2000 Ruling 2000-0025183 - LIMITED PARTNERSHIP FILM FINANCING

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: Multi-level partnership structure to provide financing through a limited partnership for film and television industry production in Canada for those costs not eligible for tax credits.

(1) Are the operating partnership's costs deductible. (2) Does section 18.1 apply to the operating partnership. (3) Are losses deductible. (4) What impacts upon the at-risk amount of investors. (5) Is interest on amount borrowed to invest deductible.

Position:

(1) Yes, subject to eligibility under the Act and caveats described in the ruling. (2) No. (3) Yes, to extent of at-risk amount and subject to 143.2. (4) At-risk amount will generally be full outlay by the investors and upper partnership, but subject to caveats. (5) Yes, subject to caveats.

Reasons:

(1) Incurred in the course of earning income from business or profit (subject to REOP). (2) The exception in paragraph 18.1(15)(b) is met. (3) to the extent realized in the course of earning income from business or property. (4) Application of 96(2.2). (5) Application of 20(1)(c).

XXXXXXXXXX 						2000-002518

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Offering Partnership")
XXXXXXXXXX (the "Production Services Partnership") and
XXXXXXXXXX
(either to be referred to as the "Production Co.")

We are writing in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the Offering Partnership, the Production Services Partnership, the Production Co., and those investors who will acquire a limited partnership interest in the Offering Partnership during the XXXXXXXXXX year.

You have confirmed that to the best of the knowledge of the Offering Partnership, the

Production Services Partnership, the Production Co. and XXXXXXXXXX, none of the issues contained herein:

a) is in an earlier return of the General Partner, the Initial Limited Partner, PSGP, the Production Co. or a related person;

b) is being considered by a tax services office or taxation centre in connection with previously filed return of the General Partner, the Initial Limited Partner, PSGP, the Production Co. or a related person;

c) is under objection by the General Partner, the Initial Limited Partner, PSGP, the Production Co. or a related person;

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

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

DEFINITIONS

In this advance ruling, the following terms have the meanings specified:

"Act" means the Income Tax Act (Canada) R.S.C. 1985 (5th Supp) C. 1, as amended to the date hereof;

"XXXXXXXXXX Agreement" means the XXXXXXXXXX agreement to be made among the Production Services Partnership, the PSGP, and the Production Co. as described in 13 below;

"XXXXXXXXXX Fee" means the agency fee that will be paid by the Production Services Partnership to the Production Co. pursuant to the XXXXXXXXXX Agreement;

"CLE" means those salary, wage and remuneration expenses that will be incurred by the Production Co. in respect of the production of the Programs which are intended to qualify for the Tax Credits;

"CLE Production Services Agreement" means the production services agreement to be executed between the Studio and the Production Co., as described in 9 below;

"Class A Units" means Class A units of the Production Services Partnership;

"Class B Units" means Class B units of the Production Services Partnership;

"Class B Unit Option" means the option or options to acquire Class B Units that will be granted by the Production Services Partnership as described in 29 below;

"Closing" or "Closings" means the date or dates on which subscriptions for certain Units of the Offering Partnership are accepted;

"Exercise Period" means the period from the date the Class B Unit Option is granted until XXXXXXXXXX ;

"Financing Fee" means the fee to be paid by the Production Services Partnership to the PSGP for providing the Interim Production Loan;

"General Partner" means XXXXXXXXXX, the general partner of the Offering Partnership, as described in 1 below;

XXXXXXXXXX

XXXXXXXXXX

"XXXXXXXXXX Sales Agency Agreement" means the sales agency agreement to be executed between XXXXXXXXXX and the Offering Partnership as described in 27 below;

"XXXXXXXXXX Sales Commission" means the sales agency commission payable by the Offering Partnership to XXXXXXXXXX pursuant to the XXXXXXXXXX Sales Agency Agreement;

"Initial Limited Partner" means XXXXXXXXXX, the initial limited partner of the Offering Partnership, as described in 1 below;

"Interim Production Loan" means the interim production loan that will be granted by XXXXXXXXXX to the Production Services Partnership to finance the NCLE as described in 19 below;

"Interim Production Loan Agreement" means the interim production loan agreement to be executed between PSGP and the Production Services Partnership as described in 19 below;

"Investor" or "Investors" means a person or persons who will acquire one or more Units in the Offering Partnership during the XXXXXXXXXX year;

XXXXXXXXXX

"Loan Arrangement Fee" means a fee to be paid by each Investor who obtains a Unit Loan to the Unit Lender in consideration for the Unit Lender making the Unit Loan;

XXXXXXXXXX

"NCLE" means those production expenses that will be incurred by the Production Services Partnership, or on behalf of the Production Services Partnership, pursuant to the NCLE Production Services Agreement in respect of the production of the Programs, which do not qualify for the Tax Credits;

"NCLE Production Services Agreement" means the production services agreement to be executed between the Producer and the Production Services Partnership as described in 11 below;

XXXXXXXXXX

"Offering Partnership" means XXXXXXXXXX as described in 1 below;

"Offering Partnership Agreement" means the limited partnership agreement governing the affairs of the Offering Partnership made among the General Partner, the Initial Limited Partner and each of the persons who becomes a limited partner of the Offering Partnership from time to time;

"OP Fee" means the fee payable by the Offering Partnership to the General Partner pursuant to the Offering Partnership Agreement for certain consultation, operation and management services as are necessary to complete the offering of Units and conduct the ongoing business operations of the Offering Partnership as described in 27 below;

