Units" means units of limited partnership interest in MLP;

"Parentco" means XXXXXXXXXX;

"PLP" means XXXXXXXXXX;

"PLP Services Agreement" means the production services agreement to be entered into between Studio and the PLP, as described below in paragraph 12;

"Production Limited Partnerships" means the limited partnerships, including PLP, in which MLP will acquire class A units, each of which will be formed to provide production services similar to those provided by PLP;

"Production Loans" means advances made to the PLP to fund the Total NCLE, as described below in paragraph 16;

"PromoLP" means XXXXXXXXXX as described below in paragraph 4;

"Regulations" means the regulations to the Act;

"ServiceCo" means the corporation which Parentco owns or will incorporate, in connection with the purchase of Class B Units, as described below in paragraph 27. ServiceCo will be incorporated under the laws of the XXXXXXXXXX. All of the shares in the capital of ServiceCo will be owned by Parentco;

"Studio" means XXXXXXXXXX; and

"Total NCLE" means the aggregate of each of the Production Services Expenses (including the Canadian Labour Service Fee reimbursement described in paragraph 12 below) and the Compliance Expenses to be incurred by the PLP in respect of the Film (as described in paragraph 12 below) pursuant to the PLP Services Agreement. Such expenditures are "matchable expenditures" as that term is defined in subsection 18.1(1) of the Act.

Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:

RELEVANT FACTS

1. Studio is a United States corporation headquartered in XXXXXXXXXX. Its business is the production and distribution of theatrical motion pictures.

2. Parentco is a XXXXXXXXXX corporation, the shares of which are owned by a XXXXXXXXXX.

3. XXXXXXXXXX.

4. XXXXXXXXXX.

5. XXXXXXXXXX.

6. XXXXXXXXXX.

7. XXXXXXXXXX.

8. To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling

(i) is in an earlier return of the taxpayer(s) or a related person,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer(s) or a related person,

(iii) is under objection by the taxpayer(s) or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by Revenue Canada or the Canada Customs and Revenue Agency.

PROPOSED TRANSACTIONS

9. XXXXXXXXXX.

10. Production of the Film will commence on XXXXXXXXXX.

11. Pursuant to the CLE Agreement, Studio and the PLP will engage Creditco to perform certain production services in respect of the Film, the expenses for which will qualify as CLE. The amount of the CLE is estimated to be $XXXXXXXXXX U.S. Creditco will obtain from Studio a limited use license to the copyright in the script for the Film to enable Creditco to perform its production services in respect of the Film. The CLE Agreement will provide that Studio will be the legal and beneficial owner of the copyright in the Film during production and thereafter. For greater certainty, at no time will Creditco own any interest in the copyright in the Film. The services to be performed by Creditco will include the payment of salaries and wages to Canadian residents in respect of the performance of CLE production services in Canada, and production accounting and audit (these latter services will be incidental in relation to performance of the former services). As consideration for the performance of production services by Creditco, XXXXXXXXXX.

12. Pursuant to the PLP Services Agreement, Studio will engage the PLP to provide, and to pay for, the production services (excluding expenses for meals and entertainment and certain expense overages) in respect of the Film (the "Production Services Expenses"). PLP will obtain from Studio a limited use license to the copyright in the script for the Film to enable PLP to provide the Production Services, however the PLP Services Agreement will provide that Studio will be the legal and beneficial owner of the copyright in the Film during production and thereafter. As noted above in paragraph 11, the PLP and Studio will enter into the CLE Agreement with Creditco to incur the CLE. Under the PLP Services Agreement, the PLP will agree to reimburse Studio in respect of the Canadian Labour Service Fee paid by Studio to Creditco. Further, under the same PLP Services Agreement, the PLP will be responsible for and may subcontract with Studio or an affiliate of Studio, which, on behalf of the PLP, will engage United States cast and crew, in order to ensure compliance with all applicable film industry guild and union requirements (i.e., The Screen Actors Guild, The Directors Guild of America, The Writers Guild of America East Inc. and The Writers Guild of America West Inc., etc., typically require the party which directly engages the foreign talent to be a signatory to the applicable collective agreements administered by such guilds and unions). The PLP will be responsible to reimburse the subcontractor in respect of these production services in respect of the Film (the "Compliance Expenses"). The Production Services Expenses and the Compliance Expenses will include budgeted items, the Canadian Labour Service Fee, actual overhead costs (which overhead will not exceed 15% of total production budget), and may include a fixed, determinable, non-refundable payment by the PLP to Studio in respect of deferred and contingent compensation (e.g., participation payments/residuals) that Studio may become liable to pay actors, producers and directors. The Total NCLE (being the sum of the Production Services Expenses and the Compliance Expenses) is estimated to be $XXXXXXXXXX U.S.

