2003 Ruling 2003-0033453 - INTEREST DEDUCTIBILITY QUALIFIED CORPORATION

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: Loss consolidations of Sistercos

Position: Similar to previous loss consolidations

Reasons: ITA

XXXXXXXXXX 							2003-003345

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling in respect of Proposed Transactions of
XXXXXXXXXX ("Topco");
XXXXXXXXXX ("Aco");
XXXXXXXXXX ("Bco");
XXXXXXXXXX ("Cco");
XXXXXXXXXX ("Dco");
XXXXXXXXXX ("Eco");
XXXXXXXXXX ("Fco");
XXXXXXXXXX ("Gco");
XXXXXXXXXX ("Hco");
XXXXXXXXXX ("Ico"); and
XXXXXXXXXX ("Lossco")

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above taxpayers.

To the best of your knowledge and that of the taxpayers involved, the proposed transactions will not impact the ability of the taxpayers involved to pay their existing tax liabilities.

To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request are:

(i) dealt with in an earlier return of the taxpayers or a related person, except for the issues, if any, relating to previous loss consolidation transactions described in Paragraphs 28 and 29;

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

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

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

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

DEFINITIONS

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

(a) XXXXXXXXXX;

(b) "Aco" means XXXXXXXXXX;

(c) "Aco Demand Loan" has the meaning assigned by Paragraph 38;

(d) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof, and unless otherwise stated, a reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act and the regulations thereunder are referred to as the "Regulations";

(e) "adjusted cost base" has the meaning assigned by section 54;

(f) "affiliated persons" has the meaning assigned by subsection 251.1(1);

(g) XXXXXXXXXX;

(h) "Bco" means XXXXXXXXXX;

(i) "Bco Demand Loan" has the meaning assigned by Paragraph 38;

(j) XXXXXXXXXX;

(k) "Canadian film or video production" has the meaning assigned by subsection 1106(3) of the Regulations;

(l) "Canadian film or video production business" means a business of producing Canadian film or video productions, and the distribution, marketing, and sale of merchandising rights in respect of those productions;

(m) "Canadian film or video production tax credit" has the meaning assigned by subsection 125.4(3);

(n) "capital cost allowance" refers to the deduction allowed under paragraph 20(1)(a);

(o) "CBCA" means the Canada Business Corporations Act, as amended;

(p) "Cco" means XXXXXXXXXX;

(q) "Cco Demand Loan" has the meaning assigned by Paragraph 38;

(r) XXXXXXXXXX;

(s) "Daylight Loan" has the meaning assigned by Paragraph 36;

(t) "Dco" means XXXXXXXXXX;

(u) "Dco Demand Loan" has the meaning assigned by Paragraph 38;

(v) "Demand Loan" means any of the Aco Demand Loan, Bco Demand Loan, Cco Demand Loan, Dco Demand Loan, Eco Demand Loan, Fco Demand Loan, Gco Demand Loan, Hco Demand Loan, or Ico Demand Loan as the case may be, referred to collectively as the "Demand Loans";

(w) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(x) "Eco" means XXXXXXXXXX;

(y) "Eco Demand Loan" has the meaning assigned by Paragraph 38;

(z) "Fco" means XXXXXXXXXX;

(aa) "Fco Demand Loan" has the meaning assigned by Paragraph 38;

(bb) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(cc) "forgiven amount" has the meaning assigned by subsection 80(1) or 80.01(1);

(dd) "Gco" means XXXXXXXXXX;

(ee) "Gco Demand Loan" has the meaning assigned by Paragraph 38;

(ff) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(gg) "Hco" means XXXXXXXXXX;

(hh) "Hco Demand Loan" has the meaning assigned by Paragraph 38;

(ii) "Ico" means XXXXXXXXXX;

(jj) "Ico Demand Loan" has the meaning assigned by Paragraph 38;

(kk) "investor" has the meaning assigned by subsection 125.4(1);

(ll) "Lossco" means XXXXXXXXXX;

(mm) "Lossco Demand Loan" has the meaning assigned by Paragraph 37;

(nn) "Lossco Preferred Shares" has the meaning assigned by Paragraph 35;

(oo) "non-capital loss" has the meaning assigned by subsection 111(8);

(pp) XXXXXXXXXX;

(qq) "paid-up capital" has the meaning assigned by subsection 89(1);

(rr) "Paragraph" means a numbered paragraph in this advance income tax ruling;

(ss) "prescribed taxable Canadian corporation" has the meaning assigned by subsection 1106(2) of the Regulations;

(tt) "principal amount" has the meaning assigned by subsection 248(1);

(uu) "Proposed Transactions" means the transactions described in Paragraph 36 to Paragraph 43;

(vv) "public corporation" has the meaning assigned by subsection 89(1);

(ww) "qualified corporation" has the meaning assigned by subsection 125.4(1);

(xx) "series of transaction or events" means "series of transactions or events" for purposes of the Act as modified by subsection 248(10);

(yy) "specified financial institution" has the meaning assigned by subsection 248(1);

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

(aaa) "taxable dividend" has the meaning assigned by subsection 89(1);

(bbb) "TC" means Taxation Centre;

(ccc) "Topco" means XXXXXXXXXX; and

(ddd) "TSO" means Tax Services Office.