"Option Maintenance Fee" is a fee payable by the holder of the Class B Unit Option in order to maintain the Class B Unit Option as described in 29 below;

XXXXXXXXXX

"Producer" means XXXXXXXXXX as described in 6 below;

"Producer/XXXXXXXXXX Loan" means the loan made by the Producer to the XXXXXXXXXX as described in 18 below;

"Producer Services Agreement" means the production services agreement to be executed between the Studio and the Producer as described in 10 below;

"Production Co. " means XXXXXXXXXX

"Production Services Partnership" means XXXXXXXXXX, as described in 2 below;

"Production Services Partnership Agreement" means the limited partnership agreement governing the affairs of the Production Services Partnership made among PSGP, an initial limited partner, each Class A Unitholder and each Class B Unitholder of the Production Services Partnership, from time to time;

"Programs" means the following programs intended to be produced in Canada XXXXXXXXXX;

"PSGP" meansXXXXXXXXXX, the general partner of the Productions Services Partnership described in 2 below;

"PSP Fee" means the fee payable by the Production Services Partnership to PSGP under the Production Services Partnership Agreement for the management and administrative services provided by the PSGP as described in 2 below;

"Regulations" means the regulations made under the Act;

"Release Date" means the date (to be negotiated) by which the Studio or its appointed distributor is to release or distribute the Programs for commercial exploitation;

"Studio" means XXXXXXXXXX as described in 4 below;

"Studio/Producer Loan" means the loan made by the Studio to the Producer as described in 18 below;

"Subscription Agreement" means each subscription agreement pursuant to which an Investor will acquire Units of the Offering Partnership;

"Tax Credits" means the film and video production services tax credits that are available pursuant to section 125.5 of the Act and the corresponding film and video production services tax credits that are available under provincial legislation in respect of certain salary, wage and remuneration expenses incurred in Canada in relation to the production of a film or video;

"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

"Undistributed Cash" means any cash retained on hand by the Production Services Partnership or any amount due to the Production Services Partnership as unpaid subscription price;

"Unit" or "Units" means a unit or units of the Offering Partnership;

"Unit Lender" means the XXXXXXXXXX described in 7 below;

"Unit Loan" means a loan to be made available to each Investor pursuant to which the Unit Lender will lend, and an Investor will borrow, an amount to finance approximately XXXXXXXXXX% of the subscription price for an Investor's Units;

"Unit Loan Agreement" means the unit loan agreement to be executed between the Unit Lender and an Investor, as described in 23 below; and

"Unit Subscription Price" means the amount paid by a subscriber to the Offering Partnership to acquire a unit of the Offering Partnership.

Our understanding of the facts, proposed transactions and their purposes is as follows.

FACTS

1. The Offering Partnership was formed on XXXXXXXXXX as a limited partnership pursuant to the Limited Partnerships Act (XXXXXXXXXX). The business number of the Offering Partnership is XXXXXXXXXX. The General Partner, a corporation incorporated under the XXXXXXXXXX, is the general partner of the Offering Partnership. The General Partner conducts its business from XXXXXXXXXX It files its tax return with the XXXXXXXXXX Tax Services Office. The General Partner will be solely responsible for the daily operating activities of the Offering Partnership. The sole shareholder of the General Partner is XXXXXXXXXX. The Initial Limited Partner, a corporation also governed by the XXXXXXXXXX and incorporated on XXXXXXXXXX, is the initial limited partner of the Offering Partnership. Both the General Partner and the Initial Limited Partner are taxable Canadian corporations.

The Offering Partnership will conduct its business from the office of the General Partner. The fiscal year end of the Offering Partnership is XXXXXXXXXX. The Offering Partnership will be a tax shelter and will apply for a tax shelter identification number for purposes of the Act. The Offering Partnership will obtain a partnership identification number for purposes of the Act and will file its partnership information return at the Specialized Programs Unit, Ottawa Technology Centre, 875 Heron Road, Ottawa, Ontario, K1A 1A2.

The business of the Offering Partnership includes acquiring, holding and exploiting an equity interest in Class A Units of the Production Services Partnership and such other business as may be determined by the Offering Partnership from time to time. (It is intended that the Offering Partnership will acquire interests in other production services partnerships that will provide production services for other films or television programs produced in whole or in part in Canada; however, these are not the subject of this advance income tax ruling.)

2. The Production Services Partnership was formed on XXXXXXXXXX and registered by declaration dated XXXXXXXXXX as a limited partnership pursuant to the Partnership Act (XXXXXXXXXX). Its business address is the same as that of the General Partner as described above. The business number of the Production Services Partnership is XXXXXXXXXX. The Production Services Partnership will obtain a partnership identification number for purposes of the Act and will file its partnership information return with the Specialized Programs Unit, Ottawa Technology Centre, 875 Heron Road, Ottawa, Ontario, K1A 1A2. The Production Services Partnership will be a tax shelter and will apply for a tax shelter identification number. The Production Services Partnership will be extra-provincially registered in the province of XXXXXXXXXX and the province of XXXXXXXXXX. The fiscal year end of the Production Services Partnership is XXXXXXXXXX. The initial limited partner of the Production Services Partnership is XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX.

The business of the Production Services Partnership will include arranging for, and/or providing, certain production services for the Programs, the expenses of which will be NCLE, and any other activities or businesses determined to be incidental to the foregoing.

