1998 Ruling 9832393 - CANADIAN FILM OR VIDEO PRODUCTION TAX CREDIT

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:

1. This file originally came in as a supplemental ruling request to our file #980551, dated XXXXXXXXXX, 1998, but is now being issued as a new ruling. We have been asked whether the changes to the facts outlined in file #980551 will change any of the rulings previously given.

2. The main issue is whether section 8.1 will apply to restrict the deductibility of the production expenses incurred by the Production Partnership?

Position:

1. We provided rulings similar to those given in file #980551.

2. Not if before the end of the taxation year in which the production expenditures are made, income in respect of the Film exceeding XXXXXXXXXX% of such production expenses is included in computing the Production Partnership's income for that year.

Reasons:

1. The changes to the proposed transactions mainly reflect different owners of Creditco and THC, and a different year-end for the partnerships. In addition there is only one investor in the MLP instead of numerous investors. There are also changes to the fee structure paid for the production services.

As initially proposed to us, if the Film was not successful, the fee paid to THC for production services was significantly higher than the fee THC was paying the roduction Partnership (i.e. $XXXXXXXXXX). After we raised concerns about the apparent difference between the potentially large amount of profit being given to THC (an arm's length 3rd party) and the amount of services provided by THC, the fee structure was amended to reflect a XXXXXXXXXX% of net profits spread for THC which would be used to at least cover THC's operating expenses.

The differences in this proposal compared to our prior ruling (file #980551, dated XXXXXXXXXX, 1998) are such that we were able to issue similar rulings in this case.

2. The application of paragraph 18.1(15)(b) of the Act.

XXXXXXXXXX

	XXXXXXXXXX
	XXXXXXXXXX	983239
	XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX, and our numerous telephone conversations, wherein you requested an advance income tax ruling on behalf of the proposed XXXXXXXXXX transactions described herein. Unless otherwise stated, all dollar amounts quoted in this letter are in U.S. dollars.

FACTS

1. XXXXXXXXXX is a corporation incorporated under the XXXXXXXXXX. Its principal office and its tax services office is in XXXXXXXXXX and its taxation centre is XXXXXXXXXX. Its business identification number is XXXXXXXXXX. XXXXXXXXXX has agreed to provide production services for certain feature film and television productions in Canada, one of which is the subject of this letter.

2. XXXXXXXXXX (Creditco") is incorporated under the laws of Canada, as a wholly-owned subsidiary of XXXXXXXXXX. Creditco's principal office is in XXXXXXXXXX. Its principal business is the provision of production services which qualify as "Canadian labour expenditures" for the purposes of the film or video production services tax credit under section 125.5 of the Income Tax Act (Canada) (the "Act"), and any equivalent provincial tax credit programs. Creditco's tax services office is XXXXXXXXXX and its taxation centre is XXXXXXXXXX. Its business identification number is XXXXXXXXXX.

3. "XXXXXXXXXX" ("Productions") is a corporation incorporated under the XXXXXXXXXX. Its principal office and its tax services office is in XXXXXXXXXX and its taxation centre is XXXXXXXXXX. Its business identification number is XXXXXXXXXX. Productions is a wholly-owned subsidiary of XXXXXXXXXX.

4. XXXXXXXXXX ("THC") is a corporation formed under the laws of XXXXXXXXXX to provide or arrange for production services in respect of motion picture films and television productions in Canada and other jurisdictions outside the United States. XXXXXXXXXX THC is not related to, and deals at arm's length with each of the other parties described in this letter, XXXXXXXXXX.

5. XXXXXXXXXX (the "Production Partnership") is a limited partnership, formed in XXXXXXXXXX. Its fiscal year-end will be XXXXXXXXXX. Its general partner is Productions and its initial limited partner is XXXXXXXXXX.

6. XXXXXXXXXX (the "MLP") is a limited partnership formed in XXXXXXXXXX. Its fiscal year-end will be XXXXXXXXXX. Its purpose is to subscribe for Class A units of limited partnership interest in a number of production limited partnerships, one of which will be the Production Partnership (see paragraph 20, below). Productions is the general partner of the MLP, and its initial limited partner is XXXXXXXXXX.

