2001 Ruling 2001-0086553 - PARTNERSHIP; AT-RISK

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: Whether XXXXXXXXXX , Liquidity Rights, etc. grind at risk?

Whether 18.1 applies to Operating Partnerships acquisition of Amended License Agreement?

Position: No.

Reasons: see ruling
Agreement is not an asset/see ruling

XXXXXXXXXX 2001-008655

XXXXXXXXXX, 2001

Re: XXXXXXXXXX
XXXXXXXXXX
(the "Operating Partnership")
Those persons who from time to time become limited partners
in the Offering Partnership
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested advance income tax rulings on behalf of the above taxpayers as well as our subsequent telephone conversations on this matter, your amended and restated advance income tax ruling request dated XXXXXXXXXX, our (XXXXXXXXXX) meeting on XXXXXXXXXX, as well as additional correspondence and telephone conversations.

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one or any of the taxpayers or a related person;

(iii) under objection by one or any of the taxpayers or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate;

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

(vi) including, but not limited to the Unit Loans described in paragraph 17 below, the Canco #2/Lender #1 Loan described in paragraph 40 below, the Liquidity Rights described in paragraph 55 below, XXXXXXXXXX, dealt with in any documents or any agreements (either verbal or written), other than the documents and agreements in respect of which the relevant terms have been provided to the Income Tax Rulings Directorate and have not been significantly amended and that will be submitted within 30 days of their execution to the Income Tax Rulings Directorate.

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "Adjusted Fair Market Value" means XXXXXXXXXX

(c) "arm's length" has the meaning assigned by section 251;

(d) "Asset #1" means XXXXXXXXXX;

(e) "Assets" means the primary assets owned by Canco #3, to be transferred to the Operating Partnership as described in paragraph 32 below, which are:

(i) Asset #1; and

(ii) the Operating Assets;

(f) "at-risk amount" has the meaning assigned by subsection 96(2.2);

(g) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(h) "Canco #1" means XXXXXXXXXX;

(i) "Canco #2" means XXXXXXXXXX;

(j) "Canco #3" means XXXXXXXXXX;

(k) "Company A" means XXXXXXXXXX and its partners and persons related thereto;

(l) "Company B" means XXXXXXXXXX and related corporations;

(m) "Creditor #1" means XXXXXXXXXX;

(n) "Creditor #2" means XXXXXXXXXX;

(o) XXXXXXXXXX;

(p) XXXXXXXXXX;

(q) XXXXXXXXXX;

(r) XXXXXXXXXX;

(s) XXXXXXXXXX;

(t) XXXXXXXXXX;

(u) XXXXXXXXXX;

(v) XXXXXXXXXX;

(w) XXXXXXXXXX;

(x) XXXXXXXXXX;

(y) XXXXXXXXXX;

(z) XXXXXXXXXX;

(aa) "Incentive Fee" means the fee described in paragraph 34;

(bb) "Initial Limited Partner of the Offering Partnership" means XXXXXXXXXX;

(cc) "Lender #1" means XXXXXXXXXX. The Trustee of Lender #1 is XXXXXXXXXX corporation, which deals at arm's length with all parties referred to in this Ruling;

(dd) "Lender #2" means XXXXXXXXXX;

(ee) "Lender #3" means XXXXXXXXXX;

(ff) "Main Activity" means the XXXXXXXXXX of Canco #3's, and subsequently the Operating Partnership's, XXXXXXXXXX;

(gg) XXXXXXXXXX;

(hh) XXXXXXXXXX;

(ii) "Offering Partnership" means XXXXXXXXXX, as described in paragraphs 8 to 11 below;

(jj) "Offering General Partner" means, XXXXXXXXXX, the general partner of the Offering Partnership. It is described in paragraphs 9 and 10 below;

(kk) "Operating Assets" means XXXXXXXXXX;

(ll) "Operating General Partner" means XXXXXXXXXX, the general partner of Operating Partnership. Operating General Partner is a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . All the issued and outstanding shares in the capital of the Operating General Partner are owned by Company A and Company B;

(mm) "Operating Partnership" means XXXXXXXXXX , a limited partnership formed under the Limited Partnership Act (XXXXXXXXXX). It is described in paragraphs 27 to 31 below;

(nn) "Principal" means XXXXXXXXXX;

(oo) XXXXXXXXXX;

(pp) "Regulations" means the regulations to the Act;

(qq) "tax shelter" has the meaning assigned by subsection 237.1(1) and "tax shelter investment" has the meaning assigned by subsection 143.2(1);

(rr) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Any references to an amount of money are expressed in Canadian dollars, unless otherwise indicated.

FACTS

1. Canco #1 XXXXXXXXXX Canco #1 is a "taxable Canadian corporation" and a "Canadian-controlled private corporation".

2. Canco #2's principal business activity is the operation of the XXXXXXXXXX. Canco #2 is a "taxable Canadian corporation" and a "Canadian-controlled private corporation".