PSGP is the general partner of the Production Services Partnership. PSGP is a corporation incorporated under the XXXXXXXXXX, having its head office at XXXXXXXXXX. PSGP files its tax return at the XXXXXXXXXX Tax Centre, XXXXXXXXXX PGSP may continue from XXXXXXXXXX to XXXXXXXXXX during the XXXXXXXXXX calendar year.

The duties of PSGP include the administration, management, control and operation of the partnership business, consulting services, maintaining accurate books and records and reporting. In consideration for PSGP performing its obligations under the Production Services Partnership Agreement, PSGP will be entitled to the PSP Fee. PSGP is required to pay the operating expenses that are incurred in the ordinary and usual course of managing the Production Services Partnership's business. Pursuant to the terms of the Production Services Partnership Agreement, PSGP may retain third parties, including related parties, to provide assistance to it in providing such services.

3. XXXXXXXXXX are both taxable Canadian corporations incorporated pursuant to the XXXXXXXXXX. The voting shares of XXXXXXXXXX are owned equally by XXXXXXXXXX, both of which are taxable Canadian corporations. The shares of XXXXXXXXXX are owned by XXXXXXXXXX, a taxable Canadian corporation. The business offices of XXXXXXXXXX

XXXXXXXXXX

4. The Studio is a XXXXXXXXXX corporation which will own, acquire or control the exclusive underlying rights to authorize production of, and commercially exploit, the Programs. The Studio does not have a permanent establishment in Canada in connection with a film or video production business or a film or video production services business.

5. Production Co., XXXXXXXXXX and is an affiliate of the Studio. Production Co., XXXXXXXXXX, is a corporation incorporated under the laws of XXXXXXXXXX and is an affiliate of the Studio. The Production Co. has a permanent establishment in Canada within the meaning of section 8201 of the Regulations as it applies for purposes of subsection 125.5(1) of the Act and will carry on its business in Canada through its permanent establishment.

Production Co. will carry on a film or video production services business in Canada for owners of copyrights in productions which will meet the definition of "accredited production" (as defined in the Act and the related proposed amendments to the Regulations). Production Co.'s business activities will consist largely of providing production services to Studio for the Programs, the expenses of which will be CLE. Production Co. will provide certain administrative services to Production Services Partnership pursuant to the Agency and Allocation Agreement as described in 13 below.

6. The Producer is a corporation governed by the laws of XXXXXXXXXX. The Producer's address is XXXXXXXXXX. The Producer will carry on the business of, among other things, arranging for the provision of certain production services for the Programs, the expenses of which will be NCLE.

7. The Unit Lender is a trust formed pursuant to the laws of XXXXXXXXXX. The address of the Unit Lender is XXXXXXXXXX The trustee of the Unit Lender is a corporation incorporated under the laws of the province of XXXXXXXXXX. The Unit Lender carries on the business of, inter alia, lending money to Canadian resident investors. The Unit Lender is, and at all material times will be, at arm's length with the Offering Partnership, the Production Services Partnership, and each of the Investors.

PROPOSED TRANSACTIONS

8. As described more fully below, the Production Services Partnership has agreed to provide, or arrange for, certain production services for the Programs, the expenses of which will be NCLE and Production Co. will provide certain other production services, the expenses of which will be CLE. The total estimated amount of the production budget is approximately $XXXXXXXXXX, consisting of NCLE of $XXXXXXXXXX and CLE of $XXXXXXXXXX. (The Production Services Partnership may also agree to provide, or arrange for, certain production services for other film or television productions, however, these are not the subject of this advance income tax ruling.)

9. The Studio will enter into the CLE Production Services Agreement with Production Co. whereby the Studio will engage the Production Co. to provide, or arrange for, the provision of certain production services for the Programs. The Production Co. will incur expenses in connection with providing the production services, which expenses will be CLE and are expected to entitle the Production Co. to receive the Tax Credits. Production Co. will be responsible for applying for the available Tax Credits and will be entitled to retain the sole benefit of the Tax Credits. The Production Co. will be solely responsible for the payment of the CLE.

As consideration for providing or arranging for the provision of production services, the Production Co. will receive a production services fee from the Studio in an amount to be negotiated. The production services provided or arranged for by the Production Co. will generally include the supply and provision of technical knowledge and expertise by Canadian personnel, and the services of Canadian cast and crew for the Programs. The Production Co. will be responsible for all costs in connection with the remuneration of Canadian personnel, cast and crew for the Programs, and all costs ancillary to the provision of such services.

10. The Studio will also enter into the Producer Services Agreement with the Producer (a corporation with which the Studio deals at arm's length) pursuant to which the Producer will agree to arrange for the provision of production services for the Programs, the expenses of which will be NCLE. NCLE will include those items, other than CLE, listed in the production budget including insurance but excluding those items not 100% deductible in computing income such as meals and entertainment expenses and may also include certain Studio overhead costs representing not more than XXXXXXXXXX% of the NCLE specified in the production budget. The Producer will be solely responsible for the payment of the NCLE. As consideration therefor, the Producer will receive a fee from the Studio equal to the aggregate of:

(a) XXXXXXXXXX; and

(b) XXXXXXXXXX.

(The "net revenue" component of the fee payable to Producer will be based on an industry standard definition.)