7. XXXXXXXXXX is incorporated under the laws of XXXXXXXXXX and, as described in paragraph 17 below, will acquire units of limited partnership interest in the MLP after the date of this letter and before XXXXXXXXXX. XXX½XXXXXXX is a private taxable Canadian corporation and a subsidiary of XXXXXXXXXX.

8.

XXXXXXXXXX

9. Pursuant to a production services agreement, XXXXXXXXXX ("Studio"), a XXXXXXXXXX has hired THC to perform certain production services for a feature motion picture currently titled "XXXXXXXXXX" (the “Film”). THC has obtained from Studio a limited-use license to the copyright in the script for the Film to enable THC to provide such services in respect of the Film. Studio will own all of the copyright in the Film during production and thereafter, For greater certainty, at no time will THC own any interest in the copyright in the Film. Principal photography for the Film has not yet commenced. The production budget for the Film will approximate $XXXXXXXXXX. THC will be entitled to receive a fee of $XXXXXXXXXX upon completion of the production services plus XXXXXXXXXX% of the net profits from the Film, calculated in accordance with an industry standard definition.

10. Pursuant to a production services agreement, Studio has engaged Creditco to perform $XXXXXXXXXX of production services in connection with the production of the Film. Creditco has obtained 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. Studio will own all 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. These services will require Creditco to perform production accounting services and audit and oversight services, in addition to paying salary and wages to Canadian residents in respect of the performance of production services in Canada. These salary and wage expenses will qualify Creditco to be entitled to the film or video production services tax credit in respect of "Canadian labour expenditures in accordance with section 125.5 of the Act. The amount of this federal tax credit, plus the corresponding XXXXXXXXXX provincial tax credit (together referred to herein as the 44Tax Credits"), is estimated to be $XXXXXXXXXX in aggregate. Creditco's consideration for the providing of its services will be XXXXXXXXXX.

11. Pursuant to a production services agreement, THC has engaged the Production Partnership to provide to THC $XXXXXXXXXX of production services in connection with the Film. These services Will not qualify as Canadian labour expenditures under section 125.5 of the Act. The consideration payable by THC to the Production Partnership in respect of the production services will be a fixed amount (the "XXXXXXXXXX% Fee") equal to XXXXXXXXXX% of the amount of the production expenses of the Production Partnership payable upon satisfactory completion of the production services (generally upon completion and delivery of the Film). There are no guarantees or other unconditional commitments with respect to the entitlement of the Production Partnership to the XXXXXXXXXX% Fee, if it fails to provide the production services, and no such guarantee agreements will be entered into. In addition,. the Production Partnership will be entitled to XXXXXXXXXX% of the net profits from the Film, calculated in accordance with an industry standard definition. Further, the Production Partnership may earn bonuses if the Film is nominated for, or receives, certain industry-recognized awards for excellence, such as Golden Globes or Academy Awards. The net profits percentages and bonus amounts that the Production Partnership could earn will be open-ended, both as to amount and duration. It is expected that the quantum of these amounts, together with the XXXXXXXXXX% Fee, will be at least sufficient to give the Production Partnership a reasonable expectation of earning an amount in excess of its deductible production expenses and, in the case of a successful film, the potential to realize a significant amount.

12. During the course of the production of the Film, the contractual arrangements between the parties are governed by an interim agreement (the "Interim Agreement" a copy of which was provided to us on XXXXXXXXXX), Formal documents evidencing the transactions are generally executed at a closing upon completion of the production services. Funds required by Creditco, THC and the Production Partnership are provided by way of advances from Studio directly into a common bank account (Separate accounts are maintained for Canadian and United States expenses.). Each of the borrowing parties (THC, Creditco and the Production Partnership) account for their proportionate indebtedness in respect of the advances. Upon completion of the production services, the aggregate amount of the advances (to the extent that the advances do not exceed the production expenses) are documented in the form of the loans referred to in paragraphs 14, 15 and 16, below. Any excess of the advances over the production expenses is repaid to Studio. To date, less than $XXXXXXXXXX has been advanced to pay such expenses as compen~ation advances to principal cast members, amounts to secure production locations and down payments or pre-payments to sub-contractors.