3. Canco #3 is a "taxable Canadian corporation" and a "Canadian-controlled private corporation".

4. Canco #3 obtained its right XXXXXXXXXX pursuant to a license agreement with Canco #2 (the "License Agreement"). Under the arrangements with Canco #2, Canco #3 XXXXXXXXXX.

Commercial Environment

5. The financial services industry has a well-established market value for the services of financial intermediaries and providers of capital. Financial intermediaries include investment bankers, brokerage houses, mortgage brokers and the financial services divisions of the large accounting firms. Providers of capital include banks, insurance companies, investment funds and private sources. Capital providers have various areas of specialty from basic lending and personal credit to asset-backed lending, cash-flow lending, mezzanine financing and equity financing. These various funding activities are further subdivided by specialties based upon credit quality.

6. In general terms, fees charged by the providers of debt capital are in the range of XXXXXXXXXX percent depending on credit quality and general market conditions. Compensation to intermediaries for debt transactions is in the range of XXXXXXXXXX percent depending on credit quality and general market conditions. Combined fees to providers of capital and intermediaries for debt transactions traditionally fall in the range of XXXXXXXXXX percent.

7. There are no general guidelines in respect of charges for the availability of the services of unique individuals. The nature of the industry, the experience of the individual, the availability of comparable skills in the marketplace and the magnitude of the economic undertaking are all factors which are germane to the appropriateness of charges for the availability of services of unique individuals.

The Offering Partnership

8. Offering Partnership is a Limited Partnership formed under the Limited Partnerships Act (XXXXXXXXXX). The business of the Offering Partnership will include the ownership of a partnership interest in the Operating Partnership, a partnership that will carry on the business of operating the Assets. The Offering Partnership has applied for and received a tax shelter identification number for purposes of subsection 237.1(2) of the Act. The initial partnership interest in the Offering Partnership was issued to Initial Limited Partner of the Offering Partnership, for a price of $XXXXXXXXXX to facilitate the formation of the Offering Partnership. The Offering Partnership has a XXXXXXXXXX year-end.

9. The Offering General Partner is a taxable Canadian corporation. The issued common shares in the capital of Offering General Partner are held by Company A and Company B. Both Company A and Company B are in the business, directly or indirectly, of XXXXXXXXXX. Company A and Company B deal at arm's length with one another and with each of Canco #1, Canco #2, Canco #3, Creditor #1, and Principal.

10. The only assets of the Offering General Partner are nominal cash and its general partnership interest in the Offering Partnership. The Offering General Partner will provide consultation, management, administration and financial services to the Offering Partnership for an annual fee. In addition, the Offering General Partner will be entitled to reimbursement of reasonable costs incurred on behalf of the Offering Partnership and will be responsible for the management of the Offering Partnership within the terms of the partnership agreement for the Offering Partnership.

11. The partnership interests in the Offering Partnership are divided into Class A Units and Class B Units.

PROPOSED TRANSACTIONS

Preliminary Transactions

12. XXXXXXXXXX.

13. Canco #2 will enter into an agreement with Canco #3 whereby Canco #2 will agree to pay $XXXXXXXXXX of the indebtedness of Canco #3 that is XXXXXXXXXX.

In consideration for agreeing to pay the indebtedness of Canco #3 XXXXXXXXXX, Canco #3 will issue a note (the "Canco #3 Note") to Canco #2 in the amount of $XXXXXXXXXX . The Canco #3 Note will bear interest (at a rate that is equivalent to the average rate of interest on XXXXXXXXXX).

Canco #3 will pay a fee (the "Loan Assumption Fee") to Canco #2 in the amount of $XXXXXXXXXX, as consideration for Canco #2 agreeing to assume the indebtedness described in this paragraph.

14. XXXXXXXXXX.

Offering of Class A Units by the Offering Partnership

15. The Offering Partnership shall offer its Class A Units for sale to persons (individuals, corporations, partnerships or other entities) resident in Canada (other than the Territories of Canada) pursuant to registration and prospectus exemptions under applicable securities legislation of each province of Canada, by way of a confidential offering memorandum (the "Offering Memorandum"). No person in whom there is an interest that is a "tax shelter investment" may subscribe for Class A Units. It is expected that the Offering of the Class A Units will be completed on XXXXXXXXXX.

The Offering Memorandum will contain the following mention:

"THE RULING OBTAINED FROM THE CANADA CUSTOMS AND REVENUE AGENCY CONTAINS CAVEATS. THE RULING MAY BE VIEWED ON REQUEST PROVIDED THAT THE REQUESTING PARTY EXECUTES A CONFIDENTIALITY AGREEMENT".

16. The Offering Partnership will issue XXXXXXXXXX Class A Units ("Class A Units"), with a unit subscription price of $XXXXXXXXXX per Class A Unit. Upon acceptance of the subscription for the XXXXXXXXXX Class A Units, the Offering Partnership will redeem the initial partnership interest subscribed for by Initial Limited Partner of the Offering Partnership and make payment therefor in the amount of $XXXXXXXXXX.