11. Concurrently with entering into the Producer Services Agreement, the Producer will enter into the NCLE Production Services Agreement with the Production Services Partnership. Under the terms of the NCLE Production Services Agreement, the Production Services Partnership will agree to provide, or arrange for the provision of, the production services for the Programs, the expenses of which will be NCLE. The NCLE Production Services Agreement will further provide for the Production Services Partnership to subcontract with the Studio or a corporation affiliated with the Studio ("Personnelco") to engage XXXXXXXXXX cast and crew for the Programs on behalf of the Production Services Partnership and, if requested by the Production Services Partnership, to provide other XXXXXXXXXX services. Personnelco will not be acting as the agent of the Production Services Partnership but will be paid a fee for its services. (For greater certainty, the amounts paid to Personnelco for its services will form part of the NCLE). The Production Services Partnership may agree to advance amounts to the Personnelco to cover the costs to be incurred by Personnelco. In addition, Personnelco will be responsible to repay any advances made by the Production Services Partnership to it. The NCLE production services will generally include the production services for the Programs stemming from all production expenditures incurred except the CLE listed in the production budget (other than meals and entertainment) and may also include certain studio overhead costs representing not more than XXXXXXXXXX% of the NCLE specified in the production budget. The NCLE Production Services Agreement will provide that the Production Services Partnership will be responsible for all costs associated with such production services.

12. As consideration for providing the production services, the Production Services Partnership will receive a production services fee equal to the aggregate of:

(a) XXXXXXXXXX; and

(b) XXXXXXXXXX.

The NCLE Production Services Agreement will further provide that principal photography for the Programs must commence prior to XXXXXXXXXX. Moreover, the NCLE Production Services Agreement will stipulate as to the nature and scope of the production as well as the particulars of the production schedule and the production budget for the Programs.

13. The Production Services Partnership and the Production Co. will enter into the XXXXXXXXXX Agreement. Under the XXXXXXXXXX Agreement, the Production Services Partnership will be provided with certain XXXXXXXXXX services by the Production Co. in connection with production services (XXXXXXXXXX). As consideration for such services, the Production Services Partnership will pay the XXXXXXXXXX Fee to Production Co.

14. The Studio and/or Producer will exercise its approval rights in relation to a variety of artistic and creative decisions for the Programs in accordance with industry practice. In accordance with standard industry practice, the Studio, and/or Production Co. and/or the Production Services Partnership and/or the Producer will maintain a policy or policies of insurance (with each named as an insured beneficiary) to insure against all appropriate risks including the following:

(a) death or disability of a principal performer;

(b) loss or destruction of the master tape, original negative or sound track of the Programs, or of sets, props or equipment;

(c) errors and omissions in the Programs;

(d) third party liability; and

(e) infringement of copyright, libel and slander, defamation of character, invasion of privacy and right of publicity.

Any insurance costs included in the production budget for the Programs will form part of the NCLE.

15. Both the CLE Production Services Agreement and the NCLE Production Services Agreement will provide that ownership of all results of the production services referred to herein, including any tangible property and equipment purchased and supplied in connection with the production services, will immediately vest in and be retained by the Studio. Copyrights and rights of exploitation in the Programs will be owned by the Studio. The CLE Production Services Agreement and the NCLE Production Services Agreement will also stipulate that the Studio will own the entire interest in the Programs, including copyrights, and will have control over decisions respecting the exploitation of the Programs. All copyrighted works incorporated into the Programs, or upon which the Programs are based, will be owned by the Studio as "works made for hire" for purposes of U.S. copyright law, and/or "works done in the course of employment" for purposes of Canadian copyright law.

16. Pursuant to the NCLE Production Services Agreement, the Production Services Partnership will prepare, or cause to be prepared, any production reports that may be reasonably required. All applicable laws, statutes, levies, regulations and requirements of all governmental agencies and regulatory bodies will be complied with by the Production Services Partnership. The Production Services Partnership will duly apply for all necessary consents, licenses and permits which may be necessary in connection with the Programs. In addition, the Production Services Partnership will, where necessary, recognize the rules of applicable film industry guilds and unions, and, as aforementioned, will subcontract with Personnelco to engage XXXXXXXXXX cast and crew for the Programs on behalf of the Production Services Partnership. The Production Services Partnership will also take all reasonable steps to ensure that any personnel who provide services for the Programs and who claim any copyright or moral rights related to the Programs will execute such assignments and waivers that may reasonably be required.

17. If the Studio or an appointed distributor has not released or distributed the Programs prior to the Release Date in a manner consistent with the NCLE Production Services Agreement, the Production Services Partnership will be entitled to elect to substitute other Programs or productions for the purpose of calculating the net revenue component of the production services fee owing to it. For this purpose, the Studio will designate a substituted program or production owned by the Studio, acceptable to Production Services Partnership, which program or production is a comparable program or production produced in whole or in part during the XXXXXXXXXX years which has not been released or distributed prior to the Release Date and for which there is no ascertainable net revenue at the time the substitution is made.

18. The Studio will lend and the Production Co. will borrow an amount on a non-interest bearing basis, the other terms and conditions of such loan to be negotiated (the "Studio/Production Co. Loan"). The proceeds of the Studio/Production Co. Loan will be used by the Production Co. to meet its interim funding requirements for the production services to be performed by it, the expenses of which will qualify as CLE.

The Studio will also lend and the Producer will borrow an amount pursuant to the Studio/Producer Loan. The Studio/Producer Loan will be non- interest bearing and the principal amount of the loan will be repayable on the day that is five years plus three days after the last day any funds are advanced under this loan. The Producer will have the option to prepay any outstanding principal amount on the Studio/Producer Loan at any time, without notice, bonus or penalty.