13. 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 taxpayers 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 taxpayers or a related person,

(iii) is under objection by the taxpayers 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,

(v) is the subject of a ruling previously issued by the Directorate.

PROPOSED TRANSACTIONS

14. Subject to the amounts already advanced to THC, as described above in paragraph 12, Studio will loan THC, without charging interest, an amount equal to the amount of the budget for production expenses which will not qualify as "Canadian labour expenditures", as that term is defined in subsection 125.5(1) of the Act (i.e. approximately $XXXXXXXXXX). THC will repay this loan from Studio with the amount of the fee payments (referred to above in paragraph 9) received from Studio, together with the loan repayments THC receives from the Production Partnership (see paragraph 15 below)

15. Subject to the amounts already advanced to the Production Partnership, as de5cribed above in paragraph 12, THC will loan $XXXXXXXXXX to the Production Partnership, without charging interest, to fund the production services expenses noted above in paragraph 11, on an interim basis. The Production Partnership will repay this $xxxxxXxxxX loan from THC as follows:

(a) XXXXXXXXXX% of the indebtedness when the XXXXXXXXXX% Fee is received; and

(b) the balance, using a portion of the capital raised by the sale of Class A units of the Production Partnership to the MLP (refer below to paragraph 20).

16. Subject to the amounts already advanced to Creditco, as described above in. paragraph 12, Studio will loan $XXXXXXXXXX to Creditco, without charging interest, to fund its production services on an interim basis. Creditco will repay this $XXXXXXXXXX loan from Studio as follows:

(a) $XXXXXXXXXX upon receipt of the proceeds of the fee that is referred to above in paragraph 10; and

(b) the balance, using the Tax Credits received by Credi tco.

17. Units of limited partnership interest in the MLP will be acquired by XXXXXXXXXX at a closing or closings after the date of this letter and before XXXXXXXXXX. Upon issuance of the first units of limited partnership interest in the MLP to XXXXXXXXXX initial limited partnership interest in the MLP will be redeemed for proceeds equal to the amount of its original investment, being the nominal sum of $XXXXXXXXXX. Thereafter, XXXXXXXXXX will be the sole limited partner in the MLP.

18. The sale of units of limited partnership interest in the MLP will occur without issuing an offering memorandum. However, the documents provided to XXXXXXXXXX will contain the following mention:

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

The total subscription amount from selling limited partnership interests in the MLP will be approximately $XXXXXXXXXX. However, of this amount, we are only providing rulings in respect of an estimated $XXXXXXXXXX, which will be used to acquire Class A Units in the Production Partnership (see paragraph 20 below), The subscription price will be $XXXXXXXXXX per unit, payable as to $XXXXXXXXXX from a full-recourse loan from a Canadian resident lender (the "Lender") which is unrelated to, and which deals at arm's length with each of XXXXXXXXXX The loan from the Lender to XXXXXXXXXX (the "Investment Loan") will have a 10-year term 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 Investor Loan is made. Interest for the 10-year term of the Investment Loan will be due and payable annually. Interest will be paid by the XXXXXXXXXX, in respect of each year, no later than 60 days after the end of XXXXXXXXXX taxation year. At the time of closing of subscription for its units in the MLP, XXXXXXXXXX will pay financing charges (e.g. loan commitment fees and legal fees) in respect of the Investment Loan to the Lender.

19. Subscription proceeds received from XXXXXXXXXX investment in units in the MLP will be held by the MLP and applied to acquire Class A units in various production partnerships at various times during the year, XXXXXXXXXX.

20. $XXXXXXXXXX per unit of the proceeds of subscription for units in the MLP will be used by the MLP to subscribe for Class A units of the Production Partnership (the "Class A Units"). $XXXXXXXXXX per unit of the subscription proceeds received by the MLP will be used to pay the fees, costs, expenses and commissions related to the MLP's offering. The Class A Units will each have a cost of $XXXXXXXXXX and it is estimated that a maximum amount of $XXXXXXXXXX will be raised from their sale. Upon issuance of the Class A Units to the MLP, XXXXXXXXXX initial limited partnership interest in the Production Partnership will be redeemed for proceeds equal to the amount of the original investment, being the nominal sum of $XXXXXXXXXX. As noted above in paragraph 19, the MLP will use the estimated $XXXXXXXXXX balance of the subscription proce~ds from the sale of units in the MLP to acquire Class A units in various other production partnerships.

21. a) THC will, on closing, have the option, but will not be required, to subscribe for XXXXXXXXXX Class B units of the Production Partnership (the "Class B Units") at a purchase price of $XXXXXXXXXX per unit, for an aggregate subscription amount (the "Subscription Amount") of $XXXXXXXXXX THC may exercise this option at any time, up to and including the beginning of the tenth year following the closing of subscriptions for Class A Units (see paragraph 20, above). Upon such a subscription, THC would be responsible to finance the Subscription Amount from its own resources. This may be in the forin of a loan from a financial institution, or a participating loan arrangement with Studio.

XXXXXXXXXX

THC may pay for its investment in the Class B Units at any time, thereby entitling it to a share of any income or losses of the Production Partnership, as outlined below in paragraph 22. THC will not become a partner in the Production Partnership until the full amount of the Subscription Amount is paid in cash. The Subscription Amount will represent an amount equal to the fair market value of the Class 8 Units at the time of closing of subscription for the Class A Units (see paragraph 20, above).

b) At the time of payment of the Subscription Amount, the Production Partnership will decide whether the Subscription Amount will be included in the amount of cash on hand to be distributed to its partners, as noted below in paragraph 22, or whether it will be used by the Production Partnership to make additional investments in, for example, another film.

22. Under the partnership agreement for the Production Partnership.

a) the Class A Units, in the aggregate, will represent a 99.99% interest and entitlement to the income and losses of the Production Partnership, unless and until the Class B Units have been subscribed for and paid in full (see paragraph 21, above). The general partner of the Production Partnership will own a 0.01% interest;

b) once the subscription price for Class B Units has been paid in cash, subject to the exemption described below in paragraph c), 99.99% of the profits and losses of the Production Partnership will be allocated ratably between the holders of the Class A Units and the Class B Units, based upon the amount of their partnership capital at the end of the relevant fiscal period (i.e. approximately XXXXXXXXXX% of the 99.99% share of the Production Partnership's profits and losses for the MLP, and approximately XXXXXXXXXX% ot the 99.99% share for THC), In computing partnership capital for these purposes, adjustments will be made for each partner's share of the net income and losses of the Production Partnership, the amount of any distributions made to each partner, and contributions to the Production Partnership's capital. These capital contributions will only include amounts paid in cash and not amounts owing to the Production Partnership;

c)

XXXXXXXXXX

d) once the Production Partnership has repaid in full its interim production loan to THC (see paragraph 15, above), any additional cash on hand, after paying its operating expenses, will be distributed by the Production Partnership to the holders of Class A Units and Class B Units in accordance with their respective participating interests, as described above in c) and below in e);

e) subject to c) above, the Class A Units will be entitled to a priority distribution of cash on hand, to a maximum amount equal to their investment in respect of the Class A Units (refer to paragraph 20, above). The Class B Units will be entitled to cash on hand which is distributed after the priority distribution to the holder of the Class A Units, to a maximum of the Class B Unit holders' investment in respect of the Class B Units (refer to paragraph 21, above). However, no cash distributions will be made to either partner, except on dissolution of the Production Partnership, if such distributions would reduce either of their capital accounts below the amount of their initial capital investments in the Production Partnership (i.e. approximately $XXXXXXXXXX and $XXXXXXXXXX for the MLP and THC, respectively), In addition, any such cash distributions must be made in a manner that the relative capital accounts of the partners are maintained (i.e. approximately XXXXXXXXXX% for the MLP and XXXXXXXXXX% for THC); and

f) each Class A Unit and Class B Unit will have equal voting rights, Other than the revenue sharing 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.