17. Lender #1 will make a loan (the "Unit Loan") in the amount of $XXXXXXXXXX per Class A Unit to each subscriber for Class A Units (the "Class A Unitholder") of the Offering Partnership who wishes to finance a portion of the purchase price in respect of such Class A Units. Class A Unitholders are not obligated to borrow the Unit Loan and are entitled to purchase Class A Units by payment of the full subscription price of $XXXXXXXXXX per Class A Unit. In order to qualify for the Unit Loan, a Class A Unitholder will be required to deliver a completed Unit Loan Application Form in the form required by Lender #1 together with a promissory note ("Class A Unitholder Note") to Lender #1 in the principal amount of $XXXXXXXXXX per Class A Unit. The Unit Loans will be full recourse loans made by Lender #1 and each Class A Unitholder who borrows will be obligated to repay the principal amount of the Unit Loan and all interest thereon in accordance with the terms of the loan. The Unit Loan will be evidenced by the Class A Unitholder Note and will be secured by a pledge and assignment of the Class A Units purchased and an assignment of distributions from the Offering Partnership to the Class A Unitholder in respect of those Class A Units. So long as the Unit Loan is not in default, distributions from the Offering Partnership in respect of income of the Operating Partnership sufficient in amount to permit Class A Unitholders to pay tax on that income, if any, will be distributable to the Class A Unitholders free of the pledge.

18. The principal amount of the Unit Loan will bear interest, both before and after maturity, from the date of advance until repayment in full. Each Unit Loan must be repaid in full no later than XXXXXXXXXX years from the date of advance. The Unit Loans will bear interest from the date of disbursement until the date XXXXXXXXXX after the date of advance, at the rate of XXXXXXXXXX percent and thereafter will be reset at a rate which is, on such date, equal to the greater of the prime bank rate plus XXXXXXXXXX percent and the prescribed rate of interest for the purposes of section 143.2 of the Act. Interest accruing in any year must be paid by the Class A Unitholder to Lender #1 on or before XXXXXXXXXX of the following year. All amounts owing under the Unit Loans will be due and payable in full on or before the date which is XXXXXXXXXX years from the date of the advance.

19. Lender #1 has agreed to perform the functions summarized herein, at the request of Canco #2. The Trustee of Lender #1 will deal at arm's length with all parties referred to herein. XXXXXXXXXX.

20. On closing of the proposed transactions, accepted subscription payments will be released to the Offering Partnership, which will issue Class A Units to the Class A Unitholders whose subscription payments were accepted.

21. Canco #2 has arranged for Lender #1 to provide the Unit Loans. In consideration for the services that Canco #2 has and will provide in arranging for Unit Loans, Class A Unitholders who borrow from Lender #1 under the terms of a Unit Loan will pay a loan arrangement fee (the "Loan Arrangement Fee") to Canco #2 of $XXXXXXXXXX per Class A Unit or approximately XXXXXXXXXX percent of the amount of the Unit Loan. The Loan Arrangement Fee is payable on closing. If all Class A Unitholders subscribe for Unit Loans, Canco #2 will receive an aggregate Loan Arrangement Fee of $XXXXXXXXXX.

22. Class A Unitholders who borrow pursuant to a Unit Loan will contribute a total amount of $XXXXXXXXXX per Class A Unit. These proceeds will comprise the Unit Loan of $XXXXXXXXXX and a cash portion of $XXXXXXXXXX . The cash portion is payable as to $XXXXXXXXXX at the time of subscription and as to $XXXXXXXXXX by post-dated cheque payable XXXXXXXXXX . The total proceeds of $XXXXXXXXXX per Class A Unit are applied as to $XXXXXXXXXX to the subscription price for the Class A Unit, $XXXXXXXXXX to collaterally secure the obligation to pay interest on the Unit Loan (as described below) and $XXXXXXXXXX to pay the Loan Arrangement Fee. Of the $XXXXXXXXXX cash portion of the total subscription payments payable at closing, $XXXXXXXXXX is allocable to the subscription price for the Class A Unit, $XXXXXXXXXX to pay the Loan Arrangement Fee and $XXXXXXXXXX to the collateralization of interest. The full amount of the $XXXXXXXXXX cash payment made XXXXXXXXXX pursuant to the post-dated cheque is allocable to the collateralization of interest in respect of the Unit Loan.

23. The $XXXXXXXXXX per Class A Unit received by the Offering Partnership in respect of interest collateralization will be applied to collaterally secure the obligation of the Class A Unitholder to pay interest on the Unit Loan for the XXXXXXXXXX period following the date of subscription. These proceeds, when received ($XXXXXXXXXX upon subscription, $XXXXXXXXXX on XXXXXXXXXX) will be delivered by the Offering Partnership to Lender #1, to effect such collateralization. The collateralized funds will be applied by Lender #1 to pay the interest on the Unit Loan as such interest becomes due and payable.