The proceeds of the Studio/Producer Loan will be used by the Producer to make the Producer/PSGP Loan. The Producer/PSGP Loan will be non-interest bearing and the principal amount of the loan will be repayable on the day that is five years plus two days after the last day any funds are advanced under this loan. The PSGP will have the option to prepay any outstanding principal amount on the Producer/PSGP Loan at any time, without notice, bonus or penalty. As consideration for the provision of credit under the Producer/PSGP Loan, PSGP will be required to pay to the Producer a financing and loan arranging fee, which is yet to be negotiated but which will be reasonable and of the same magnitude as such fees on similar risk loans.

The proceeds of the Producer/PSGP Loan will be used by the PSGP to make the Interim Production Loan to the Production Services Partnership as described in 19 below.

19. PSGP will enter into the Interim Production Loan Agreement with the Production Services Partnership pursuant to which PSGP will establish a loan facility in favour of the Production Services Partnership. As consideration for the provision of credit under the Interim Production Loan, the Production Services Partnership will pay the Financing Fee to PSGP, in an amount equal to the fee paid to the Producer under the Producer/PSGP Loan, which is yet to be negotiated but which will be reasonable and of the same magnitude as such fees on other similar risk loans.

The purpose of the Interim Production Loan is to fund the NCLE that will be incurred by the Production Services Partnership pending the issuance of the Class A Units, Class B Units (in the event the Class B Option is exercised) and the receipt of the production services fee from the Producer.

The Interim Production Loan will be a revolving loan facility to be drawn in several installments as required to meet NCLE obligations on a current basis. The Interim Production Loan will be non-interest bearing. The maximum amount that may be drawn is an amount equal to the NCLE, being approximately $XXXXXXXXXX, plus XXXXXXXXXX% to finance interim GST obligations. Any amounts drawn down under the credit facility will not be repayable until the day that is five years plus one day after the last advance made to the Production Services Partnership in respect of the Interim Production Loan, however, the Production Services Partnership will be permitted to prepay the whole or any part of the loan at any time without notice, bonus or penalty. The Interim Production Loan will be full recourse to all assets of the Production Services Partnership. As security for all obligations of the Production Services Partnership to PSGP with respect to the Interim Production Loan, the Production Services Partnership will grant to PSGP a continuing security interest in all of its present and subsequently acquired property and assets.

PSGP will assign its rights with respect to the Interim Production Loan and the security therefor to the Producer to secure its obligation under the Producer/PSGP Loan. Similarly, the Producer will assign its rights with respect to the Producer/PSGP Loan and the security therefor to the Studio to secure its obligations under the Studio/Producer Loan.

20. The Production Co. will establish a production bank account for the benefit of Production Co., PSGP, and the Production Services Partnership. The proceeds from the Interim Production Loan will be deposited into the production bank account or an account maintained by Personnelco, as applicable, to be used by Production Co. and the Production Services Partnership to fund NCLE.

21. There will be a confidential offering memorandum (the "Offering Memorandum") provided to prospective Investors of the Offering Partnership. At various times throughout XXXXXXXXXX, Investors will enter into Subscription Agreements with the Offering Partnership and thereby agree to acquire Units of the Offering Partnership. It is anticipated that there will be a number of Closings but in no event will a Closing occur after XXXXXXXXXX. The Offering Memorandum will contain the following:

"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."

The offering of Units by the Offering Partnership will consist of an unlimited number of Units. There will be certain minimum purchase requirements which vary based on the jurisdiction of residence of the subscriber. Provided the minimum number of Units is purchased by a subscriber, fractional Units may be acquired. The total amount expected to be raised by the Offering Partnership with respect to the proposed transactions described herein is approximately $XXXXXXXXXX. The total number of Units expected to be sold with respect to the proposed transactions described herein related to the Programs is approximately XXXXXXXXXX Units.

Given the Offering Partnership's intention to acquire Units in a number of other production services partnerships that will provide production services for other films or television programs to be produced in whole or in part in Canada in XXXXXXXXXX but that such acquisitions have not yet been determined (and which are not the subject of this advance ruling), there is no certainty at the present time regarding the number of Units that will be offered under the Offering Memorandum.

22. The Unit Subscription Price is $XXXXXXXXXX per Unit. However, Investors who are financing the purchase of Units with an Investor Loan as described in 23 below will be required to pay an aggregate amount of $XXXXXXXXXX to the Offering Partnership in respect of each Unit. The additional $XXXXXXXXXX will be used, in part, to pay the Loan Arrangement Fee and the balance will be applied to pay, in part, future interest obligations on the Investor Loans. A portion of the Unit Subscription Price payable by Investors may be satisfied by the delivery of post-dated cheques. The unpaid balance of the Unit Subscription Price will be secured by a security interest in the Unit granted by the Investor to the Offering Partnership. All but a small portion of this amount will be due before XXXXXXXXXX and the balance will be due on or before XXXXXXXXXX.

23. Investors may choose to finance up to approximately XXXXXXXXXX% of their investment in Units by way of a Unit Loan from the Unit Lender. The Unit Loan Agreement will provide, inter alia, that the Unit Loan will be a full recourse loan to the Investor such that the Investor will be obligated to repay its Unit Loan in its entirety and all interest thereon. Amounts owing under the Unit Loan will be due and payable on or before XXXXXXXXXX. Interest accruing in any year on a Unit Loan must be paid by the Investor to the Unit Lender on or before XXXXXXXXXX of the next year. The annual interest rate payable on the unpaid principal amount of a Unit Loan from time to time will be equal to

XXXXXXXXXX

A Unit Loan may be prepaid at any time by an Investor in whole or in part without notice, penalty or bonus. Each Unit Loan will be evidenced by a promissory note and will be secured by a pledge and assignment of the Investor's Units in favour of the Unit Lender and an assignment of the right to receive any and all distributions from the Offering Partnership. Investors will also pay the Loan Arrangement Fee in respect of their Unit Loan.