STATEMENT OF FACTS

1. Topco was incorporated under the CBCA on XXXXXXXXXX. Topco is a public corporation, and a taxable Canadian corporation. Topco's mailing address is: XXXXXXXXXX.

2. Topco has an XXXXXXXXXX year-end, files its tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Topco's federal tax account number is XXXXXXXXXX.

3. XXXXXXXXXX.

4. Aco is a taxable Canadian corporation governed by the XXXXXXXXXX. Aco's mailing address is the same as Topco's noted in Paragraph 1. Aco has an XXXXXXXXXX taxation year-end and files its federal income tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Aco's federal tax account number is XXXXXXXXXX.

5. Cco owns all of the shares of the capital stock of Aco. XXXXXXXXXX.

6. Bco is a taxable Canadian corporation governed by the XXXXXXXXXX . Bco's mailing address is the same as Topco's noted in Paragraph 1. Bco has an XXXXXXXXXX taxation year-end and files its federal income tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Bco's federal tax account number is XXXXXXXXXX.

7. XXXXXXXXXX owns all of the shares of the capital stock of Bco. Topco owns all of the shares of XXXXXXXXXX.

8. Cco is a taxable Canadian corporation governed by the CBCA. Cco's mailing address is the same as Topco's noted in Paragraph 1. Cco has an XXXXXXXXXX taxation year-end and files its federal income tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Cco's federal tax account number is XXXXXXXXXX.

9. All of the common shares of Cco are owned by XXXXXXXXXX. All of the common shares of XXXXXXXXXX are owned by XXXXXXXXXX. Topco owns all of the common shares of XXXXXXXXXX . The preferred shares of Cco, XXXXXXXXXX are owned by Topco and various direct and indirect subsidiaries of Topco. XXXXXXXXXX

10. Dco is a taxable Canadian corporation governed by the XXXXXXXXXX Dco's mailing address is the same as Topco's noted in Paragraph 1. Dco has an XXXXXXXXXX taxation year-end and files its federal income tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Dco's federal tax account number is XXXXXXXXXX.

11. All of the shares of the capital stock of Dco are owned by XXXXXXXXXX. Topco owns all of the common shares of XXXXXXXXXX. The preferred shares of XXXXXXXXXX are owned by various direct and indirect subsidiaries of Topco. XXXXXXXXXX.

12. Eco is a taxable Canadian corporation governed by the XXXXXXXXXX. Eco's mailing address is the same as Topco's noted in Paragraph 1. Eco has an XXXXXXXXXX taxation year-end and files its federal income tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Eco's federal tax account number is XXXXXXXXXX.

13. All of the common shares of the capital stock of Eco are owned by XXXXXXXXXX. Further, all of the common shares of XXXXXXXXXX are owned by Topco; and all of the preferred shares of Eco are owned by Topco. XXXXXXXXXX.

14. Fco is a taxable Canadian corporation governed by the XXXXXXXXXX. Fco's mailing address is the same as Topco's noted in Paragraph 1. Fco has an XXXXXXXXXX taxation year-end and files its federal income tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Fco's federal tax account number is XXXXXXXXXX.

15. All of the shares of the capital stock of Fco are owned by XXXXXXXXXX.

16. Gco is a taxable Canadian corporation governed by the XXXXXXXXXX. Gco's mailing address is the same as Topco's address noted in Paragraph 1. Gco has an XXXXXXXXXX taxation year-end and files its federal income tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Gco's federal tax account number is XXXXXXXXXX.

17. All of the shares of the capital stock of Gco are owned by Cco. XXXXXXXXXX.

18. Hco is a corporation formed by the amalgamation of XXXXXXXXXX Hco is a taxable Canadian corporation governed by the CBCA. Hco's mailing address is the same as Topco's address noted in Paragraph 1. Hco has an XXXXXXXXXX taxation year-end and files its federal income tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Hco's federal tax account number is XXXXXXXXXX.