23. If and when any XXXXXXXXXX% Fees, percentage of net profits payments or bonuses (all as described above in paragraph 11, and together referred to hereafter as the "Revenues") are earned by the Production Partnership, they will be paid by THC to the Production Partnership. These payments will be made, regardless of whether XXXXXXXXXX is able to repay its Investment Loan to the Lender.

24. Under the partnership agreement for the MLP,

a) the limited partners of the MLP will be entitled to 99.99% of the profits and losses allocated to the MLP by the Production Partnership, and

b) the general partner of the MLP will be entitled to 0.01% of the profits and losses allocated to the MLP by the Production Partnership.

25. MLP will pay out to its partners all revenues it receives from the Production Partnership. In the event that cash distributions from the MLP are insufficient to enable XXXXXXXXXX to repay its Investment Loan, XXXXXXXXXX will be responsible for the shortfall on the basis that the Investment Loan represents an unconditional, full-recourse obligations of XXXXXXXXXX. There will be no set-off, or other mechanisms, that will protect XXXXXXXXXX from an insolvency at either the Production Partnership or the MLP level. For greater certainty, there are no assurances of the amount of any cash distributions from the Production Partnership to the MLP or from the MLP to XXXXXXXXXX.

26. The MLP and the Production Partnership 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 Production Partnership will apply for tax shelter identification numbers for the MLP and the Production Partnership, 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.

27. Neither Creditco nor the Production Partnership will be in an agency relationship with THC or Studio in respect of the production of the Film. THC will not be in an agency relationship with ~tudio in respect of the production of the Film.

28. In your letter of XXXXXXXXXX, as amended in your letter of XXXXXXXXXX, you provided us with copies of the following draft documents in support of your ruling request for a very similar proposal (our file #980551):

• XXXXXXXXXX
• XXXXXXXXXX
• XXXXXXXXXX
• XXXXXXXXXX
• XXXXXXXXXX
• XXXXXXXXXX
• XXXXXXXXXX
• XXXXXXXXXX

In contemplation of changes to the above proposal, you have also provided us with the following draft documents:

• XXXXXXXXXX
• XXXXXXXXXX

PURPOSE OF THE PROPOSED TRANSACTIONS

29. 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 the films; and

b) in tandem with the federal and provincial tax credit system for film and television production services, 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

30. 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 or 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 the final documents listed above in paragraph 28 are amended to reflect the proposed transactions described in this letter, and are materially as submitted in draft, and provided that the Production Partnership and the MLP are partnerships at law, we confirm the following:

A. The production services expenses incurred by the Production Partnership after the date of this letter and forming part of the production services rendered it pursuant to the agreement referred to above in paragraph 11, will, subject to the application of subsections 143.2(6) and (10) of the Act (referred below in ruling I) and subject to the provisions of section 18.1 of the Act, be deductible in the computation of the Production Partnership's income loss for the relevant taxation year in which the expenses are incurred, pursuant to section 9 of the Act, to the extent that:

i) such reporting conforms with generally accepted accounting principles;

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. Section 18.1 of the Act will not apply to restrict the deductibility of the production expenses incurred by the Production Partnership pursuant to the proposed transactions (referred to above in paragraph 11), 50 long as before the end of the taxation year in which the production expenditures are made, Revenues included in computing the Production Partnership's income for that year (other than any portion of such an amount that is the subject of a reserve claimed by the Production Partnership for the year under the Act) in respect of the Film, exceed XXXXXXXXXX% of such production expenses.

C. Losses for a taxation year of the Production Partnership which are allocated to the holders of Class A Units and Class B Units by the Production Partnership, in accordance with the terms of the partnership agreement referred to above in paragraph 22, will, subject to the application of subsections 143.2(6) and (10) of the Act (referred to below in ruling I), be deductible in computing the income or loss of such holders of Class A Units and Class B Units at the end of. the taxation year of such holders in which such fiscal year-end of the Production Partnership ends, to the extent of the at-risk amount (as defined in subsection 96(2.2) of the Act) of the holder in respect of the Production Partnership at the end of that taxation year.