13. XXXXXXXXXX.

XXXXXXXXXX All amounts earned XXXXXXXXXX will be reported for income tax purposes on an accrual basis in accordance with established case law principles or rules of law, and well-accepted business principles. XXXXXXXXXX In either case, PLP will generally be insured for (i) death and disability of principal performers, (ii) loss or destruction of the master tape, original negative or sound track, or sets, props or equipment, (iii) errors and omissions in the production, (iv) third party liability, (v) significant production delays, and (vi) infringement of copyright, libel and slander, defamation of character, invasion of privacy and rights of publicity.

14. The PLP's production services, together with those pursuant to the CLE Agreement described in paragraph 11 above, will be performed by the PLP and Creditco pursuant to a production services co-ordination agreement. There will also be a common production (Canadian and/or U.S. dollar) bank account(s) for PLP and Creditco.

15. Studio will lend to Creditco an amount equal to 100% of the CLE component of the production budget for the Film XXXXXXXXXX All such advances will be made as and when required during production, and will be deposited directly into the common production bank account(s) of Creditco and the PLP.

XXXXXXXXXX

16. XXXXXXXXXX. The balance of the funds required by the PLP to incur the Total NCLE will be loaned by Studio to the PLP. All such loans are collectively referred to herein as the Production Loans. They will be full recourse to the PLP, will be made as and when required during production, and will be deposited directly to the common production bank account(s) of Creditco and the PLP. Depending on negotiations, the Production Loans may or may not be interest bearing, and financing charges (commitment fees, loan arranging fees, administration fees, etc.) may be paid to Creditco and/or Studio. If the Production Loans are interest bearing, the rate will reflect a market rate of interest. XXXXXXXXXX.

17. During the course of the production of the Film, the contractual arrangements agreed to by the parties may be reflected in a written interim agreement. Notwithstanding this, the formal documents evidencing more particularly the transactions will be executed at the closing of subscription for Class A Units (which closing will occur after production has commenced). XXXXXXXXXX. Each of the borrowing parties will be liable to repay, and will account for, its own indebtedness in respect of the advances.

18. MLP Units will be offered to Canadian resident Investors (who must represent and warrant to MLP that they are resident of Canada, and may be required to provide an I.R.S. certificate W-8BEN to this effect) pursuant to prospectus exemptions available in the provinces of Canada where the MLP Units are offered for sale. The sale will occur pursuant to an Offering Memorandum (which may contain excerpts of this ruling). In any event, the offering documents and any Executive Summary will contain the following wording:

THE RULING OBTAINED FROM THE CANADA CUSTOMS AND REVENUE AGENCY CONTAINS CAVEATS. THE RULING MAY BE VIEWED ON REQUEST SUBJECT TO THE SIGNING OF A CONFIDENTIALITY AGREEMENT.

19. It is anticipated that Investors will subscribe for the MLP Units at various times throughout the XXXXXXXXXX calendar year. The subscription price for each MLP Unit will be approximately $XXXXXXXXXX. Each Investor may choose to finance up to approximately $XXXXXXXXXX of their subscription price for each MLP Unit acquired with a full recourse Investment Loan from the Lender. Each of the Investment Loans will be due on or before XXXXXXXXXX, and will bear interest at a rate at least equal to the prescribed rate (for purposes of section 143.2 of the Act) prevailing at the time the Investment Loan is made. Interest on the outstanding Investment Loans for any particular year will be due and payable on or before XXXXXXXXXX of the next calendar year. The balance of the subscription price for the MLP Units will be provided from each Investor's own sources, and each Investor must represent and warrant that none of such proceeds will be obtained from any limited recourse financing. A small portion of the subscription price owing by the Investors may be satisfied or secured by the delivery of post-dated cheques, which will be due on or before XXXXXXXXXX.