24. Investors must pay the balance of the Unit Subscription Price for their Units and must represent and warrant in the Subscription Agreement that any financing arranged for the subscription of Units (including any financing for an Investor who chooses not to enter into a Unit Loan Agreement) will not constitute a "limited recourse amount" for purposes of the Act.

25. Following the acquisition of Units by Investors, the Initial Limited Partner's interest in the Offering Partnership will be redeemed.

26. The Offering Partnership Agreement will provide that all allocations of income and losses and all distributions of cash from the Offering Partnership will be XXXXXXXXXX% to the Investors and XXXXXXXXXX% to the General Partner.

27. The Offering Partnership will pay the OP Fee to the General Partner for the XXXXXXXXXX services provided to the Offering Partnership by the General Partner, including

XXXXXXXXXX.

From this fee, the General Partner will be obligated to pay all of the operating expenses incurred in the ordinary and usual course of managing the Offering Partnership's business. Pursuant to the terms of the Operating Partnership Agreement, the General Partner may retain third parties, including related parties, to provide assistance to it in providing such services.

Pursuant to the XXXXXXXXXX Agreement, XXXXXXXXXX will exclusively co-ordinate the XXXXXXXXXX of the sale of the Units and as consideration therefor, XXXXXXXXXX will receive the XXXXXXXXXX Sales Commission from the Offering Partnership, being approximately XXXXXXXXXX will introduce licensed brokers or investment dealers and, where permitted under applicable securities laws, unregistered agents, to the General Partner to serve as sub-agents in connection with the sale of Units. XXXXXXXXXX will be solely responsible for compensating any of its sub-agents.

The Offering Partnership may also incur certain additional and other fees and expenses in connection with the issuance of Units and its operations.

28. The number of authorized Class A Units to be issued by the Production Services Partnership is unlimited. The Class A Unit Subscription Price will be $XXXXXXXXXX per Unit. Each Class A Unit will entitle the holder to one vote per Unit at any meeting of the Production Services Partnership.

The Offering Partnership will use approximately XXXXXXXXXX% of the Unit Subscription Price for the Units to acquire Class A Units of the Production Services Partnership. A small portion of the subscription price payable by the Offering Partnership to the Production Services Partnership for each Class A Unit may not be paid at the time

the Class A Units are acquired. The unpaid portion of the subscription price will be paid in full before XXXXXXXXXX. The acquisition of Class A Units of the Production Services Partnership by the Offering Partnership will occur prior to there being any ascertainable net revenues from the exploitation of the Programs. Following the acquisition of the Class A Units by the Offering Partnership, the interest of the initial limited partner of the Production Services Partnership will be redeemed. If the acquisition of Class A Units of the Production Services Partnership occurs on or before XXXXXXXXXX, the Offering Partnership will borrow from XXXXXXXXXX approximately $XXXXXXXXXX per Unit to be acquired. The borrowed funds will be used by the Offering Partnership to pay a portion of the subscription price for the Class A Units. This loan will be repaid in full before the end of XXXXXXXXXX.

29. The Production Services Partnership will also grant, for nominal consideration, a Class B Unit Option to the Producer pursuant to which the holder of the Class B Unit Option will be entitled to acquire a certain number of Class B Units (XXXXXXXXXX) at any time during the Exercise Period. The exercise price for each Class B Unit will be XXXXXXXXXX of the Class B Unit as reasonably determined by the General Partner on an annual basis. In order to exercise the Class B Unit Option, the holder must pay an Option Maintenance Fee which fee will paid annually on XXXXXXXXXX of each year. The Option Maintenance Fee will be prorated on a daily basis in the year the Class B Unit Option is exercised, if ever. XXXXXXXXXX.

30. Should the holder of the Class B Unit Option choose to exercise the option, the holder will be solely responsible to finance the subscription amount for the Class B Units. The subscription amount may be financed by way of a loan from the Producer, a loan from an arm's length lender or the acquisition by the Studio of a right to a portion of distributions on the Class B Units.

If a holder of a Class B Unit Option exercises the option during the Exercise Period, the holder will have the right to pay the Class B Unit Option exercise price at any time up to and including XXXXXXXXXX. However, should the holder opt to defer payment of all or any portion of the Class B Unit Option exercise price, the holder will be required to pay interest, at a negotiated rate, to the Production Services Partnership on any unpaid balance for the Class B Units from the date of exercise to the date of full payment. The interest payable on the unpaid balance will bear interest at a rate equal to XXXXXXXXXX.

Once issued, each Class B Unit will entitle the holder to one vote per Unit at any meeting of the Production Services Partnership. The Class B Unit Options are discretionary and there is no guarantee that Class B Unit Options will ever be exercised.

31. The Production Services Partnership Agreement will provide that all allocations of income and losses will be XXXXXXXXXX% to the limited partners and XXXXXXXXXX% to the General Partner. Moreover, it will provide that the income and losses of the Production Services Partnership will generally be allocated in each fiscal period to the holder of Class A Units (being the Offering Partnership) and the holders (if any) of Class B Units based upon their respective cash capital contributions to the Production Services Partnership as at the last day of the relevant fiscal period. Allocations for income tax purposes may not correspond with the distribution of any available cash during that fiscal period.

XXXXXXXXXX.

32. The subscription proceeds from the Class A Units, and the subscription proceeds, if any, from the Class B Units, will be used primarily to repay a portion of the Interim Production Loan. The PSGP will use the proceeds of the partial repayment of the Interim Production Loan to repay the Producer/PSGP Loan. The proceeds may also be used to pay the XXXXXXXXXX Fee, the XXXXXXXXXX Fee and the XXXXXXXXXX Fee. The funds from the production services fees that are earned by the Production Services Partnership will also be used to re-pay a portion of the Interim Production Loan. The Production Services Partnership may also incur certain additional fees and expenses in connection with its operations.

33. The Production Services Partnership may distribute a portion of its Undistributed Cash at the end of the XXXXXXXXXX calendar year which in the discretion of the PSGP is not required in the operations of the Production Services Partnership. To the extent the Offering Partnership, as the Class A Unitholder, receives such distribution, it may in turn make a distribution to Investors in accordance with the terms of the Offering Partnership Agreement.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to:

(i) afford Canadian subscribers the opportunity to invest in the film and television industry through the provision of production services in Canada for the Programs, thereby providing Investors with the opportunity to participate financially in the receipts generated from the exploitation of the Programs; and

(ii) to encourage and facilitate the production of films and television programs in Canada by foreign producers, thereby creating employment in Canada and utilizing and enhancing the expertise of Canadian production personnel.

RULINGS GIVEN

Provided that: (a) all relevant facts, proposed transactions and the purposes thereof have been fully disclosed and, as summarized above, are accurate, and in all material respects are as will be reflected in the final versions of the documentation referred to above; (b) all of the proposed transactions are carried out as described above; (c) the offering documents contain a reference, such as described in 21 above, in respect of caveats in the rulings given; and (d) the Offering Partnership and the Production Services Partnership are partnerships at law, we confirm the following.

A. The NCLE incurred by the Production Services Partnership and forming part of the production services rendered by it pursuant to the agreement referred to in 11 above will, subject to the application of subsections 143.2(6) and (10) of the Act and subject to the provisions of section 18.1 of the Act, be deductible in the computation of the Production Services Partnership's income or 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 is not inconsistent with established case law principles or rules of law and well-accepted business 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. Pursuant to subsection 18.1(15) of the Act, section 18.1 of the Act will not apply to restrict the deductibility of the NCLE incurred by the Production Services Partnership as described in 11 above provided that before the end of the taxation year in which such NCLE are made, amounts included in computing the Production Services 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 Services Partnership for the year under the Act) in respect of the Programs, exceed 80% of such NCLE.

C. Losses for a taxation year of the Production Services Partnership which are allocated to the holders of Class A Units and Class B Units (if then issued) by the Production Services Partnership, in accordance with the terms of the Production Services Partnership Agreement referred to above will, subject to the application of subsections 143.2(6) and (10) of the Act, 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 taxation year of the Production Services 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 Services Partnership at the end of that taxation year.

D. Losses for a taxation year of the Offering Partnership which are allocated by the Offering Partnership to an Investor, in accordance with the terms of the Offering Partnership Agreement referred to above, will be deductible in computing the income or loss of such Investor at the end of the Investor's taxation year in which such taxation year of the Offering Partnership ends, to the extent of the at-risk amount (within the meaning of subsection 96(2.2) of the Act) of such Investor in respect of the Offering Partnership at the end of that taxation year.

E. Subject to the application of paragraphs 96(2.2)(b), (b.l) and (c) of the Act, the at-risk amount, within the meaning of subsection 96(2.2) of the Act, of the Offering Partnership in respect of the Production Services Partnership, at the end of the XXXXXXXXXX taxation year of the Production Services Partnership, will be equal to the amount of the Offering Partnership's investment in the Class A Units, as described in 28 above, to the extent that the Offering Partnership or a person with whom the Offering Partnership 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) thereof.

F. Subject to the application of paragraphs 96(2.2)(b,), (b.l) and (c) 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 Offering Partnership, at the end of the XXXXXXXXXX taxation year of the Offering Partnership, will be equal to the amount of the Investor's investment in Units of the Offering Partnership, as described in 22 above, to the extent that there is no amount owing by such Investor to the Offering Partnership in respect of such Units, and further, to the extent such Investor or a person with whom such 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 subparagraphs (i), (iii), (vi) or (vii) thereof.

G. For greater certainty, in calculating the at-risk amount, within the meaning of subsection 96(2.2) of the Act, of: (a) an Investor in respect of the Offering Partnership or (b) the Offering Partnership in respect of the Production Services Partnership, the Production Services Partnership's entitlement to the fee referred to in 12 above 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 an Investor (depending upon the method regularly followed by such Investor in computing income) in connection with the Unit Loan will be deductible by such Investor in computing income in that taxation year in accordance with paragraph 20(l)(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 Services Partnership owes to PSGP under the Interim Production Loan will be a limited-recourse amount, as defined in subsection 143.2(1) of the Act, of the Production Services Partnership with the result that:

(i) the provisions of subsection 143.2(6) of the Act will apply to reduce the Production Services Partnership's expenditures (including the amounts of the NCLE) to the extent that the amount of the Interim Production Loan can reasonably be considered to relate to such expenditures incurred by the Production Services Partnership;

(ii) at the time that all or a portion of the Interim Production Loan is repaid by the Production Services Partnership, 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 payment, provided such repayment is not part of a series of loans or other indebtedness and repayments; and

(iii) the Interim Production Loan 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 Offering Partnership or the cost of the Units in the Offering Partnership acquired by the Investors.