D. THC will be considered to be carrying on business in Canada when it is a partner of the Production Partnership.

E. Losses for a taxation year of the MLP which are allocated by the MLP to XXXXXXXXXX, in accordance with the terms of the partnership agreement referred to above in paragraph 24, will be deductible in computing the income or loss of XXXXXXXXXX at the end of the taxation year of XXXXXXXXXX in which such fiscal year-end of the MLP ends, to the extent of the at-risk amount (as defined in subsection 96(2.2) of the Act) of XXXXXXXXXX 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 the Production Partnership, at the end of XXXXXXXXXX (i.e. the fiscal year-end of the Production Partnership), will be equal to the amount of the MLP's investment in the Class A Units, as described above in paragraph 20, to the extent that the MLP, or a person with whom 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 XXXXXXXXXX in the MLP, at the end of XXXXXXXXXX (i.e. the fiscal year-end of the MLP), will be equal to the amount of XXXXXXXXXX investment in units of the MLP, as described in 17 and 18 above, to the extent that XXXXXXXXXX, or a person with whom XXXXXXXXXX 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.

For greater certainty, in calculating the at-risk amount of XXXXXXXXXX in the MLP or in calculating the at-risk amount of the MLP in the Production Partnership, the Production Partnership's entitlement to the XXXXXXXXXX% Fees, referred to above in paragraph 11, will not constitute an amount or benefit for the purposes of paragraph 96(2.2)(d) of the Act.

H. 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 XXXXXXXXXX (depending upon the method regularly followed by XXXXXXXXXX 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

I. Any amount of unpaid principal which the Production Partnership o~es to THC (refer above to paragraph 15) will be a limited-recourse amount of the Production Partnership, and the provisions of subsection 143.2(6) of the Act will apply, thereto. To the extent the amount owing to THC is repaid by the Production Partnership, the provisions of subsection 143.2(10) of the Act will apply.

J. If XXXXXXXXXX funds any portion of the balance of their $XXXXXXXXXX investment in a unit in the MLP (as described above in paragraph 18) with limited-recourse financing, the provisions of subsection 143.2(6) of the Act will apply.

K. Subsection 143.2(6) of the Act will not apply to reduce the amount of XXXXXXXXXX expenditure to acquire units of the MLP:

i) by reason of the distribution of capital by the Production Partnership to the MLP as described above in paragraph 22(e); or

ii) by reason of the Production Partnership's entitlement to the Revenues as described above in paragraphs 11 and 23.

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 referred to above in paragraph 28, 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 generally accepted accounting principle applicable in the determination of the timing of the deduction of the cost of any of the production expenses incurred by the Production Partnership;

c) the existence of reasonable expectation of profit of any of Creditco, the Production Partnership, the MLP or XXXXXXXXXX;

d) whether Creditco will be an eligible production corporation in respect of the Film, for the purposes of section 125.5 of the Act;

e) whether the Production Partnership or Creditco will be acting as legal agents for THC or Studio in respect of the making of the Film;

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

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

h) the applicability or non-applicability of paragraph 96(2.2)(d) of the Act. In this regard, it is our opinion that if any amount of gross revenue related to the Film is ascertainable, whether contingent or otherwise, at the time that XXXXXXXXXX acquires an interest in the MLP, or at the time the MLP acquires a unit of the Production Partnership, this would affect the at-risk amount of XXXXXXXXXX and the MLP;

i) the proper income tax treatment of any payments made by THC to Studio in the event that THC enters into a participating loan arrangement with Studio such as is referred to above in paragraph 21(a);

j) the proper income tax treatment of any expenditures made by the MLP with the $XXXXXXXXXX per unit of the subscription proceeds received by the MLP. as referred to above in paragraph 20; and

k) 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 (refer to paragraphs 6, 19 and 20, above), we are not ruling on the MLP's investment in any limited partnerships other than their investment in the Production Partnership, as described herein. In addition, notwithstanding that the Production Partnership may invest in other films (refer to paragraph 21(b), above), we are not ruling on the Production Partnership's investment in any films other than the Film.

Yours truly,

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