24. Canco #3 has agreed with the Offering Partnership to pay all costs and expenses which may be incurred in connection with the offering by the Offering Partnership of the Class A Units including, without limitation, legal fees, accounting fees, financial service fees, printing costs, travel expenses and other similar costs, but excluding sales commission and placement fees. In consideration for these services, the Offering Partnership shall pay to Canco #3 an expense fee of $XXXXXXXXXX (the "Offering Expense Fee"). It is anticipated that the Offering Expense Fee will approximate the issue expenses (other than XXXXXXXXXX) actually incurred and paid to third parties in connection with the offering of the Class A Units. As a result of these arrangements, the Offering Partnership is assured that aggregate issue costs incurred by the Offering Partnership in respect of the offering of the Class A Units will not exceed $XXXXXXXXXX.

Allocation of Proceeds of Public Offering of Units of the Offering Partnership

25. The total amounts payable in respect of the issuance and sale of Class A Units and the loan arrangements in respect of the Unit Loans (assuming all subscribers borrow pursuant to the Unit Loan arrangements) will be $XXXXXXXXXX. These aggregate proceeds are comprised of $XXXXXXXXXX in respect of the issuance of Class A Units (XXXXXXXXXX Class A Units x $XXXXXXXXXX), $ XXXXXXXXXX in respect of collateralized interest for the first XXXXXXXXXX period of the Unit Loans and $ XXXXXXXXXX being the aggregate Loan Arrangement Fee payable to Canco #2.

Sources and Uses of Funds by Offering Partnership

26. The aggregate proceeds of subscriptions for the Class A Units of $XXXXXXXXXX received by the Offering Partnership will be principally applied as follows:

? as to $XXXXXXXXXX, to pay the Offering Expense Fee to Canco #3;
? as to $XXXXXXXXXX, to pay sales commissions and placement fees payable to Company A and Company B and salespersons; and
? as to $XXXXXXXXXX , to enable the Offering Partnership to subscribe for units in the Operating Partnership as described below.

The Operating Partnership

27. The business of the Operating Partnership will be to acquire and operate the Assets. The capital of the Operating Partnership will consist of the nominal interest of the Operating General Partner and one class of units (the "OP Units") all of which will be owned by the Offering Partnership. The Operating Partnership has a XXXXXXXXXX year-end.

28. The Operating General Partner will contribute $XXXXXXXXXX to the Operating Partnership for its general partnership interest in the Operating Partnership. The partnership interest of the Operating General Partner in the Operating Partnership shall entitle the Operating General Partner to XXXXXXXXXX percent of the profits and losses of the Operating Partnership. The only assets of the Operating General Partner will be nominal cash and its general partnership interest in the Operating Partnership.

29. The Operating General Partner is negotiating and settling all of the terms of the arrangements to be entered into by the Operating Partnership as summarized herein, including the terms of acquisition of Asset #1. On an ongoing basis, following completion of the transactions contemplated hereby, the Operating General Partner will provide consultation, management, administration and financial services to the Operating Partnership. In addition, the Operating General Partner will be entitled to the reimbursement of reasonable costs incurred on behalf of the Operating Partnership and will be responsible for the management of the Operating Partnership within the terms of the limited partnership agreement for the Operating Partnership.

30. The Operating Partnership intends to raise $XXXXXXXXXX of total financing proceeds by the issuance to the Offering Partnership of the OP Units representing a XXXXXXXXXX percent limited partnership interest in the Operating Partnership. The Offering Partnership will contribute capital in respect of the OP Units aggregating $XXXXXXXXXX.

31. The partnership agreement for the Operating Partnership will provide that all income and losses of the Operating Partnership will be allocated XXXXXXXXXX percent to the Offering Partnership and the balance to the Operating General Partner.

Purchase of the Assets and Use of Proceeds of OP Units

32. The Operating Partnership will acquire from Canco #3, on or about XXXXXXXXXX , the assets and undertakings of Canco #3 which relate to the Main Activity, including the Operating Assets.

The purchase price for the Assets (excluding the Operating Assets) will be $XXXXXXXXXX, which purchase price will be payable by the issuance of a promissory note (the "Purchase Note"). The Purchase Note will bear interest at a rate of approximately XXXXXXXXXX percent per annum until XXXXXXXXXX, after which time no interest will be payable on the Purchase Note. The Purchase Note will be secured by a first charge on the Assets. The $XXXXXXXXXX proceeds received by the Operating Partnership from the purchase by the Offering Partnership of the OP Units will be used to pay the principal and accrued interest under the Purchase Note, which is expected to be approximately $XXXXXXXXXX as of Closing Date, and to pay the Incentive Fee of $XXXXXXXXXX. Neither the License Agreement nor the Amended License Agreement described in paragraphs 35 to 37 below are, nor will they be, assets of Canco #3 and they do not form part of the Assets.

33. XXXXXXXXXX.

33A. The Operating Partnership will also acquire from Canco #3 the Operating Assets for a purchase price of approximately $XXXXXXXXXX. The purchase price for the Operating Assets will be paid by the Operating Partnership by its assumption of Debt #XXXXXXXXXX. Additionally, Canco #3 will issue a note payable to the Operating Partnership (the "Canco #3/OP Note") in the amount of $XXXXXXXXXX, being the amount by which Debt #XXXXXXXXXX exceeds the purchase price for the Operating Assets.