20. The Lender is a private Canadian resident lender and will obtain its financing from a Schedule I Canadian chartered bank (currently intended to be the XXXXXXXXXX). None of the trustees or beneficiaries of the Lender are related to any of ACo, the ACo Principals, the ACo Shareholders or the ACo Shareholders Owners, nor are any of the ACo Shareholders Owners (or non-arm's length persons) beneficially interested in the Lender for the purposes of paragraph 251(1)(b) of the Act.

21. Subscription proceeds from Investors will be used by the MLP to acquire Class A units in numerous Production Limited Partnerships, including the PLP, at various times during the year. Each of the acquisitions, including those in the PLP, will occur before any ascertainable revenues, in respect of which the Basic Fee or net profits participations (or any similar fees) owing to that production limited partnership, may be computed. The aggregate number of MLP Units issued in respect of each film (and acquisition of Class A units of a Production Limited Partnership) is dependent upon the amount of production services expenses which is estimated to be incurred by the particular Production Limited Partnership (with each MLP Unit relating to an approximate amount of budgeted production services expenses).

22. Immediately following the initial subscription for MLP Units by Investors, the Initial Limited Partner's interest in the MLP will be redeemed for the amount of the original investment, being the nominal sum of ten dollars.

23. The majority (i.e., greater than XXXXXXXXXX% and in total approximately $XXXXXXXXXX) of the total subscription proceeds received by the MLP, in respect of its proposed investment in the PLP, will be used by the MLP to subscribe for Class A Units at a subscription price of $XXXXXXXXXX each. The balance of the subscription proceeds received will be used to pay fees, costs, and expenses related to the offering.

24. Immediately following issuance of the Class A Units to the MLP, the Initial Limited Partner's limited partnership interest in the PLP will be redeemed for proceeds equal to the amount of the original investment, being the nominal sum of XXXXXXXXXX dollars.

25. XXXXXXXXXX.

26. XXXXXXXXXX.

27. At the closing of the MLP's subscription for Class A Units, a taxable Canadian resident affiliate of ServiceCo (likely a trust) will subscribe for the Class B Units at a subscription price of $XXXXXXXXXX each. The total subscription proceeds from the sale of Class B Units will be approximately $XXXXXXXXXX. The aggregate number of Class B Units to be issued will be a negotiated number and will be dependent upon the amount of Total NCLE which is estimated to be incurred by the PLP and the number of Class A Units to be issued (with each Class B Unit relating to an approximate amount of budgeted Total NCLE). The number of Class B Units will never exceed the number of Class A Units. Furthermore, it is intended that the total number of Class B Units to be issued will approximate XXXXXXXXXX of the number Class A Units to be issued. The number of Class B Units will be reduced proportionately (and proceeds refunded, if applicable) if the actual Total NCLE is less than the anticipated Total NCLE at the time of closing of the subscription for Class A Units (this reduction, only in the number of Class B Units, is intended to avoid having to refund subscription funds to Investors in Class A Units, which refund could bring their subscription price below the applicable securities law minimums). ServiceCo and its affiliate, which will purchase the Class B Units, will finance the subscription amount from their own resources, which may be in the form of a participating loan arrangement with Studio or the purchase by Studio of a profit participation from ServiceCo. The subscriber will be able to choose to pay immediately the full amount of the subscription amount in cash, or to defer its obligation to pay the subscription amount up to the tenth year following the closing of subscriptions for Class B Units. If the payment is deferred, the unpaid subscription price will be evidenced by a Class B Subscription Promissory Note, will bear interest (at a rate at least equal to the prescribed rate (for purposes of section 143.2 of the Act) at the time the obligation is created) and the subscriber will place an amount in an interest bearing deposit with the Lender or an affiliate, which amount will be assigned to the PLP as security for its obligation to pay to the PLP the subscription proceeds for the Class B Units. The investment in the Class B Units may be paid in cash at any time, thereby entitling the holder of the Class B Units to a share of income or losses of the PLP, as outlined below. The terms of the PLP partnership agreement will provide that the subscriber will not become a partner in the PLP until the full amount of the subscription amount for the Class B Units is paid in cash. The proceeds from the sale of Class B Units will be used by PLP in the following order of priority: (1) to repay any outstanding balance in the Production Loans; (2) to pay all other outstanding liabilities of the PLP (such as cost of the offering, commercial liabilities, etc.); and (3) to be paid out as distributable cash to the limited partners of the PLP in accordance with the terms of PLP's partnership agreement described below in paragraph 28.