J. Any amount owing by the Offering Partnership to:

(i) the Production Services Partnership in respect of the unpaid portion of the subscription price in respect of Class A Units of the Production Services Partnership; and

(ii) XXXXXXXXXX as described in 28 above,

will be a limited recourse amount, as defined in subsection 143.2(1) of the Act, of the Offering Partnership with the result that:

(i) the provisions of subsection 143.2(6) of the Act will apply to reduce the Offering Partnership's expenditures to the extent that the amount of such outstanding amounts can reasonably be considered to relate to such expenditures incurred by the Offering Partnership;

(ii) at the time that all or a portion of the outstanding amounts are repaid by the Offering Partnership, 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 payments, provided such repayment is not part of a series of loans or other indebtedness and repayments; and

(iii) the amount owing to the Production Services Partnership in respect of the Class A Units and the amount owing to XXXXXXXXXX referred to in 28 above will not, in and of itself, result in the application of subsection 143.2(6) of the Act to reduce the cost of the Units in the Offering Partnership acquired by the Investors.

K. Subsection 143.2(6) of the Act will not apply to reduce the amount of an Investor's expenditure to acquire Units of the Offering Partnership:

(i) by reason of the distribution of capital by the Production Services Partnership to the holders of Class A Units and Class B Units as described in 31 above; or

(ii) by reason of the Production Services Partnership's entitlement to the production services fee as described in 12.

L. Subject to the application of subsections 18(9) and (9.2) to (9.8) of the Act, in the event that the holder of the Class B Unit Option decides to exercise the Option but to defer payment of the Class B Unit subscription amount, the interest paid or payable in a year by the holder of the Class B Unit Option (depending upon the method regularly followed by the holder) to the Production Services Partnership will be deductible by such holder in computing income in that taxation year in accordance with paragraph 20(1)(c) of the Act, to the extent the amount thereof is reasonable and paid pursuant to a legal obligation to pay interest on an amount payable for property acquired for the purpose of earning income from a business or property.

M. Notwithstanding that the Class A Unitholder of the Production Services Partnership receives an entitlement to a priority distribution of available cash and interest on Undistributed Cash over the Class B Unitholder (if any), such priority distribution will not reduce the at-risk amount of: (i) the Offering Partnership's interest in the Production Services Partnership; or (ii) an Investor's interest in the Offering Partnership, within the meaning of subsection 96(2.2) of the Act.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996 and are binding on the Canada Customs and Revenue Agency provided the proposed transactions are implemented on or before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto. Except as expressly stated, these 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 Production Services Partnership;

c) the existence of a reasonable expectation of profit of any of the Production Services Partnership, the Offering Partnership or any Investor;

d) whether the Production Services Partnership or Production Co. will be acting as legal agents for the Studio in respect of the making of the Programs;

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 or non-applicability of paragraph 96(2.2)(d) of the Act, except as otherwise stated herein; and

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 Offering Partnership will be subscribing for Class A units of limited partnership interest in a number of production limited partnerships, we are not ruling on the Offering Partnership's investment in any limited partnerships other than their investment in the Production Services Partnership, as described herein.

OPINIONS

I. It is our opinion that Production Co., insofar as it is described in 5 above, will be an "eligible production corporation" within the meaning of subsection 125.5(1) of the Act in respect of the Programs provided that all of the following conditions are met:

(i) the activities of Production Co. are carried on in Canada through a "permanent establishment" (as defined in section 8201 of the Regulations) in Canada;

(ii) the activities of Production Co. consist solely of (a) providing film and video production services; and (b) providing services to Production Services Partnership pursuant to the Agency and Allocation Agreement;

(iii) draft section 9300 of the Regulations is enacted as proposed and each of the Programs is an "accredited production" within the meaning thereof;

(iv) Production Co. contracts directly with Studio to provide the production services pursuant to the CLE Production Services Agreement;

(vi) Studio is not an "eligible production corporation", as defined in subsection 125.5(1) the Act, in respect of the Programs; and

(vii) Production Co. is not a corporation described in any of paragraphs (c) to (e) of the definition of "eligible production corporation" in subsection 125.5(1) of the Act.

II. If any amount of gross revenue related to the Programs is ascertainable, whether contingent or otherwise, at the time that Units of the Offering Partnership are acquired by Investors, or at the time that Class A Units of the Production Services Partnership are acquired by the Offering Partnership, it is our opinion that this would affect the at-risk amount of the Investors and the Offering Partnership, as the case may be, to the extent that the amount or benefit of such ascertainable revenue was granted for any of the purposes described in paragraph 96(2.2)(d) of the Act.

III. Where a portion of the Unit Subscription Price payable by an Investor is satisfied by the delivery of post-dated cheques, or a portion of such amount is unpaid as described in 22 above, it is our opinion that paragraph 96(2.2)(c) of the Act will apply to reduce accordingly the at-risk amount of the Investor or alternatively, that subsection 143.2(7) of the Act will apply to deem the amount of the post-dated cheque or the unpaid amount, as the case may be, to be a limited recourse amount such that subsection 143.2(6) of the Act will apply and that subsections 143.2(10) and (12) of the Act will apply to any repayments thereof.

The foregoing opinions are provided in accordance with the policy described in paragraph 22 of Information Circular 70-6R3 and, as stated therein, are not binding on the Canada Customs and Revenue Agency.

Yours truly,

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