34. Canco #3 will enter into an agreement with the Operating Partnership pursuant to which it will manage the day-to-day operations of Asset #1 for a fee. Pursuant to such agreement, Canco #3 will agree to release its key senior employees from their employment contracts so that they may be hired by Operating Partnership. The services of these key senior employees of Canco #3 will be essential to the successful operation of the business of the Operating Partnership. As an inducement to allow the services of these employees to be made available to the Operating Partnership, the Operating Partnership will agree to pay to Canco #3 a fee (the "Incentive Fee") in the amount of $XXXXXXXXXX.

Amendments to License Agreement between Canco #2 and Canco #3

35. Canco #3 obtains its right to XXXXXXXXXX.

36. XXXXXXXXXX, in order to encourage completion of the transactions contemplated herein, Canco #2 has undertaken to enter into an agreement (the "Amended License Agreement") to amend the economic terms of the arrangements under which XXXXXXXXXX by providing for the following amendments to the License Agreement:

? XXXXXXXXXX;

? XXXXXXXXXX; and

? a new revenue sharing arrangement (the "Sharing Arrangement") will be entered into between Canco #3 (and then the Operating Partnership) and Canco #2 and others for XXXXXXXXXX. The Sharing Arrangement will provide that during the term of the Amended License Agreement, Canco #2 will agree to pay to Canco #3 (and then the Operating Partnership) amounts intended to increase the economic return to Canco #3 (and then the Operating Partnership) in respect of revenue generated from XXXXXXXXXX.

Canco #3 will pay $XXXXXXXXXX (the "License Amendment Fee") to Canco #2 as consideration for Canco#2 agreeing to amend the License Agreement. The License Amendment Fee has been computed as the present value of the expected decrease in the amounts that will now be payable under the Amended License Agreement.

The intent of these amendments is to ensure that the amounts payable by Canco #3 and then Operating Partnership for the use of XXXXXXXXXX is not less disadvantageous XXXXXXXXXX by adjusting upwards the share of the revenue retained by Canco #3 and subsequently the Operating Partnership XXXXXXXXXX, thereby having the effect of reducing the occupancy cost payable. XXXXXXXXXX.

37. It is a condition precedent to the purchase of the Assets by the Operating Partnership, that the Amended License Agreement be entered into. The Amended License Agreement may be terminated by Canco #2 after redemption or purchase for cancellation of all of the Class A Units of the Offering Partnership.

Sources and Uses of Funds by Canco #3

38. Canco #3 will use a portion of the funds it has received to that time from the sale of the Assets ($XXXXXXXXXX plus accrued interest of approximately $XXXXXXXXXX), and the Offering Expense Fee ($XXXXXXXXXX), and the Incentive Fee ($XXXXXXXXXX), paid by Operating Partnership to Canco #3 to:

(a) repay the Canco #3 Note of $XXXXXXXXXX, described in paragraph 13 above, to Canco #2;

(b) make a loan, in the amount of $XXXXXXXXXX to Canco #2;

(c) pay the Loan Assumption Fee of $XXXXXXXXXX, described in paragraph 13 above, to Canco #2;

(d) pay the License Amendment Fee of $XXXXXXXXXX, described in paragraph 36 above, to Canco #2; and

(e) pay Debt XXXXXXXXXX.

After the transaction described in this paragraph, Canco #3 will have $XXXXXXXXXX of funds remaining related to the Proposed Transactions.

Sources and Uses of Funds by Canco #2

39. Canco #2 will now have funds on hand of $XXXXXXXXXX relating to the Proposed Transactions, consisting of the funds received from Canco #3, as described in paragraph 38 above.

40. Canco #2 will use a portion of these funds to make a loan (the "Canco #2/Lender #1 Loan") in the amount of $XXXXXXXXXX to Lender #1. The Canco #2/Lender #1 Loan will have a term of XXXXXXXXXX and will bear interest, both before and after maturity, from the date of the advance until payment in full is received by Canco #2. The interest rate from the date of the advance until the date that is XXXXXXXXXX after the date of the advance shall be XXXXXXXXXX% and thereafter will be reset at a rate which is, on such date, equal to the greater of the prime bank rate plus XXXXXXXXXX % and the prescribed rate of interest for the purposes of section 143.2 of the Act. Interest accruing in any year must be paid by Lender #1 to Canco #2 on or before XXXXXXXXXX of the following year.

After the transactions described above in this paragraph, Canco #2 will have $XXXXXXXXXX of funds remaining related to the Proposed Transactions. Lender #1 will prepay interest to Canco #2 on the Canco #2/Lender #1 Loan in the amount of $XXXXXXXXXX, which will be included in the income of Canco #2.

XXXXXXXXXX

41. XXXXXXXXXX.

42. XXXXXXXXXX.

43. XXXXXXXXXX.

44. XXXXXXXXXX place funds on deposit with a Canadian chartered bank to support a revolving type of credit arrangement with a Canadian chartered bank for the benefit of the Operating Partnership (the "Working Capital Loan"). The Working Capital Loan proceeds, if and when drawn down by the Operating Partnership, will be used by Operating Partnership for its working capital purposes.

Sources and Uses of Funds by Canco #2

45. Canco #2 will use:

(a) the $XXXXXXXXXX proceeds of the Canco #2 Loan, described in paragraph 43 above;

(b) the $XXXXXXXXXX of funds received as prepaid interest, described in paragraph 40 above;

(c) the $XXXXXXXXXX Loan Arrangement Fee, described in paragraph 21 above; and

(d) cash on hand of $XXXXXXXXXX, described in paragraph 40 above

to:

(a) repay the $XXXXXXXXXX loan owing to Canco #3, described in paragraph 38 above;

(b) make a loan to Canco #3 in the amount of $XXXXXXXXXX;

(c) pay fees to Lender #3 of $XXXXXXXXXX (which are the costs incurred by Canco #2 associated with earning the Loan Arrangement Fee);

(d) XXXXXXXXXX and

(e) the balance of $XXXXXXXXXX will be retained for working capital purposes.

Sources and Uses of Funds by Canco #3

46. Canco #3 will use the net receipts described in paragraphs 38 and 45 to:

(a) repay Debt XXXXXXXXXX and the Canco #3/OP Note;

(b) pay certain costs and expenses in connection with the offering of Class A Units, including legal, accounting, printing and similar costs, of approximately $XXXXXXXXXX; and

(c) pay other ongoing professional advisory fees including legal, accounting and similar costs, estimated to be approximately $XXXXXXXXXX.

XXXXXXXXXX

47. XXXXXXXXXX.

48. XXXXXXXXXX.

49. XXXXXXXXXX.

50. XXXXXXXXXX.

51. XXXXXXXXXX.

52. XXXXXXXXXX.

XXXXXXXXXX

53. XXXXXXXXXX.

Time Period
Percentage of Excess of Resale Price Over Liquidity Price
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

Allocations and Distributions within the Offering Partnership

54. The partnership agreement for the Offering Partnership will provide that allocations and distributions of income, loss, proceeds of sale and proceeds of refinancing within the Offering Partnership shall be made as follows:

? XXXXXXXXXX percent of income or loss shall be allocated to the Offering General Partner and the remaining income and loss shall be allocated to the holders of the Class A Units. The distribution of such income is at the discretion of the Offering General Partner but, if distributed, shall be distributed in the same manner as such income is allocated. All proceeds of sale and refinancing of Asset #1 (after repayment of any outstanding indebtedness) shall be distributed to the Offering Partnership. Such net proceeds distributed to the Offering Partnership shall be allocated and distributed XXXXXXXXXX percent to holders of the Class A Units and XXXXXXXXXX percent to the Offering General Partner.

? XXXXXXXXXX

(i) any losses will be allocated XXXXXXXXXX percent to the holders of the Class A Units until XXXXXXXXXX, and thereafter shall be allocated XXXXXXXXXX percent to the holders of the Class A Units and XXXXXXXXXX percent to the holders of the Class B Units; and

(ii) all income shall be allocated XXXXXXXXXX percent to the holders of the Class A Units until XXXXXXXXXX, and thereafter shall be allocated XXXXXXXXXX percent to the holders of the Class A Units and XXXXXXXXXX percent to the holders of the Class B Units.

All proceeds of sale and refinancing of the Assets (after repayment of any outstanding indebtedness) shall be distributed to the Offering Partnership. Such proceeds, together with any proceeds of refinancing the Offering Partnership, any proceeds received in connection with the issuance of Class B Units or proceeds from the Creditor #1 Commitment (as defined in paragraph 57 below) shall be allocated and distributed as follows:

(i) the first $XXXXXXXXXX of such amounts to the holders of the Class A Units; and

(ii) any such amounts in excess of $XXXXXXXXXX to be allocated and distributed as to XXXXXXXXXX percent to holders of the Class A Units, as to XXXXXXXXXX percent to the holders of the Class B Units and as to XXXXXXXXXX percent to the Offering General Partner.

The distribution of such income is at the discretion of the Offering General Partner but, if distributed, shall be distributed in the same manner as such income is allocated.

XXXXXXXXXX

Liquidity Rights

55. The Offering Partnership and the Operating Partnership will enter into an agreement (the "Liquidity Rights Agreement") which will provide a mechanism to allow the Class A Unitholders to realize on their indirect investment in the Assets by procedures which will be implemented no later than XXXXXXXXXX. These arrangements are intended to accomplish two principal objectives:

(i) to cause the Assets to be sold at fair market value in order to liquidate the investment; or

(ii) to allow the Offering General Partner alone or with the holders of the Class B Units, if issued, to propose a refinancing transaction which will provide the Class A Unitholders with the same economic result as a sale of the Assets at fair market value.