28. Under the partnership agreement for the PLP:

a) the Class A Units, in the aggregate, will represent a 99.99% interest and entitlement to the income and losses of the PLP, unless and until the Class B Units have been subscribed for and paid in full in cash. The general partner of the PLP will own a 0.01% interest;

b) once the subscription price for Class B Units has been paid in full in cash, subject to the exception described below in paragraph (c), 99.99% of the income and losses of the PLP will be allocated ratably between the holders of the Class A Units and the Class B Units, based upon the number of units owned;

c) if the Class B Units are not subscribed for in cash by the end of a particular fiscal period of the PLP and, in the result, losses are allocated solely to the holder of the Class A Units (i.e., the MLP), income of the PLP for subsequent fiscal periods will be allocated solely to the holder of the Class A Units in an aggregate amount equal to the losses previously allocated to the holder of the Class A Units;

d) any distributable cash on hand, as determined by the general partner of the PLP, will be distributed by the PLP to the holders of Class A Units and Class B Units in accordance with e) below. For greater certainty, no cash will be distributed by the PLP until its operating expenses have been paid and until its liabilities, including the Production Loan(s) to Creditco and/or Studio, have been repaid in full or provision has been made for such payment;

e) if the subscriber for the Class B Units chooses to defer its payment for the Class B Units (as described above in paragraph 27), the holders of the Class A Units will be entitled to receive all interest received by PLP in respect of the Class B Subscription Promissory Note and a priority distribution of distributable cash on hand, to a maximum amount equal to their investment in respect of the Class A Units. If the subscriber for the Class B Units chooses not to defer its payment, and therefore there are no Class B Subscription Promissory Notes, the holders of the Class A Units will be entitled to receive a priority distribution of distributable cash on hand, to a maximum amount equal to their investment in respect of the Class A Units, plus certain carrying costs (these carrying costs will reflect a fair market value imputed return on contributed capital to compensate the Class A Unitholders if they have paid for their Units before the Class B Units are fully paid.)

The holders of Class B Units will be entitled to distributable cash on hand which is distributed after the priority distribution to holders of the Class A Units, to a maximum of a Class B Unitholder's investment in respect of the Class B Units. Thereafter, any such cash distributions will be made ratably based upon the number of units owned; and

f) each Class A Unit and Class B Unit will be entitled to one vote. Other than the revenue sharing and distribution entitlements described in this paragraph, owners of the Class A Units will have the same rights and obligations as the owners of the Class B Units.

29. Under the partnership agreement for the MLP:

a) the limited partners of the MLP will be entitled to 99.99% of the income and losses allocated to the MLP by the PLP; and

b) the general partner of the MLP will be entitled to 0.01% of the income and losses allocated to the MLP by the PLP.

30. The MLP will distribute to its partners all revenues it receives from the PLP. In the event that cash distributions from the MLP are insufficient to enable Investors to repay their Investment Loans, the Investors will be personally responsible for the shortfall on the basis that the Investment Loans represent unconditional, full-recourse obligations of Investors. The relevant agreements will contain no set-off, or other mechanisms, that will protect the Investors from an insolvency at either the PLP or the MLP level. For greater certainty, there are no assurances that the amount of any cash distributions from the PLP to the MLP, or from the MLP to the Investors, will be sufficient to fund interest payments, and to fully repay, the Investment Loans.

31. The MLP and the PLP will be tax shelters within the meaning assigned by subsection 237.1(1) of the Act. The general partner of the MLP and the general partner of the PLP will apply for tax shelter identification numbers for the MLP (both federally and in Quebec) and the PLP, respectively, and upon receipt of the number will file annual tax shelter information returns, pursuant to and in accordance with subsections 237.1(2) and (7) of the Act.

32. The transaction documents will provide that neither Creditco nor the PLP will be in an agency relationship with ServiceCo or Studio in respect of the transactions described herein.

29. a) a) a) a) a) a) a) a) a) a) a) a) a) a) a) 29.

PURPOSE OF THE PROPOSED TRANSACTIONS

33. The purpose of the proposed transactions is as follows:

a) to afford private Canadian investors the opportunity to invest in the motion picture and television industry, through the provision of production services in Canada, thereby providing investors with the opportunity to participate financially in the receipts generated from the worldwide exploitation of films and television projects; and

b) in tandem with the federal and provincial tax credit system for film and television production services, to encourage and facilitate the production of film in Canada by non-resident producers, thereby creating employment in Canada and utilizing and enhancing the expertise of Canadian production personnel.

RULINGS

34. Provided that the statement of facts, the proposed transactions and the purposes thereof, all as described above, are accurate and constitute complete disclosure of all of the representations, relevant facts, proposed transactions and the purposes thereof, and provided further that all of the proposed transactions are carried out as described above, and that the offering documents and executive summary contain a reference, such as described above in paragraph 18 of this letter, in respect of the existence of caveats in the rulings given, and provided that the PLP and the MLP are partnerships at law and that all the relevant facts and proposed transactions described are or will be legally effective, we confirm the following:

A. The Total NCLE incurred by the PLP after the date of this letter and forming part of the production services rendered by it pursuant to the PLP Services Agreement will, subject to the application of subsections 143.2(6) and (10) of the Act and also subject to the provisions of section 18.1 of the Act, be deductible in the computation of the PLP's income or loss for the relevant fiscal period in which the expenses are incurred, pursuant to section 9 of the Act, to the extent that:

(i) such reporting is not inconsistent with established case law principles or rules of law, and well-accepted business practices;

(ii) the outlays and expenses are reasonable in amount and are not on account of capital; and

(iii) the outlays and expenses are made or incurred for the purpose of gaining or producing income from a business with a reasonable expectation of profit.

B. Any amount of unpaid principal which the PLP owes on account of the Production Loans (the "Unpaid Loans") will be a limited-recourse amount of the PLP, with the result that:

(i) the provisions of subsection 143.2(6) of the Act will apply to reduce the PLP's expenditures (including the amount of the Total NCLE) to the extent that the amount of the Unpaid Loans can reasonably be considered to relate to such expenditures incurred by the PLP;

(ii) at the time that all or a portion of the Unpaid Loans are repaid by the PLP, the provisions of subsection 143.2(10) of the Act will apply to deem such expenditures to have been made or incurred at the time of, and to the extent of, the repayment; and

(iii) the Unpaid Loans will not, in and of itself, result in the application of subsection 143.2(6) of the Act to reduce the cost of the Class A Units acquired by the MLP or the cost of the MLP Units acquired by the Investors.

C. Pursuant to subsection 18.1(15) of the Act, section 18.1 of the Act will not apply to restrict the deductibility of the Total NCLE incurred by the PLP in a fiscal period pursuant to the PLP Services Agreement, only if before the end of the fiscal period in which such Total NCLE is incurred (or deemed to be incurred in accordance with subsection 143.2(10) of the Act, as described in ruling B), amounts included in computing the PLP's income for that period (other than any portion of such an amount that is the subject of a reserve claimed by the PLP for the year under the Act) in respect of the PLP Services Agreement exceed 80% of such Total NCLE.

D. Losses for a particular fiscal period of the PLP which are allocated a holder of Class A Units or Class B Units by the PLP, in accordance with the terms of the partnership agreement referred to above in paragraph 28, will, subject to the application of subsections 143.2(6) and (10) of the Act (referred to above in ruling B, ruling J, and opinion 4), be deductible, pursuant and in accordance with section 3 of the Act, in computing the income or loss of such holder in the taxation year of such holder in which the PLP's particular fiscal period ends (or coincides with), to the extent of the holder's at-risk amount (as defined in subsection 96(2.2) of the Act) in respect of the PLP at the end of that taxation year.

E. Losses for a particular fiscal period of the MLP which are allocated by the MLP to an Investor, in accordance with the terms of the partnership agreement referred to above in paragraph 29, will, subject to the application of subsections 143.2(6) and (10) of the Act (referred to below in ruling J and opinion 4), be deductible, pursuant and in accordance with section 3 of the Act, in computing the income or loss of such Investor in the taxation year of such Investor in which the MLP's particular fiscal period ends (or coincides with), to the extent of that Investor's at-risk amount (as defined in subsection 96(2.2) of the Act) in respect of the MLP at the end of that taxation year.

F. Subject to the application of paragraphs (b), (b.1) and (c) of subsection 96(2.2) of the Act, the at-risk amount, within the meaning of subsection 96(2.2) of the Act, of the MLP in respect of the PLP at the end of the XXXXXXXXXX fiscal year of the PLP, will be equal to the amount of the MLP's investment in the Class A Units, as described above in paragraph 21, to the extent that the MLP, or a person with which the MLP does not deal at arm's length, does not receive or obtain any amount or benefit referred to in paragraph 96(2.2)(d) of the Act, other than an amount or benefit excluded by one of subparagraphs (i), (iii), (vi) or (vii) of that paragraph.

G. Subject to the application of paragraphs (b), (b.1) and (c) of subsection 96(2.2) of the Act, the at-risk amount, within the meaning of subsection 96(2.2) of the Act, of an Investor in respect of the MLP at the end of the XXXXXXXXXX fiscal period of the MLP, will be equal to the amount of the Investor's investment in MLP Units, as described above in paragraph 19, to the extent that the Investor, or a person with whom the Investor does not deal at arm's length, does not receive or obtain any amount or benefit referred to in paragraph 96(2.2)(d) of the Act, other than an amount or benefit excluded by one of the subparagraphs (i), (iii), (vi) or (vii) of that paragraph.

H. In connection with the rulings provided in paragraphs F and G above, except as set out below in opinions 2 to 4, XXXXXXXXXX, all as described above in paragraph 13 will not, in and of themselves, result in the application of paragraphs 96(2.2)(c) or (d) of the Act to reduce the at-risk amount of an Investor in respect of the MLP, or the at-risk amount of the MLP in respect of the PLP.

I. Subject to the application of subsections 18(9) and (9.2) to (9.8) of the Act, interest paid in a taxation year or payable in respect of a taxation year by an Investor (depending upon the method regularly followed by an Investor in computing income) in connection with their Investment Loan will be deductible in computing income in that taxation year in accordance with paragraph 20(1)(c) of the Act, to the extent that the amount thereof is reasonable and paid pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property with a reasonable expectation of profit.

J. Provided interest in respect of their particular Investment Loan (as described above in paragraph 19) is paid by an Investor no later than 60 days after the end of each of the Investor's taxation years in which the Investment Loan is outstanding, and provided "bona fide" repayment arrangements are made in accordance with the provisions of paragraph 143.2(7)(a) of the Act, the Investment Loan will not constitute a limited recourse amount or an at-risk adjustment, within the meaning of those terms in section 143.2 of the Act. Accordingly, the existence of an Investment Loan, where the above provisos are also met, will not in and of itself, result in the application of subsection 143.2(6) of the Act to reduce the cost of the MLP Units, the cost of the Class A Units or any expenses of the MLP or the PLP. However, if an Investor funds any portion of their investment in the MLP Units with limited-recourse financing, the provisions of subsection 143.2(6) of the Act will apply.

K. The following entitlements will not, in and of themselves, constitute an at-risk adjustment for the purposes of subsection 143.2(2) of the Act:

(i) XXXXXXXXXX; and

(ii) the distribution of capital of the PLP to holders of the Class A Units and the Class B Units as described above in paragraph 28.

COMMENTS

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada December 30, 1996, and are binding provided the proposed transactions are entered into on or before XXXXXXXXXX. These rulings are based on the draft documents provided to us and are based on the Act in its present form and do not take into account the effect of any proposed amendments. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:

a) the reasonableness or fair market value of any expenditures referred to in this letter;

b) the proper established case law principles or rules of law, or well-accepted business principles applicable in the determination of the timing of the deduction of the cost of any of the production expenses incurred by the PLP;

c) the existence of a reasonable expectation of profit for any of Creditco, the PLP, the MLP or the Investors;

d) whether the PLP, Creditco, ServiceCo or ServiceCo's affiliates will be acting as legal agents for Studio in respect of the making of the Film;

e) the applicability or non-applicability of subsection 245(2) of the Act;

f) the GST implications of any of the proposed transactions;

g) the applicability of paragraph 96(2.2)(d) of the Act (except as expressly set out in ruling H, above and opinions 2 and 3, below); and

g) g) g) g) h) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.

As stated in paragraph 7 of Information Circular 70-6R3, rulings are not provided for transactions that are not seriously contemplated and are hypothetical in nature. Therefore, notwithstanding that the MLP will be subscribing for Class A Units of limited partnership interest in a number of production limited partnerships which will each produce a film or other production (refer to paragraphs 7, 21 and 25, above), we are not ruling on the MLP's investment in any limited partnerships other than their investment in the PLP, nor are we ruling in respect of any film or other production except for the Film, all as described herein.

OPINIONS

1. Creditco will be an "eligible production corporation" for purposes of subsection 125.5(1) of the Act, provided all of the following conditions are met:

(i) draft section 9300 of the Regulations is enacted as proposed and the Film is an "accredited production" under that section;

(ii) Studio is not an eligible production corporation in respect of the Film, for the purposes of subsection 125.5(1) of the Act;

(iii) Creditco will carry on its activities in Canada and they will be carried on through a permanent establishment in Canada (as defined by regulation);

(iv) Creditco's activities are limited to providing the CLE production services, the co-ordination services, and to making the PLP NCLE Loan to the PLP, all as described above in paragraphs 11, 14 and 16;

(v) the amount of the PLP NCLE Loan from Creditco to the PLP, as described above in paragraph 16, does not exceed the amount of CLE actually incurred by Creditco; and

(vi) Creditco is not a corporation described in any of paragraphs (c) to (e) at the definition of eligible production corporation in subsection 125.5(1) of the Act.

2. If any amount of gross revenue related to the Film is ascertainable, whether contingent or otherwise, at the time that MLP Units are acquired by an Investor, or at the time the MLP acquires a unit in the PLP, it is our opinion that this would affect the at-risk amount of the Investor and the MLP, to the extent that the amount or benefit in respect of such ascertainable revenue was granted for any of the purposes stipulated in paragraph 96(2.2)(d) of the Act.

3. The fact that holders of Class A Units will have rights to a priority distribution of distributable cash on hand (as described above in paragraph 28(e)), may result in the application of paragraph 96(2.2)(d) of the Act, so as to reduce the at-risk amount of the Investor and the MLP by an amount not to exceed the total subscription amount for the Class B Units.

4. If an Investor pays any portion of the cost of acquiring the MLP Units with a post-dated cheque (as described above in paragraph 19), depending on the facts, either

• paragraph 96(2.2)(c) of the Act will apply to reduce the Investor's at-risk amount until the post-dated cheque is cashed, or alternatively,
• subsection 143.2(7) of the Act will apply to deem the amount of the post-dated cheque to be a limited-recourse amount and subsection 143.2(6) of the Act will apply, thereto. To the extent this amount is repaid by the Investor, the provisions of subsection 143.2(10) of the Act will apply.

As indicated in paragraph 22 of Information Circular 70-6R3, an expression of opinion is not an advance income tax ruling and, accordingly, is not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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