19. All of the shares of the capital stock of Hco are owned by XXXXXXXXXX.

20. Ico is a taxable Canadian corporation governed by the XXXXXXXXXX. Ico's mailing address is the same as Topco's address noted in Paragraph 1. Ico has an XXXXXXXXXX taxation year-end and files its federal income tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Ico's federal tax account number is XXXXXXXXXX.

21. All of the shares of the capital stock of Ico are owned by XXXXXXXXXX.

22. Lossco is a taxable Canadian corporation and a prescribed taxable Canadian corporation, and is governed by the laws of the XXXXXXXXXX. Lossco's mailing address is XXXXXXXXXX. Lossco has an XXXXXXXXXX taxation year-end and files its federal income tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Lossco's federal tax account number is XXXXXXXXXX.

23. Lossco's shares are owned by XXXXXXXXXX. Each of XXXXXXXXXX are wholly-owned subsidiaries of XXXXXXXXXX Lossco carries on a Canadian film or video production business XXXXXXXXXX Lossco has XXXXXXXXXX employees, of which XXXXXXXXXX employees are directly engaged in its Canadian film or video production business; and of which XXXXXXXXXX employees provide administrative support for the Canadian film or video production business. Lossco produced XXXXXXXXXX Canadian film or video productions in XXXXXXXXXX Canadian film or video productions in XXXXXXXXXX and Lossco expects to produce XXXXXXXXXX Canadian film or video productions in XXXXXXXXXX.

24. All or substantially all of Lossco's gross revenue is derived from its Canadian film or video production business; all or substantially all of its assets are devoted to its Canadian film or video production business; all or substantially all of its capital is employed in its Canadian film or video production business; and all or substantially all of the time, attention and effort expended by its employees, agents or officers is devoted to its Canadian film or video production business.

25. Lossco was a qualified corporation in XXXXXXXXXX , and expects to be a qualified corporation in XXXXXXXXXX.

26. As at XXXXXXXXXX, Lossco had no non-capital losses carried forward; however, it is estimated that the non-capital loss for federal tax purposes for the taxation year ending XXXXXXXXXX will be approximately $XXXXXXXXXX. Included in the non-capital loss for tax purposes is capital cost allowance of approximately $XXXXXXXXXX, of which approximately $XXXXXXXXXX is attributable to capital cost allowance on XXXXXXXXXX. It is estimated that Lossco's income for tax purposes in the next few years will not be sufficient to utilize the non-capital losses and undeducted expenses that will be available to it. All or substantially all of the losses that Lossco will realize in its XXXXXXXXXX taxation year can be attributed to its Canadian film or video production business.

27. The federal taxable income reported by each of Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, and Ico for its taxation year ended on XXXXXXXXXX is summarized in the following chart along with their expected federal taxable income for the year ending XXXXXXXXXX.

Company
Taxable Income XXXXXXXXXX
Taxable Income XXXXXXXXXX
Estimated Taxable Income
XXXXXXXXXX
Aco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Bco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Cco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Dco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Eco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Fco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Gco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Hco 1
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Ico
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Each of Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, and Ico's estimated federal taxable income for its taxation year ending XXXXXXXXXX is expected to be in excess of the interest charged annually on the respective Demand Loan (as described in Paragraph 38).

28. When Topco was created on XXXXXXXXXX it owned, inter alia, XXXXXXXXXX preferred shares of Cco and XXXXXXXXXX preferred shares of Eco (i.e., these preferred shares were redeemable at $XXXXXXXXXX per share and entitled the holder to cumulative dividends). Topco has entered into the following loss consolidation arrangements with respect to these preferred shares:

a) On XXXXXXXXXX Topco sold the XXXXXXXXXX preferred shares of Eco to Cco in exchange for an interest bearing promissory note due on demand from Cco ("Old Cco Note").

b) On XXXXXXXXXX Topco sold the XXXXXXXXXX preferred shares of Cco to Bco (i.e., XXXXXXXXXX preferred shares); to Fco (i.e., XXXXXXXXXX preferred shares); and to XXXXXXXXXX (i.e., XXXXXXXXXX preferred shares) in exchange for interest bearing promissory notes due on demand (i.e., principal amounts of $XXXXXXXXXX respectively referred to as "Old Bco Note 1"; "Old Fco Note"; and "Old XXXXXXXXXX Note").

c) On XXXXXXXXXX sold the XXXXXXXXXX preferred shares of Cco back to Topco in exchange for the cancellation of its $XXXXXXXXXX promissory note. Topco then sold the XXXXXXXXXX preferred shares of Cco to Bco in exchange for an interest bearing promissory note due on demand with a principal amount of $XXXXXXXXXX (i.e., "Old Bco Note 2").

29. In XXXXXXXXXX, Topco and certain of its subsidiaries entered into a series of loss consolidation arrangements intended to transfer income to Topco from certain of its profitable subsidiaries. In particular, Topco and certain of its subsidiaries entered into the following arrangements:

a) Topco transferred its common shares of Aco to Cco in exchange for an interest-bearing promissory note from Cco for $XXXXXXXXXX (the "Cco Note A") and common shares of Cco. Topco and Cco will elect pursuant to subsection 85(1) to effect the exchange at an agreed amount equal to the principal amount of the Cco Note A (which is equal to Topco's tax cost of the Aco shares and the fair market value of the Cco Note A). Topco then transferred its common shares of Cco to XXXXXXXXXX. in exchange for shares therein. The purpose of the creation of the Cco Note A was to generate interest income in Topco to offset its accumulated non-capital losses and to create an equivalent interest deduction in Cco.

b) Topco transferred its common and preferred shares of Ico and XXXXXXXXXX to XXXXXXXXXX in exchange for an interest-bearing promissory note of XXXXXXXXXX in the amount of $XXXXXXXXXX ("XXXXXXXXXX Note A") and common shares of XXXXXXXXXX. Topco and XXXXXXXXXX will elect pursuant to subsection 85(1) to transfer the shares on a tax-deferred basis. The elected amount will equal the greater of the fair market value of XXXXXXXXXX Note A received on the transfer and the adjusted cost base of the shares transferred. The purpose of the creation of the XXXXXXXXXX Note A was to generate interest income in Topco to be able to offset its accumulated non-capital losses and to create an equivalent interest deduction in XXXXXXXXXX.

c) Topco transferred its common shares of Eco to XXXXXXXXXX in exchange for common shares thereof. Topco and XXXXXXXXXX will elect pursuant to subsection 85(1) to transfer the shares on a tax-deferred basis. The elected amount will equal the adjusted cost base of the shares transferred. Topco then exchanged its common shares of XXXXXXXXXX for both common and preferred shares of XXXXXXXXXX. Topco and XXXXXXXXXX will elect pursuant to subsection 85(1) to transfer the shares on a tax-deferred basis. The elected amount will equal the adjusted cost base of the shares transferred. Topco then sold its XXXXXXXXXX preferred shares to Cco in exchange for an interest-bearing promissory note having a principal amount of $XXXXXXXXXX ("Cco Note B"). The purpose of this series of transactions was to create the Cco Note B between Topco and Cco to generate interest income in Topco and an equivalent interest expense in Cco.

d) Topco transferred its common shares of Dco to XXXXXXXXXX in exchange for common shares of XXXXXXXXXX on a tax-deferred basis pursuant to subsection 85(1). Topco and XXXXXXXXXX will elect pursuant to subsection 85(1) to transfer the Dco shares at an elected amount equal to the adjusted cost base of the shares transferred. Topco then exchanged its common shares of XXXXXXXXXX for new common shares and preferred shares of XXXXXXXXXX on a tax-deferred basis pursuant to subsection 85(1). Topco and XXXXXXXXXX will elect pursuant to subsection 85(1) on the exchange at the adjusted cost base of the shares transferred. Topco then sold its preferred shares of XXXXXXXXXX to the following group companies in exchange for interest-bearing promissory notes thereof:

Number of Preferred Shares
Fair Market Value
Principal Amount

Aco
XXXXXXX
XXXXXXXXX
XXXXXXXXX

"Aco Note"

Bco
XXXXXXX
XXXXXXXXX
XXXXXXXXX

"Bco Note"

Cco
XXXXXXX
XXXXXXXXX
XXXXXXXXX

"Cco Note C"

XXXXXXXX .

XXXXXXX
XXXXXXXXX
XXXXXXXXX

"XXXXXXX Note"

XXXXXXX
XXXXXXXXX
XXXXXXXXX

The purpose of this series of transactions was to create the Aco Note, Bco Note, Cco Note C, and XXXXXXXXXX Note between Topco and Aco, Bco, Cco, and XXXXXXXXXX to generate interest income in Topco and an equivalent interest expense in the four companies purchasing the preferred shares of XXXXXXXXXX.

e) Topco transferred its common shares of XXXXXXXXXX to XXXXXXXXXX in exchange for common shares of XXXXXXXXXX on a tax-deferred basis pursuant to subsection 85(1). Topco and XXXXXXXXXX will elect under subsection 85(1) to effect the exchange at the adjusted cost base of the XXXXXXXXXX shares. Topco then exchanged its common shares of XXXXXXXXXX for preferred shares and common shares of XXXXXXXXXX on a tax-deferred basis pursuant to subsection 85(1). Topco and XXXXXXXXXX will elect pursuant to subsection 85(1) on the exchange at the adjusted cost base of the shares transferred. Topco then sold its preferred shares of XXXXXXXXXX to the following group companies in exchange for interest-bearing promissory notes thereof:

Number of Preferred Shares
Fair Market Value
Principal Amount

XXXXXXXXXX
XXXXXXX
XXXXXXXX
XXXXXXX

"XXXXXXXX Note B"

Bco
XXXXXXX
XXXXXXXX
XXXXXXX

"Bco Note B"

Fco
XXXXXXX
XXXXXXXX
XXXXXXX

"Fco Note"

XXXXXXXXXX
XXXXXXX
XXXXXXXX
XXXXXXX

"XXXXXXXX Note"

XXXXXXXXXX
XXXXXXX
XXXXXXXX
XXXXXXX

"XXXXXXXX Note"

XXXXXXX
XXXXXXXX
XXXXXXX

The purpose of this series of transactions was to create the XXXXXXXXXX Note B, Bco Note B, Fco Note, XXXXXXXXXX Note, and the XXXXXXXXXX Note to generate interest income in Topco and an equivalent interest expense in the five companies purchasing the preferred shares of XXXXXXXXXX.

30. On XXXXXXXXXX, Topco unwound the loss consolidation transaction described in Paragraph 28(a) by subscribing for XXXXXXXXXX preferred shares of Eco in exchange for contributing the Old Cco Note to Eco. The preferred shares are non-participating, non-voting, entitle the holder to an annual non-cumulative dividend and are redeemable at any time at the option of the holder or Eco. A joint election will be made pursuant to subsection 85(1) of the Act to transfer the note at an elected amount equal to the lesser of the adjusted cost base and fair market value of the note transferred. Eco then redeemed the XXXXXXXXXX preferred shares held by Cco and Eco issued a demand promissory note to Cco (the "New Eco Note") in satisfaction of the redemption amount. The Old Cco Note and New Eco Note were then set-off and each of the notes was cancelled.

31. On XXXXXXXXXX, Topco unwound a portion of the loss consolidation transactions described in Paragraphs 28(b) and (c) by subscribing for XXXXXXXXXX preferred shares of Cco in exchange for contributing the Old Bco Note 1 and Old Bco Note 2. The preferred shares are non-participating, non-voting, entitle the holder to an annual non-cumulative dividend and are redeemable at any time at the option of the holder or Cco. A joint election will be made pursuant to subsection 85(1) of the Act to transfer the each of the notes at an elected amount equal to the lesser of the adjusted cost base and fair market value of the note transferred. Cco then redeemed its XXXXXXXXXX preferred shares held by Bco and Cco issued a demand promissory note to Bco (the "New Cco Note 1") in satisfaction of the redemption amount. The Old Bco Note 1 and Old Bco Note 2 were then set-off against a corresponding portion of the New Cco Note 1 and each of these notes was cancelled.

On XXXXXXXXXX Topco unwound the rest of the loss consolidation transactions described in Paragraphs 28(b) and (c) by subscribing for XXXXXXXXXX preferred shares of Cco in exchange for contributing the Old Fco Note. The preferred shares are non-participating, non-voting, entitle the holder to an annual non-cumulative dividend and are redeemable at any time at the option of the holder or Cco. A joint election will be made pursuant to subsection 85(1) of the Act to transfer the note at an elected amount equal to the lesser of the adjusted cost base and fair market value of the note transferred. Cco then redeemed its XXXXXXXXXX preferred shares held by Fco and Cco issued a demand promissory note to Fco (the "New Cco Note 2") in satisfaction of the redemption amount. The Old Fco Note was set-off against the New Cco Note 2 and each of these notes was cancelled.

32. On XXXXXXXXXX Topco unwound the loss consolidation transactions described in Paragraph 29(c) by transferring the Cco Note B to XXXXXXXXXX in exchange for XXXXXXXXXX class B common shares of Belcand having a fair market value of $XXXXXXXXXX. A joint election will be made pursuant to subsection 85(1) of the Act to transfer the note at an elected amount equal to the lesser of the adjusted cost base and fair market value of the note transferred. XXXXXXXXXX then redeemed its issued and outstanding preferred shares held by Cco and XXXXXXXXXX issued a demand promissory note (the "XXXXXXXXXX Note") in satisfaction of the redemption amount. The Cco Note B was set-off against the XXXXXXXXXX Note and each of the notes was cancelled.

33. On XXXXXXXXXX Topco unwound part of the loss consolidation transactions described in Paragraph 29(d) by transferring its Cco Note C to XXXXXXXXXX for XXXXXXXXXX class D common shares having a fair market value of $XXXXXXXXXX. A joint election will be made pursuant to subsection 85(1) of the Act to transfer the note at an elected amount equal to the lesser of the adjusted cost base and fair market value of the note transferred. XXXXXXXXXX then redeemed its XXXXXXXXXX preferred shares held by Cco and issued a demand promissory note (the "XXXXXXXXXX Note A") in satisfaction of the redemption amount. The Cco Note C was set-off against the XXXXXXXXXX Note A and each of these notes was cancelled.

On XXXXXXXXXX Topco unwound part of the loss consolidation transactions described in Paragraph 29(d) by transferring its Aco Note to XXXXXXXXXX for XXXXXXXXXX class D common shares having a fair market value of $XXXXXXXXXX. A joint election will be made pursuant to subsection 85(1) of the Act to transfer the note at an elected amount equal to the lesser of the adjusted cost base and fair market value of the note transferred. XXXXXXXXXX then redeemed its XXXXXXXXXX preferred shares held by Aco and issued a demand promissory note (the "XXXXXXXXXX Note B") in satisfaction of the redemption amount. The Aco Note was set-off against the XXXXXXXXXX Note B and each of these notes was cancelled.

On XXXXXXXXXX Topco unwound part of the loss consolidation transactions described in Paragraph 29(d) by transferring its Bco Note to XXXXXXXXXX for XXXXXXXXXX class D common shares having a fair market value of $XXXXXXXXXX. A joint election will be made pursuant to subsection 85(1) of the Act to transfer the note at an elected amount equal to the lesser of the adjusted cost base and fair market value of the note transferred. XXXXXXXXXX then redeemed its XXXXXXXXXX preferred shares held by Bco and issued a demand promissory note (the "XXXXXXXXXX Note C") in satisfaction of the redemption amount. The Bco Note was set-off against the XXXXXXXXXX Note C and each of these notes was cancelled.

34. On XXXXXXXXXX Topco unwound part of the loss consolidation transactions described in Paragraph 29(e) by transferring its Bco Note B to XXXXXXXXXX in exchange for XXXXXXXXXX class A common shares having a fair market value of $XXXXXXXXXX. A joint election will be made pursuant to subsection 85(1) of the Act to transfer the note at an elected amount equal to the lesser of the adjusted cost base and fair market value of the note transferred. XXXXXXXXXX then redeemed its XXXXXXXXXX preferred shares held by Bco and issued a demand promissory note (the "XXXXXXXXXX Note A") in satisfaction of the redemption amount. The Bco Note B was set-off against the XXXXXXXXXX Note A and each of these notes was cancelled.

Topco unwound part of the loss consolidation transactions described in Paragraph 29(e) by transferring its Fco Note to XXXXXXXXXX in exchange for XXXXXXXXXX class A common shares having a fair market value of $XXXXXXXXXX. A joint election will be made pursuant to subsection 85(1) of the Act to transfer the note at an elected amount equal to the lesser of the adjusted cost base and fair market value of the note transferred. XXXXXXXXXX . then redeemed its XXXXXXXXXX preferred shares held by Fco and issued a demand promissory note (the "XXXXXXXXXX Note B") in satisfaction of the redemption amount. The Fco Note was set-off against the XXXXXXXXXX Note B and each of these notes was cancelled.

34A. In order to simplify the corporate structure, the following transactions were completed on XXXXXXXXXX:

(i) Topco exchanged XXXXXXXXXX class D common shares of XXXXXXXXXX for XXXXXXXXXX preferred shares and one class B common share of XXXXXXXXXX. A joint election will be made pursuant to subsection 85(1) of the Act to transfer the note at an elected amount equal to the lesser of the adjusted cost base and fair market value of the note transferred.

(ii) XXXXXXXXXX transferred XXXXXXXXXX preferred shares of XXXXXXXXXX to Topco in exchange for XXXXXXXXXX preferred shares of XXXXXXXXXX and a demand promissory note due from Topco ("Topco Note A") having a principal amount of $XXXXXXXXXX .

(iii) The Topco Note A was set-off against a corresponding portion of the XXXXXXXXXX Note. The Topco Note A was cancelled and the principal amount of the XXXXXXXXXX Note was reduced to $XXXXXXXXXX.

(iv) XXXXXXXXXX transferred XXXXXXXXXX preferred shares of XXXXXXXXXX to Topco in exchange for XXXXXXXXXX preferred shares XXXXXXXXXX and a demand promissory note due from Topco ("Topco Note B") having a principal amount of $XXXXXXXXXX.

(v) The Topco Note B was set-off against a corresponding portion of the XXXXXXXXXX Note B. The Topco Note B was cancelled and the principal amount of the XXXXXXXXXX Note B was reduced to $XXXXXXXXXX.

(vi) Topco transferred XXXXXXXXXX preferred shares of XXXXXXXXXX to XXXXXXXXXX in exchange for a demand promissory note having a principal amount of $XXXXXXXXXX.

(vii) Topco transferred the remaining XXXXXXXXXX preferred shares of XXXXXXXXXX to XXXXXXXXXX in exchange for XXXXXXXXXX class A common shares of XXXXXXXXXX. A joint election will be made pursuant to subsection 85(1) of the Act to transfer the note at an elected amount equal to the lesser of the adjusted cost base and fair market value of the note transferred.

35. Lossco amended its Articles of Incorporation to provide for the ability to issue preferred shares and a class of preferred shares was created (the "Lossco Preferred Shares"). The Lossco Preferred Shares have rights and restrictions described as follows:

(a) the shares are non-participating and non-voting;

(b) the shares are entitled to an annual cumulative dividend at an annual rate applied to the redemption amount of the shares. It is anticipated that the dividend rate will be approximately XXXXXXXXXX% per year, which will likely be XXXXXXXXXX% higher than the expected interest rate on the Demand Loans;

(c) the shares are redeemable at any time at the option of the holder or Lossco:

(i) for cash for an amount equal to the aggregate of the fair market value of the consideration for which the shares were issued and any unpaid dividends; or

(ii) by setting off amounts owing to the shareholder against the redemption price of the Lossco Preferred Shares and paying cash equal to any unpaid dividends; and
(d) the redemption amount was set at $XXXXXXXXXX per share.

PROPOSED TRANSACTIONS

36. Topco will borrow an amount in Canadian dollars within its normal borrowing capacity not exceeding $XXXXXXXXXX on a daylight basis from an arm's-length financial institution (the "Daylight Loan").

37. Topco will lend, in Canadian dollars and on a demand basis, the proceeds of the Daylight Loan received in Paragraph 36 to Lossco (the "Lossco Demand Loan"). The terms of the Lossco Demand Loan will be as follows:

(a) the Lossco Demand Loan will be subordinated to external debt;

(b) the Lossco Demand Loan will bear interest, payable annually in arrears, at a rate which will be determined based on market rates of interest charged on indebtedness having similar terms and risk at the time the Lossco Demand Loan is granted.

38. Lossco will lend, in Canadian dollars and on a demand basis, the proceeds of the Lossco Demand Loan received in Paragraph 37. Each of the Demand Loans will not exceed the "additional debt capacity" of the respective company, as described below.

Principal Amount not to exceed
Collectively, the "Demand Loans"
Aco
XXXXXXXXXX

"Aco Demand Loan"

Bco
XXXXXXXXXX

"Bco Demand Loan"

Cco
XXXXXXXXXX

"Cco Demand Loan"

Dco
XXXXXXXXXX

"Dco Demand Loan"

Eco
XXXXXXXXXX

"Eco Demand Loan"

Fco
XXXXXXXXXX

"Fco Demand Loan"

Gco
XXXXXXXXXX

"Gco Demand Loan"

Hco
XXXXXXXXXX

"Hco Demand Loan"

Ico
XXXXXXXXXX

"Ico Demand Loan"

XXXXXXXXXX

The terms of each of the Demand Loans will be as follows:

(a) the Demand Loans will be subordinated to external debt;

(b) the Demand Loans will bear interest, payable annually in arrears, at a rate which will be determined based on market rates of interest charged on indebtedness having similar terms and risk at the time the particular Demand Loan is granted; and

(c) repayment of any of the Demand Loans may be settled in cash or by way of set-off against any redemption required in respect of the Lossco Preferred Shares, as described in Paragraph 35.

Based on financial projections of Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, and Ico each company has the financial capacity to pay the interest on the respective Demand Loan from its own cash flow (i.e., its net accounting income before depreciation and taxes). Topco has provided confirmation, in a letter from XXXXXXXXXX, that the maximum debt capacity of Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, and Ico is summarized as follows:

Aco
XXXXXXXXXX
Bco
XXXXXXXXXX
Cco
XXXXXXXXXX
Dco
XXXXXXXXXX
Eco
XXXXXXXXXX
Fco
XXXXXXXXXX
Gco
XXXXXXXXXX
Hco
XXXXXXXXXX
Ico
XXXXXXXXXX

XXXXXXXXXX

"Additional debt capacity" of each of the companies can be determined by reducing the above noted amounts by existing debt of each of the companies. It is anticipated that the additional debt capacity for each of the companies at XXXXXXXXXX will be as follows:

Company
Debt Capacity per XXXXXXXXXX Letter
Anticipated Intercompany Debt At XXXXXXXXXX
Additional Debt Capacity
Aco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Bco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Cco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Dco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Eco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Fco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Gco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Hco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Ico
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Total
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Each of Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, and Ico will use the proceeds of their respective Demand Loans to subscribe for Lossco Preferred Shares having an aggregate redemption amount and stated capital equal to the principal amount of their respective Demand Loans.

39. Lossco will use the proceeds from the Lossco Preferred Share subscription by Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, and Ico to repay the Lossco Demand Loan.

40. Topco will use the proceeds from the repayment of the Lossco Demand Loan to repay the Daylight Loan.

41. (a) Aco will pay interest to Lossco on the Aco Demand Loan annually.

(b) Bco will pay interest to Lossco on the Bco Demand Loan annually.

(c) Cco will pay interest to Lossco on the Cco Demand Loan annually.

(d) Dco will pay interest to Lossco on the Dco Demand Loan annually.

(e) Eco will pay interest to Lossco on the Eco Demand Loan annually.

(f) Fco will pay interest to Lossco on the Fco Demand Loan annually.

(g) Gco will pay interest to Lossco on the Gco Demand Loan annually.

(h) Hco will pay interest to Lossco on the Hco Demand Loan annually.

(i) Ico will pay interest to Lossco on the Ico Demand Loan annually.

42. Lossco will pay annual dividends on the Lossco Preferred Shares.

43. When all or part of the Proposed Transactions are to be unwound, Lossco will require repayment of all or part of the respective Demand Loan and Lossco will be required by Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco and/or Ico, as the case may be, to redeem all or part of the Lossco Preferred Shares held by that entity having a fair market value equal to the amount of the Demand Loan to be repaid. As described in Paragraphs 35 and 38, the redemption proceeds will be satisfied by way of set-off of the obligation arising on the redemption against such portion of the Demand Loan being repaid.

ADDITIONAL INFORMATION

44. Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, and Ico and Lossco are neither "specified financial institutions" nor "financial intermediary corporations".

45. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) is or will be, at any time during the implementation of the Proposed Transactions described herein:

(a) the subject of a dividend rental arrangement; or

(b) the subject of a guarantee agreement;

46. Lossco is an "affiliated person" of each of Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco and Ico.

47. After the Proposed Transactions are implemented, Lossco will earn interest income. Although this interest income will exceed the profits realized by Lossco from the Canadian film or video production business, economically Lossco will have little income from the Proposed Transactions, as the dividends that will be paid by Lossco will approximately equal the interest income that it will receive. The majority of Lossco's transactions will be attributed to its Canadian film or video production business and Lossco's gross sales from its Canadian film or video production business will be significantly greater than the interest income that it will earn. Further, all or substantially all of the time, attention and efforts expended by the employees, agents or officers of Lossco will be attributed to its Canadian film or video production business.

PURPOSE OF THE PROPOSED TRANSACTIONS

The overall purpose of the Proposed Transactions is to effectively consolidate profits and losses within the Topco affiliated group by enabling Lossco to earn sufficient interest income, over a period of time, so as to utilize the non-capital loss that it expects to generate in its taxation year ending XXXXXXXXXX and future years.

The loss utilization transactions described in paragraph 28 and a portion of the loss utilization transactions described in paragraph 29 are being unwound because sufficient interest income has been created in Topco such that the structure is no longer required and to free up additional debt capacity in certain of Topco's profitable subsidiaries.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant warranties 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. Provided that Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, and Ico have a legal obligation to pay interest on the respective Demand Loan issued in Paragraph 38, and that Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco and Ico continue to hold the Lossco Preferred Shares, each of Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco and Ico will be entitled, pursuant to paragraph 20(1)(c), to deduct the lesser of (i) the interest paid or payable (depending on the method regularly followed by Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, and Ico in computing its income for purposes of the Act) in respect of the year on the respective Demand Loan or (ii) a reasonable amount in respect thereof.

B. Provided that Lossco meets the conditions to be a qualified corporation, the Proposed Transactions, in and by themselves, will not cause Lossco to cease to be a qualified corporation.

C. Provided that subsection 125.4(4) does not otherwise apply, the Proposed Transactions, in and by themselves, will not cause the provisions of subsection 125.4(4) to apply to Lossco.

D. As a result of the Proposed Transactions, in and by themselves, subsection 245(2) will not apply to redetermine the tax consequences confirmed in the rulings given.

CAVEAT

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 Proposed Transactions described in Paragraphs 36 to 40 are 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:

(i) the cost or fair market value of any property referred to in this letter;

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

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

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate

ENDNOTES

1 Aggregate taxable income of predecessor corporations for XXXXXXXXXX
.../cont'd

2

.../cont'd