To accomplish this objective, the Operating General Partner will be authorized and directed to institute a process to offer the Assets for sale at such time, prior to XXXXXXXXXX, as in the reasonable opinion of the Offering General Partner, is necessary in order to maximize the likelihood of a sale of the Assets at fair market value by XXXXXXXXXX.

56. The Operating Partnership agreement will provide that in the event the Liquidity Rights are triggered or XXXXXXXXXX, the Operating Partnership is required to distribute the proceeds realized from the Liquidity Rights to the Offering Partnership. The Offering Partnership agreement will require that the amount so distributed, together with XXXXXXXXXX must, in turn, be distributed by the Offering Partnership in accordance with paragraph 54 above.

Creditor #1 Commitment

57. Creditor #1 has committed (the "Creditor #1 Commitment") to make funds available for distribution by the Offering Partnership to the Class A Unitholders based upon a formula. The formula will, in effect, provide for a payment by Creditor #1 to the Offering Partnership if the funds available for distribution by the Offering Partnership to the Class A Unitholders from proceeds realized from a sale of the Assets under the Liquidity Rights, XXXXXXXXXX or otherwise, are less than certain amounts which will vary based upon, inter alia, cash distributions to Class A Unitholders prior to that time. The maximum amount payable by Creditor #1 under the Creditor #1 Commitment will be approximately $XXXXXXXXXX. Proceeds received by the Offering Partnership in respect of the Creditor #1 Commitment will be distributable as proceeds of sale or refinancing of the Offering Partnership, in the manner contemplated in paragraph 54 above.

PURPOSE OF THE PROPOSED TRANSACTIONS

58. XXXXXXXXXX.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant warranties in paragraphs (i) to (vi) on pages 1 and 2 of this advance income tax ruling, as well as all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as set forth below:

A. Losses for a particular taxation year of the Operating Partnership which are allocated to the Offering Partnership by the Operating Partnership, in accordance with the terms of the partnership agreement referred to in paragraph 31 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 the Offering Partnership at the end of the taxation year of the Offering Partnership in which such taxation year of the Operating Partnership ends, to the extent of the at-risk amount of the Offering Partnership in respect of its interest in the Operating Partnership at the end of that taxation year.

B. Losses for a taxation year of the Offering Partnership which are allocated by the Offering Partnership to the holders of the Class A Units (and Class B Units, if then issued), in accordance with the partnership agreement referred to in paragraph 54 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 or Class B Units at the end of such holder's taxation year in which such taxation year of the Offering Partnership ends, to the extent of the at-risk amount of such Class A Unitholder or Class B Unitholder in respect of the Offering Partnership at the end of that taxation year.

C. Subject to the application of paragraphs 96(2.2)(c) and (d) of the Act, the at-risk amount of the Offering Partnership in respect of the Operating Partnership, at the end of the 2002 taxation year of the Operating Partnership, will be equal to the amount of the Offering Partnership's investment in the OP Units, as described in paragraph 30 above plus any amounts described in paragraphs 96(2.2)(b) and (b.1) of the Act;

D. Subject to the application of paragraphs 96(2.2)(c) and (d) of the Act, the at-risk amount of a Class A Unitholder in respect of the Offering Partnership, at the end of the 2002 taxation year of the Offering Partnership, will be equal to the subscription price for the Class A Unitholder's investment in Class A Units of the Offering Partnership ($150,000 per Class A Unit), as described in paragraph 16 above plus any amounts described in paragraphs 96(2.2)(b) and (b.1) of the Act;

E. In calculating the at-risk amount of:

(a) a Class A Unitholder in respect of the Offering Partnership; or

(b) the Offering Partnership in respect of the Operating Partnership;

none of the following will constitute an amount or benefit for the purposes of paragraph 96(2.2)(d) of the Act and, therefore will not result in a reduction of the at-risk amount of a Class A Unitholder in respect of the Offering Partnership or of the Offering Partnership in respect of the Operating Partnership:

(i) the Liquidity Rights, and XXXXXXXXXX as described in paragraphs 55 and 53 above, respectively;

(ii) XXXXXXXXXX

(iii) the entitlement of the Class A Unitholders of the Offering Partnership to receive priority distributions as described in paragraph 54 above; and

(iv) the transfer to the Operating Partnership of, and the terms of, the Amended License Agreement (and Sharing Arrangement provisions therein), as described in paragraphs 35 to 37 above.

F. In calculating the at-risk amount of:

(a) a Class A Unitholder in respect of the Offering Partnership; or

(b) the Offering Partnership in respect of the Operating Partnership;

the amount of the Creditor #1 Commitment will constitute an amount or benefit for the purposes of paragraph 96(2.2)(d) of the Act and, therefore will result in a reduction of the at-risk amount of a Class A Unitholder in respect of the Offering Partnership and of the Offering Partnership in respect of the Operating Partnership.

G. Subject to the application of subsections 18(9) and (9.2) to (9.8) of the Act, interest described in paragraph 18 above or a reasonable amount in respect thereof, paid in a taxation year or payable in respect of a taxation year by a Class A Unitholder (depending upon the method regularly followed by such Class A Unitholder in computing income) in connection with the Unit Loan will be deductible by such Class A Unitholder in computing income in that taxation year in accordance with subparagraph 20(l)(c)(i) 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.

H. Provided interest in respect of their particular Unit Loan (as described in paragraph 18 above) is paid by a Class A Unitholder no later than 60 days after the end of each of the Class A Unitholder's taxation years in which the Unit Loan is outstanding, and provided "bona fide" repayment arrangements are made in accordance with the provisions of 143.2(7)(a), the Unit Loan will not constitute a limited recourse amount or an at-risk adjustment, within the meaning of those terms in section 143.2 of the Act. Accordingly, the existence of a Unit Loan, where the provisos are also met, will not in and of itself, result in the application of subparagraph 143.2(6)(b)(i) to reduce the cost of a Class A Unitholder's Class A Unit, the cost of the Offering Partnership's OP Units or any expenses of the Offering Partnership or the Operating Partnership in respect of such indebtedness. However, if a Class A Unitholder funds any portion of his or her investment in the Offering Partnership with limited-recourse financing, the provisions of subsection 143.2(6) will apply.

I. The following entitlements will not, in and of themselves, constitute an at-risk adjustment under subsection 143.2(2) or result in the application of subsection 143.2(6):

(i) the Creditor #1 Commitment described in paragraphs 56 and 57;

(ii) the Liquidity Rights, and XXXXXXXXXX described in paragraphs 55 and 53 above, respectively;

(iii) the entitlement of the Class A Unitholders in the Operating Partnership to priority distributions as described in paragraph 54 above;

(iv) the transfer to the Operating Partnership of, and the terms of, the Amended License Agreement (and Sharing Arrangement provisions therein), as described in paragraphs 35 to 37 above; and

(v) XXXXXXXXXX.

J. Any amounts owing by Operating Partnership under the $XXXXXXXXXX Working Capital Loan will constitute a limited recourse amount for purposes of section 143.2 and, therefore, subsection 143.2(6) will operate to reduce the cost or capital cost of any property of the Operating Partnership or the amount of any expenditures made by the Operating Partnership when the proceeds of the Working Capital Loan are applied to acquire property or make expenditures (the "After Acquired Property or Expenditures") and subsections 143.2(10) and (12) will apply to repayments of the Working Capital Loan. The amounts owing under the Working Capital Loan will not result in the application of subsection 143.2(6) to reduce the cost or capital cost of any property of the Operating Partnership (other than the After Acquired Property or Expenditures) or any other expenditure of the Operating Partnership or the Offering Partnership, the cost or capital cost of the OP Units held by the Offering Partnership in the Operating Partnership or a Class A Unitholder's interest in the Offering Partnership.

K. Since the Amended License Agreement (and the Sharing Arrangement provisions therein) will not be an asset of Operating Partnership and since Operating Partnership will not make an expenditure when it acquires the rights and obligations under the Amended License Agreement, no "matchable expenditure" (within the meaning of subsection 18(1) of the Act) will be made by Operating Partnership in connection with the Amended License Agreement, including the Sharing Arrangement provisions thereof, and section 18.1 of the Act will not apply to the Amended License Agreement, including the Sharing Arrangement provisions thereof.

L. The amount of the Loan Arrangement Fee, as described in paragraph 21 above, incurred in connection with a Unit Loan will be deductible by the Class A Unitholder in accordance with the provisions of subparagraph 20(1)(e)(ii) of the Act, to the extent that such amount is reasonable in the circumstances.

M. The amount of the Offering Expense Fee, as described in paragraph 24 above, incurred in connection with the issuance of the Class A Units will be deductible by the Offering Partnership in accordance with the provisions of subparagraph 20(1)(e)(i) of the Act, to the extent that such amount is reasonable in the circumstances.

N. The amount of the Incentive Fee referred to in paragraph 34 will be deductible by the Operating Partnership in the XXXXXXXXXX taxation year to the extent that:

(i) such reporting is not inconsistent with established case law principles or rule of law and with 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.

O. Subsection 103(1) of the Act will not apply to redetermine the allocation of any income or loss of the Offering Partnership as described in paragraph 54 above.

P. Subsection 245(2) of the Act will not apply to redetermine the tax consequences described in the rulings above.

CAVEAT

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 (the "Circular") issued by the CCRA on January 29, 2001, and are binding provided the offering by the Offering Partnership of its Class A Units is completed 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 to the Act.

Nothing in this letter should be construed as implying that the CCRA has agreed to or accepted:

(a) whether the Offering Partnership or the Operating Partnership will have a reasonable expectation of profit;

(b) the reasonableness of any expenditures referred to in this letter;

(c) the fair market value of any expenditures referred to in this letter;

(d) whether or not any persons referred to in this ruling deal at arm's length;

(e) 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 expenses incurred by the Operating Partnership;

(f) whether a Unit held by a Partner is a "tax shelter" or a "tax shelter investment";

(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, other than as expressly stated in this ruling;

(i) whether a Unit held by a Partner is held on income or capital account; and

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

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch