2003 Ruling 2003-0016563 - 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 CCRA.

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

Principal Issues: Creation of two-tier partnership tax shelter structure designed to flow-out CDE, CEE and COGPE to investors incurred by farming-in to Canadian resource properties of a principal business corporation. Numerous issues considered. See Issue Sheet for additional discussion.

Position:

1. Call option granted to Resource Co. to acquire units of limited partnership did not give rise to an at-risk amount reduction under s. 96(2.2)(d) to the limited partners of that partnership or of the limited partners of the "top-tier" partnership.

2. Indemnities given to Manager of limited partnership did not give rise to at-risk reduction under s. 96(2.2)(d).

3. Conversion of working interests earned under farm-in arrangements to net profits interests would not likely be considered matchable expenditures under 18.1.

4. Full amount of capital contributed to partnerships by a partner to be included in at-risk amount of partner.

Reasons:

1. Exercise price will be no greater than the fair market value of the units of the limited partnership subject to the option.

2. Consistent with previous positions, s. 96(2.2)(d) is not to be applied to indemnities inherent in the contractual obligations of parties.

3. Net profits interests acquired on the conversion will likely be Canadian resource properties and therefore not included within "a right to receive production" in s. 18.1.

4. Capital contributed to partnerships will be part of the cost of the partners' partnership interest or added to the adjusted cost base of the partnership interest under s. 53(1)(e)(iv).

XXXXXXXXXX 2003-001656

XXXXXXXXXX, 2003

Dear Sir:

Re: Advance Income Tax Ruling Request -
XXXXXXXXXX
XXXXXXXXXX

This is in response to the letter of XXXXXXXXXX in which an advance income tax ruling was requested on behalf of the taxpayers listed above and your letters of XXXXXXXXXX containing amendments to the original request. We acknowledge our telephone conversations (XXXXXXXXXX) and facsimile correspondence of XXXXXXXXXX 3. In addition, we acknowledge receipt of certain drafts of documentation referred to herein via electronic mail on XXXXXXXXXX. You have advised that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(a) in an earlier return of any of the taxpayers or a related person;

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

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

(d) the subject of a ruling previously issued by the Income Tax Rulings Directorate; or

(e) before the Courts.

Unless otherwise indicated, all statutory references are to the Income Tax Act R.S.C. 1985 (5th Supp.), c. 1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

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

DEFINITIONS

In this letter, the following definitions are used:

(a) "Arm's-length" has the meaning assigned by section 251 of the Act;

(b) "At-risk amount" has the meaning assigned by subsection 96(2.2) of the Act;

(c) "Canadian resource properties" has the meaning assigned by subsection 66(15) of the Act;

(d) XXXXXXXXXX ;

(e) "Confidential Offering Memorandum" has the meaning ascribed thereto in paragraph 13;

(f) "DLP" means XXXXXXXXXX;

(g) "DLP Partnership Agreement" means the partnership agreement for DLP as described in paragraph 34 below;

(h) "Drilling Expenses" has the meaning ascribed thereto in paragraph 8;

(i) "Drilling Loan" has the meaning ascribed thereto in paragraph 11;

(j) "Depreciable property" has the meaning assigned by subsection 13(21) of the Act;

(k) "Equipping Costs" has the meaning ascribed thereto in paragraph 8;

(l) "Farm-In Agreement" has the meaning ascribed thereto in paragraph 7;

(m) "Funding Agreement" has the meaning ascribed thereto in paragraph 29;

(n) "Funding Loan" has the meaning ascribed thereto in paragraph 29;

(o) "General Partner of MLP" means XXXXXXXXXX;

(p) "General Partner of the DLP" has the meaning ascribed thereto in paragraph 6;

(q) "Indemnification Agreement" has the meaning ascribed thereto in paragraph 32;

(r) "Initial Limited Partner" means XXXXXXXXXX, a corporation incorporated under the laws of the Province of XXXXXXXXXX and a subsidiary wholly-owned corporation of XXXXXXXXXX within the meaning of subsection 248(1) of the Act;

(s) "Investment Loan" has the meaning ascribed thereto in paragraph 16;

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

(u) "Lands" means those lands and petroleum and natural gas leases located in Canada which are subject to the Farm-In Agreement;

(v) "Lender" means XXXXXXXXXX, a corporation incorporated under the laws of the Province of XXXXXXXXXX and licensed as a trust company;

(w) "Management Services" has the meaning ascribed thereto in paragraph 24;

(x) "Management Services Agreement" has the meaning ascribed thereto in paragraph 24;

(y) "Management Services Fee" has the meaning ascribed thereto in paragraph 25;

(z) "Manager" means XXXXXXXXXX ., a corporation incorporated under the laws of the Province of XXXXXXXXXX;

(aa) "MLP" means XXXXXXXXXX;

(bb) "MLP Partnership Agreement" means the partnership agreement for MLP as described in paragraph 35 below.

(cc) "MLP Units" means units which represent a partnership interest in MLP as limited partner;

(dd) "Option Agreement" has the meaning ascribed thereto in paragraph 33;

(ee) "Pledge Agreement" has the meaning ascribed thereto in paragraph 30;

(ff) "Promissory Note" has the meaning ascribed thereto in paragraph 30;

(gg) "Put/Call Agreement" has the meaning ascribed thereto in paragraph 28;

(hh) "Resources Co." means XXXXXXXXXX; and

(ii) "Undepreciated capital cost" has the meaning assigned by subsection 13(21) of the Act.

FACTS

1. Initial Limited Partner, Manager and General Partner of MLP are "taxable Canadian corporations" and "Canadian-controlled private corporations" within the meaning of those terms as defined within subsections 89(1) and 125(7) of the Act, respectively.

2. General Partner of MLP's principal business activity will be the provision of management, consultation, administration and financial services to MLP in its capacity as general partner thereof, for a fee plus reimbursement of costs. Its principal business office is in XXXXXXXXXX. General Partner of MLP's Canadian federal tax affairs are administered by the XXXXXXXXXX Tax Services Office. General Partner of MLP files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre.

3. Resources Co. is a "taxable Canadian corporation" and a "public corporation" within the meaning of those terms as defined in subsection 89(1) of the Act. Resources Co. is actively engaged in the business of exploration, development and production of natural gas, natural gas liquids and oil in XXXXXXXXXX. The common shares of Resources Co. are listed on the XXXXXXXXXX Stock Exchange. Its principal business office is in XXXXXXXXXX. Resources Co.'s Canadian federal tax affairs are administered by the XXXXXXXXXX Tax Services Office. Resources Co. files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre.

PROPOSED TRANSACTIONS

Formation of Partnerships

4. MLP will be formed and registered as a limited partnership under the laws of XXXXXXXXXX. Its general partner will be the General Partner of MLP and its initial limited partner will be the Initial Limited Partner. The fiscal period of MLP will end on XXXXXXXXXX.

5. The business of MLP will include the ownership of units in DLP and other limited partnerships similar in form and business activity to DLP. MLP may also acquire interests in limited partnerships that carry out mineral exploration and development activity in Canada and/or limited partnerships that operate mines or mineral resource development properties in Canada. In addition, MLP may acquire directly, or through interests in related partnerships that carry out mining activities, royalties in the form of net smelter returns. The method of financing such activities will be substantially similar to the methods described herein as proposed transactions. The initial limited partnership interest in MLP will be issued to the Initial Limited Partner for a price of $XXXXXXXXXX to facilitate the formation of MLP.

6. DLP will be formed and registered as a limited partnership under the laws of XXXXXXXXXX. A corporation that is a subsidiary of Manager and deals at arm's length with the General Partner of MLP will serve as the general partner of DLP (the "General Partner of the DLP") and will provide services for DLP and other limited partnerships similar to the services provided to MLP by the General Partner of MLP in its capacity as the general partner of MLP. The initial limited partner of DLP will be the Initial Limited Partner. As consideration for acting as general partner of DLP, the General Partner of the DLP will be entitled to receive a fee plus a reimbursement of the costs incurred by it in the course of acting in the capacity as general partner of DLP. DLP will conduct an oil and/or gas drilling program on properties located in Canada pursuant to the form of operating and farm-in arrangements described herein. Its fiscal period will end on XXXXXXXXXX.

Farm-In & Drilling Arrangements

7. Resources Co. will enter into a farm out, drilling and operating agreement ("Farm-In Agreement") with DLP to carry out a multi-well exploration and/or development drilling program on the Lands. The Lands that will be the subject of exploration and drilling activities under the Farm-In Agreement will be Canadian resource properties for which no proven reserves have been attributed.

8. Pursuant to the Farm-In Agreement, DLP will agree to incur up to XXXXXXXXXX% of the drilling expenses associated with drilling certain wells on the Lands and will agree to incur a like percentage of the associated equipping costs. The drilling expenses will qualify as "Canadian exploration expense" ("CEE") or "Canadian development expense" ("CDE") for purposes of the Act (the "Drilling Expenses"). The associated equipping costs will constitute the capital cost of various depreciable properties (the "Equipping Costs"). Accordingly, each such Equipping Cost will be added to the undepreciated capital cost of the appropriate class of depreciable property of DLP, determined in accordance with the Income Tax Regulations, including Schedule II thereto. Resources Co. will be the operator responsible for the drilling of the wells in accordance with a standard industry operating agreement.

9. In consideration for agreeing to incur Drilling Expenses and Equipping Costs associated with the drilling of a particular well on the Lands, DLP will earn a working interest in the well and the relevant portion of the Lands (once the well is drilled to a specified depth under the Farm-In Agreement), which, at DLP's option, may be convertible, in whole or in part, at any time into a net profits interest in the Lands. The purpose of providing DLP with the option to convert its working interests into a net profits interest(s) is to allow DLP to avoid the obligation to contribute to the payment of additional Drilling Expenses and Equipping Costs that may arise by virtue of being a holder of a working interest. The purpose of providing DLP with this option is not to reduce or shield MLP or the Investors from any losses that may be suffered as members of MLP or DLP or from holding or disposing of MLP Units or limited partnership units in DLP.

10. In the event that DLP elects to convert a working interest earned under the Farm-In Agreement (or a portion thereof) into a net profits interest, the net profits interest will have generally the following terms and conditions:

XXXXXXXXXX.

11. During the drilling period, Resources Co. may lend all or a portion of the full amount of the drilling expenses to DLP (the "Drilling Loan"). The Drilling Loan will bear interest at the rate of XXXXXXXXXX% with principal and interest to be paid at the closing of subscriptions by Investors in MLP (to take place in XXXXXXXXXX). Resources Co. will also lend DLP an amount equal to the Goods and Services Tax ("GST") payable on expenses funded by the Drilling Loan and this borrowing shall be repaid forthwith upon DLP receiving the input tax credits in respect of such GST. All amounts loaned or advanced to DLP by Resources Co. will be repaid prior to the end of the first fiscal period of DLP ending on XXXXXXXXXX.

12. Pursuant to the Farm-In Agreement, Resources Co. as the operator will be entitled to receive an operator's fee, XXXXXXXXXX. Resources Co. shall select the Lands subject to the farm-out and in consideration therefor, Resources Co. shall represent that in accordance with standard industry practice, Resources Co. shall use its best efforts to select drilling prospects such that the working interest and/or net profits interest earned may be capable of producing cash flows in excess of costs incurred.

Offering of Units by MLP

13. MLP will offer MLP Units at an estimated subscription price of $XXXXXXXXXX per unit to persons (individuals, corporations, partnerships or other entities) resident in Canada pursuant to registration and prospectus exemptions under applicable securities legislation of most provinces of Canada, by way of a confidential offering memorandum (the "Confidential Offering Memorandum"). The number of MLP Units that may be offered pursuant to the Confidential Offering Memorandum is unlimited. No person in whom there is an interest that is a "tax shelter investment" as defined in subsection 143.2(1) may subscribe for MLP Units. It is expected that the offering of MLP Units will be completed on or about XXXXXXXXXX, but no later than XXXXXXXXXX.

14. The Confidential Offering Memorandum will contain the following statements:

THE RULING OBTAINED FROM CCRA CONTAINS CAVEATS. THE RULING MAY BE VIEWED ON REQUEST SUBJECT TO THE SIGNING OF A CONFIDENTIALITY AGREEMENT.

15. Upon acceptance of subscriptions for the first MLP Units from Investors, MLP will redeem the initial limited partnership interest subscribed for by the Initial Limited Partner and will return the amount of $XXXXXXXXXX to the Initial Limited Partner.

16. Lender will make a loan in an estimated amount of $XXXXXXXXXX per MLP Unit (the "Investment Loan") to each subscriber for MLP Units who wishes to finance a portion of the purchase price in respect of such MLP Units and is approved by Lender to receive such financing. Subscribers for MLP Units will not be obliged to borrow the Investment Loan and will be entitled to purchase MLP Units by payment of the full subscription price in cash. In order to qualify for the Investment Loan, an Investor will be required to deliver a completed Investment Loan application in the form required by Lender together with a promissory note to Lender in the principal amount of the Investment Loan. The Investment Loans will be full recourse loans and each MLP Unit holder who borrows will be obligated to repay the principal amount of the Investment Loan and all interest thereon in accordance with the terms of the Investment Loan. The Investment Loan will be evidenced by a promissory note and will be secured by a pledge and assignment of the MLP Units purchased and an assignment of distributions in respect of the MLP Units so purchased.

17. The principal amount of the Investment Loan will bear interest, both before and after maturity, from the date of advance until repayment in full. Each Investment Loan must be repaid in full no later than XXXXXXXXXX years from the date of advance. The Investment Loans will bear interest from the date of advance and at a rate equal to or greater than the prescribed rate of interest that is described in paragraph 143.2(7)(a) prevailing at the time of the advance. Interest accruing in a particular year on amounts borrowed by an Investor under the Investment Loan must be paid to Lender by the Investor on or before XXXXXXXXXX of the following year. All amounts owing under the Investment Loans will be due and payable in full on or before the date, which is XXXXXXXXXX years from the date of the advance.

18. The Lender will deal at arm's length with all parties referred to herein. XXXXXXXXXX.

19. On closing of the subscriptions for MLP Units, accepted subscription payments will be released to MLP which will issue MLP Units to the Investors whose subscription payments are accepted. In consideration of Lender making the Investment Loans, Investors who borrow from Lender under the terms of an Investment Loan will pay a loan arrangement fee of up to approximately XXXXXXXXXX% of the amount of the Investment Loan. The loan arrangement fee is payable on closing.

20. Each Investor who receives an Investment Loan to finance the subscription of MLP Units will be required to prepay a portion of the interest that will become payable on the Investment Loan. The prepayment will be made by the Investor to Lender and will be approximately $XXXXXXXXXX per MLP Unit subscribed for by the Investor with the proceeds of an Investment Loan.

21. MLP will pay the costs and expenses which may be incurred in connection with the offering by MLP of MLP Units including, without limitation, legal fees, accounting fees, financial service fees, printing costs, travel expenses and other similar costs, as well as sales commissions and placement fees.

22. Subscription proceeds received from Investors net of legal and accounting fees, trustee fees, commission, loan arrangement fees and management services fees will be used by MLP to acquire units representing a limited partnership interest in DLP and to acquire units in other limited partnerships carrying on similar business activities at various times during the year. Each of the acquisitions, including those in units of DLP, will occur before ascertainable net revenues are earned by DLP. The aggregate number of MLP Units issued (and the acquisition of units of DLP or similar limited partnerships) will be dependent upon the amount of Drilling Expenses and Equipping Costs to be incurred in respect of the drilling program undertaken pursuant to the Farm-In Agreement and like arrangements.

Use of Funds by DLP

23. DLP will use the proceeds of subscription for its units to repay the Drilling Loans made to it by Resources Co. during the drilling period as described in paragraph 11 above, other contracted Drilling Expenses and Equipping Costs, if any, and to pay certain management fees and expenses owing by DLP.

Management Services Agreement

24. Manager will enter into a management services agreement (the "Management Services Agreement") with MLP whereby it will agree to provide consulting and management services (the "Management Services") to MLP XXXXXXXXXX.

25. In consideration for rendering the Management Services, Manager will be entitled to receive a fee not exceeding XXXXXXXXXX% of budgeted exploration, development and equipping costs under farm-in or other exploration services agreements entered into by resources limited partnerships of which MLP is a limited partner (such as DLP) (the "Management Services Fee"). Manager will be required to incur a variety of expenses in performing the Management Services, but will not receive any additional fee or payment from MLP to compensate for such expenses. To reflect the fact that Management Services provided by Manager to MLP also benefit a resources limited partnership such as DLP, MLP will be entitled to recover from the resources limited partnership a portion of the Management Services Fee payable to Manager. The amount charged to the resources limited partnership by MLP will be equal to two-thirds of the portion of the Management Services Fee relating to the particular farm-in agreement or other exploration services agreement to which the Management Services have benefited the resources limited partnership.

26. Under the Management Services Agreement, the Manager will agree to indemnify MLP, the partners of MLP and the directors, employees, shareholders and agents of MLP and the General Partner of MLP (in its capacity as the general partner of MLP) (collectively the "Indemnified Parties") from all liabilities of any kind (including, the fees and disbursements of counsel for the Indemnified Parties) incurred in connection with any dispute or claim or imposed on, incurred by, or asserted against the Indemnified Parties arising from or in connection with any breach by the Manager of any of its covenants, agreements, representations or warranties under the Management Services Agreement. However, the indemnity will not apply to liabilities of Indemnified Parties caused by or resulting from the wilful misconduct of an Indemnified Party.

27. Manager and MLP will enter into a General Security Agreement pursuant to which Manager will grant to MLP a security interest over all of Manager's property to secure any judgment debt that MLP may obtain for breach of representations and warranties given by Manager pursuant to the Management Services Agreement.

Other Arrangements

28. Manager will enter into a Put/Call Agreement (the "Put/Call Agreement") with Lender whereby Lender will be granted the right to cause Manager to acquire the indebtedness owing by the Investors who have availed themselves of the Investment Loans. In addition, the agreement will provide Manager with the right to cause Lender to sell such indebtedness to Manager. XXXXXXXXXX. In the event that Manager acquires the Investment Loans in any of the foregoing instances, the terms of the Investment Loans will not be altered from those entered into between Lender and the Investors, Manager will have full recourse against the Investors for repayment of the debt and there is no reason why Manager would not pursue collection of amounts owing by the Investors.

29. XXXXXXXXXX.

30. Pursuant to an agreement among, Manager, Resources Co. and Lender (the "Pledge Agreement"), Resources Co. will agree to secure its obligations to make the working interest or net profit interest payments as and when they are due XXXXXXXXXX.

31. Under the Pledge Agreement, Resources Co. will grant a security interest in the Promissory Note (i) to Lender as general and continuing collateral security for the performance of the respective obligations of Resources Co. and Manager under the Funding Agreement and Put/Call Agreement (ii) to Manager as general and continuing collateral security for the performance of Resource Co.'s obligations XXXXXXXXXX and (iii) to each of Lender and Manager as continuing collateral security for the performance of the obligations of Resources Co. to pay amounts to DLP in respect of the working interests and net profits interests earned pursuant to the Farm-In Agreement. The priority of Lender's security interest in the Promissory Note will rank ahead of Manager's security interest. Manager will also grant to Lender a security interest in Manager's interest in the Promissory Note.

XXXXXXXXXX.

However, the security arrangements described herein will terminate when the Investment Loans are repaid. Upon repayment of the Investment Loans, Lender will repay to Resources Co. all amounts owing on the Promissory Note. As a consequence, amounts deposited by Resources Co. with Lender under the terms of the Pledge Agreement will no longer be available to be applied by Lender to the payment of amounts owing by Resources Co. to DLP in respect of DLP's working interests/net profits interest earned under the Farm-In Agreement.

32. XXXXXXXXXX.

33. MLP will enter into an Option Agreement with Resources Co. (the "Option Agreement") pursuant to which Resources Co. may acquire all, but not less than all of the limited partnership units of DLP. The amount payable by Resources Co. under the Option Agreement will be equal to the lesser of (i) XXXXXXXXXX% of the amount of Drilling Expenses and Equipping Costs paid by DLP pursuant to the Farm-In Agreement and (ii) the fair market value of the limited partnership units of DLP on the exercise date of the option. In addition, the Option Agreement will provide MLP with the option to either sell all, but not less than all of the limited partnership units of DLP to Resources Co. for consideration equal to the fair market value of the limited partnership units of DLP on the exercise date of the option or alternatively, cause DLP to sell the underlying assets of DLP to Resources Co. for consideration equal to the fair market value of such assets on the exercise date of the option. The options granted to Resources Co. and MLP under the Option Agreement may be exercised on XXXXXXXXXX.

Provided Resources Co. continues to be a public corporation, the consideration given by Resources Co. for the limited partnership units of DLP under the Option Agreement may, at Resources Co.'s option, include listed shares of Resources Co.

Allocations and Distributions

34. Pursuant to the DLP Partnership Agreement:

(a) XXXXXXXXXX% of the income or loss of DLP for a particular fiscal period will be allocated to the General Partner of the DLP and the remaining income or loss shall be allocated to MLP, the holder of limited partnership units. The distribution of such income is at the discretion of the General Partner of the DLP but, if distributed, will be distributed in the same manner as such income is allocated. In the event of dissolution, the capital of DLP will be allocated in the same manner;

(b) any distributable cash on hand, as determined by the General Partner of the DLP, will be distributed by DLP to MLP as the holder of limited partnership units. For greater certainty, no cash will be distributed by DLP until its operating expenses have been paid and until its liabilities, including the Drilling Loan, have been repaid in full and provision has been made for such payment; and

(c) CEE, CDE and Canadian Oil and Gas Property Expense ("COGPE") (collectively referred to as "resource expenses") of DLP will be allocated between MLP as the limited partner of DLP and the General Partner of the DLP in the same manner and proportion as income and losses of DLP.

35. Pursuant to the MLP Partnership Agreement:

(a) The limited partners of MLP will be allocated XXXXXXXXXX% of the income, losses and resource expenses of MLP and each such partner will be allocated a portion of such amounts on a pro rata basis based on the number of MLP Units held by such partner at the end of MLP's fiscal period;

(b) The General Partner of MLP will be allocated XXXXXXXXXX% of the income, losses and resource expenses of MLP; and

(c) In the event of dissolution, the capital of MLP will be allocated as described in paragraphs (a) and (b) above.

36. MLP will distribute to its partners all revenues it receives from DLP after payment of the Management Services Fee. In accordance with the pledge of MLP Units described in paragraph 16 above, all distributions to Investors who have an outstanding Investment Loan will be assigned by such Investors to the Lender to pay accrued interest and/or repay the principal owing on the Investment Loan. In the event that cash distributions from MLP are insufficient to enable Investors to repay their Investment Loans, the Investors will be personally responsible for the shortfall on the basis that the Investment Loans represent unconditional, full recourse obligations of the Investors. The transaction agreements will contain no setoff, or other mechanisms that will protect the Investors from insolvency of either DLP or MLP. For greater certainty, there are no assurances that the amount of any cash distributions from DLP to MLP or from MLP to the Investors will be sufficient to fund interest payments and to fully repay the Investment Loans.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to afford Canadian investors the opportunity to invest directly in the Canadian oil and gas and mining industries and to participate financially in the revenue generated from the sale of production from successful oil and/or gas wells and mines or from mineral resource royalties. The proposed drilling fund will facilitate the drilling of exploration and development wells in Canada and will provide an alternative financial product to flow-through shares.

RULINGS GIVEN

Provided that the statement of facts, the proposed transactions and the purposes thereof, all as described above, are accurate and constitute complete disclosure of all of the representations, relevant facts, proposed transactions and the purposes thereof and provided further that all of the proposed transactions are carried out as described above, and that all the relevant facts and proposed transactions described are or will be legally effective, we hereby confirm the following:

A. The amount of any CEE, CDE and COGPE incurred by DLP in a particular fiscal period of DLP that is allocated in the same manner as income or losses of DLP are allocated pursuant to the DLP Partnership Agreement as described in paragraph 34 above will, subject to section 66.8, be included in the CEE, CDE and COGPE of such partners pursuant to paragraph (h) of the definition of CEE in subsection 66.1(6), paragraph (f) of the definition of CDE in subsection 66.2(5) and paragraph (b) of the definition of COGPE in subsection 66.4(5), respectively, and the amounts of CEE, CDE and COGPE so included in the CEE, CDE and COGPE of MLP will be deemed to have been incurred by MLP at the end of the particular fiscal period of DLP pursuant to subsections 66(16) and 66(18), but only for the purposes of the provisions to which subsection 66(18) applies.

B. The amount of any CEE, CDE and COGPE incurred by DLP in a fiscal period of DLP that ends within a particular fiscal period of MLP, determined with reference to section 66.8, that is deemed to be incurred by MLP in the particular fiscal period of MLP for the purposes to which subsection 66(18) applies, will be CEE, CDE and COGPE of the partners of MLP at the end of the particular fiscal period of MLP pursuant to paragraph (h) of the definition of CEE in subsection 66.1(6), paragraph (f) of the definition of CDE in subsection 66.2(5) and paragraph (b) of the definition of COGPE in subsection 66.4(5), respectively, as allocated to such partners in accordance with the income and loss allocations set out in the MLP Partnership Agreement as described in paragraph 35 above.

C. Resources Co. will not have proceeds of disposition with respect to the disposition of Canadian resource properties as a result of farming out the Lands to DLP pursuant to the Farm-In Agreement as described in paragraphs 7 through 10 above.

D. Subject to section 66.8, a Drilling Expense incurred by DLP in a particular fiscal period of DLP as contemplated by the Farm-In Agreement, the amount of which is allocated in the same manner as income or losses of DLP are allocated pursuant to the DLP Partnership Agreement to the partners of DLP at the end of the particular fiscal period of DLP, will be considered to be CEE or CDE:

(a) of such partners pursuant to paragraph (h) of the definition of CEE in subsection 66.1(6) and paragraph (f) of the definition CDE in subsection 66.2(5), respectively; and

(b) incurred by such partners for the purposes of the provisions to which subsection 66(18) applies, at the end of that fiscal period by the partners of DLP at such time pursuant to subsections 66(16) and 66(18),

provided that such Drilling Expense is, in the case of CEE, described within paragraphs (a), (b) or (d) of the definition of CEE in subsection 66.1(6) and not within any of paragraphs (j) through (o) of that definition or, in the case of CDE, within paragraphs (a) or (b) of the definition of CDE in subsection 66.2(5) and not within any of paragraphs (h) through (k) of that definition.

E. DLP will be entitled to add the amount of any Equipping Cost incurred by it pursuant to the Farm-In Agreement to the capital cost of depreciable property of a prescribed class, determined in accordance with the Income Tax Regulations, including Schedule II thereto.

F. Subject to subsection 96(2.1), losses for a particular fiscal period of DLP which are allocated to MLP in accordance with the terms of the DLP Partnership Agreement described in paragraph 34 above will be losses of MLP that are deductible in computing the income or loss of MLP for the fiscal period of MLP in which such fiscal period of DLP ends.

G. Subject to subsection 96(2.1), losses for a particular fiscal period of MLP which are allocated by MLP to the holders of MLP Units in accordance with the MLP Partnership Agreement described in paragraph 35 above will be losses of such holders that are deductible in computing the income or loss of such holder for the taxation year or fiscal period in which such fiscal period of MLP ends.

H. Subject to the application of paragraphs 96(2.2)(b), (b.1) and (c), the at-risk amount of MLP in respect of DLP at the end of DLP's fiscal period ending December 31, 2003 will be equal to the aggregate amount of MLP's capital contributions to DLP that are described in paragraph 22 above plus any reasonable costs of acquiring the limited partnership units of DLP incurred by MLP that are included in MLP's adjusted cost base of such units to the extent that MLP or a person with whom MLP does not deal at arm's length, does not receive or obtain any amount or benefit referred to in paragraph 96(2.2)(d), other than an amount or benefit excluded by one of subparagraphs 96(2.2)(d)(i), (iii), (vi) or (vii).

I. Subject to the application of paragraphs 96(2.2)(b), (b.1) and (c), the at-risk amount of an Investor in MLP at the end of MLP's fiscal period ending XXXXXXXXXX will be equal to the full amount of the subscription price paid by the Investor for the Investor's MLP Units plus any reasonable costs of acquiring the MLP Units incurred by the Investor that are included in the Investor's adjusted cost base of such MLP Units, to the extent that the Investor or a person with whom the Investor does not deal at arm's length, does not receive or obtain any amount or benefit referred to in paragraph 96(2.2)(d), other than an amount or benefit excluded by one of subparagraphs 96(2.2)(d)(i), (iii), (vi) or (vii).

J. In calculating the at-risk amount of MLP's limited partnership units in DLP and the at-risk amount of an Investor, none of the following will constitute or give rise to 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 an Investor or the at-risk amount of MLP as the holder of limited partnership units in DLP:

(i) the grant to Resources Co. of the option to acquire limited partnership units in DLP described in paragraph 33 above;

(ii) the grant to Manager of the right to acquire Investment Loans from Lender and the grant to Lender of the right to sell Investment Loans to Manager under the Put/Call Agreement described in paragraph 28 above;

(iii) the exercise by Manager of the right to acquire Investment Loans from Lender or the exercise by Lender of the right to sell Investment Loans to Manager under the Put/Call Agreement described in paragraph 28 above;

(iv) the right to convert a working interest in the Lands for a net profit interest in the Lands described in paragraphs 9 and 10 above;

(v) XXXXXXXXXX;

(vi) the indemnification described in paragraph 26 above;

(vii) the General Security Agreement described in paragraph 27 above;

(viii) XXXXXXXXXX; and

(ix) the Pledge Agreement described in paragraphs 30 and 31 above.

K. Subject to the application of subsections 18(9) and (9.2) to (9.8) of the Act, provided that an Investor has a legal obligation to pay interest on the Investment Loan and the Investor uses the money borrowed under the Investment Loan for the purpose of earning income from a business or property (other than to acquire property the income from which would be exempt or to acquire a life insurance policy), the Investor will be entitled, pursuant to subparagraph 20(1)(c)(i), to deduct the interest paid or payable on the Investment Loan in respect of the taxation year of the Investor (depending on the method regularly followed by the Investor in computing the Investor's income for the purposes of the Act), to the extent such amount is reasonable.

L. Provided interest in respect of the Investment Loan of an Investor in MLP is paid by the Investor no later than 60 days after the end of the Investor's taxation year in which the Investment Loan is outstanding, and provided bona fide arrangements are made for the repayment of the Investment Loan within a reasonable time in accordance with the provisions of paragraph 143.2(7)(a) of the Act, the Investment Loan will not constitute a limited recourse amount or an at-risk adjustment to the Investor (other than an Investor that is a partnership described in subsection 143.2(8)), within the meaning of those terms in section 143.2 of the Act.

M. The following will not, in and of themselves, be considered to be an at-risk adjustment within the meaning of subsection 143.2(2) or cause a reduction in the amount of any expenditure described herein pursuant to subsection 143.2(6):

(i) the grant to Resources Co. of the option to acquire limited partnership units in DLP described in paragraph 33 above;

(ii) the grant to Manager of the right to acquire Investment Loans from Lender and the grant to Lender of the right to sell Investment Loans to Manager under the Put/Call Agreement described in paragraph 28 above;

(iii) the exercise by Manager of the right to acquire Investment Loans from Lender or the exercise by Lender of the right to sell Investment Loans to Manager under the Put/Call Agreement described in paragraph 28 above;

(iv) the right to convert a working interest in the Lands for a net profit interest in the Lands described in paragraphs 9 and 10 above;

(v) XXXXXXXXXX;

(vi) the indemnification described in paragraph 26 above;

(vii) the General Security Agreement described in paragraph 27 above;

(viii) XXXXXXXXXX ; and

(ix) the Pledge Agreement described in paragraphs 30 and 31 above.

N. The amount of the loan arrangement fee incurred in connection with an Investment Loan, as described in paragraph 19 above, will be deductible by the Investor 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.

O. Subsection 103(1) of the Act will not apply to re-determine the allocation of any income or loss of MLP as described in paragraph 35 above.

P. As a result of the proposed transactions described herein, in and by themselves, subsection 245(2) of the Act will not apply to re-determine the tax consequences described in the rulings above.

Q. Subsection 246(1) of the Act will not apply to any of the proposed transactions referred to herein.

OPINIONS

A. Provided that the draft legislation contained in subsection 27(7) of the Legislative Proposals and Explanatory Notes Relating to Income Tax published by the Department of Finance on December 20, 2002 is enacted in substantially the same form as proposed and provided that 90% or more of the amounts payable to DLP in respect of the net profits interest that it may acquire in the circumstances described herein are payable out of or from the proceeds of the production from oil and gas wells or from natural accumulations of petroleum substances situated in Canada, it is our opinion that section 18.1 of the Act will not apply to restrict the deductibility of CDE, CEE or COGPE allocated to the Investors who acquire MLP Units and the deductibility of the capital cost of depreciable property in respect of Equipping Costs in computing the income of DLP.

B. Provided that the draft legislation contained in subsection 2(1) of the Proposed Amendments to the Income Tax Act Related to the Deductibility of Interest and Other Expenses Related to a Source published by the Department of Finance on December 31, 2003 is enacted in substantially the same form as proposed, it is our opinion that an Investor will only have a loss from a source of income of MLP for a fiscal period of MLP that ends in a particular taxation year of the Investor commencing after 2004 if it is reasonable to expect that MLP will realize a cumulative profit from the particular source of income of MLP, determined without reference to any capital gains that MLP could reasonably be expected to recognize from dispositions of capital property used in gaining or producing income from such source, and taking into account any outlays or expenses of the Investor that are applicable to such source.

COMMENTS

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 (the "Circular") issued by the CCRA on May 17, 2002, and are binding provided the offering of MLP Units described in paragraph 13 above is completed on or before XXXXXXXXXX. As stated in paragraph 7 of the Circular, rulings are not provided for transactions that are not seriously contemplated and are hypothetical in nature. Therefore, notwithstanding that MLP may be subscribing for limited partnership interests in a number of other resources limited partnerships (as referred to in paragraphs 5, 22, 24 and 25 above and as disclosed in the "PURPOSES OF THE PROPOSED TRANSACTIONS"), we are not ruling on MLP's investment in any limited partnerships other than its investment in DLP described herein.

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

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

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

(d) whether any particular expenditure that will be incurred in accordance with the terms of the Farm-In Agreement constitutes CEE, CDE, COGPE (except as expressly stated in the above opinion), or the capital cost of depreciable property;

(e) whether an MLP Unit held by an Investor is a "tax shelter investment";

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

(g) whether paragraph 96(2.2)(d) of the Act is applicable, other than as expressly stated in this ruling;

(h) whether an MLP Unit held by an Investor is held on income or capital account; and

(i) any other tax consequences of the proposed transactions or of related transactions or events whether or not described herein.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch