2011 Ruling 2010-0374221R3 - XXXXXXXXXX

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.

Principal Issues: 1) Whether the cost of the Distribution Licence acquired by the Partnership will be added to the capital cost of the Partnership’s Class 14 assets for the purposes of paragraph 20(1)(a) of the Act and Schedule II to the Regulations. 2) In accordance with the provisions of paragraph 1100(1)(c) of the Regulations, whether the Partnership will be entitled to deduct amounts in respect of the capital cost of the Distribution Licence using a gross income forecast method of depreciation resulting in the apportionment of the cost in accordance with revenue projections over its ten-year term described. 3) Whether the Distribution Licence will be a “leasing property” to the Partnership within the meaning of the term as defined in subsection 1100(17) of the Regulations.

Position: 1) Yes; 2) Fact dependent; and 3) No.

Reasons: 1) Meet the Class 14 definition. 2) we are not able to give an advance income tax ruling that would be binding on the CRA on this issue because our opinion is that such a determination can only be made on an audit basis and will depend on a number of factors, which will include a verification of the Partnership’s gross revenue projections and whether these gross revenue projections have been properly attributed to the appropriate fiscal year of the Partnership. 3) The Partnership will earn revenues from its exploitation of the Distribution Licence.

XXXXXXXXXX
2010-037422
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: XXXXXXXXXX - Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of XXXXXXXXXX (the “Partnership”) and XXXXXXXXXX (the “General Partner”). We also acknowledge the supplemental information provided during our various telephone conversations.

We understand that none of the issues involved in the ruling request is:

(a) dealt with in an earlier return of the General Partner, Producer or that of a related person;

(b) being considered by a Tax Services Office or a Tax Centre in connection with a previously filed tax return of the General Partner, Producer or that of a related person;

(c) the subject of any notice of objection by the General Partner, Producer or a related person;

(d) before the courts or is or has otherwise been under appeal by the General Partner, Producer or a related person; or

(e) the subject of a ruling previously issued by the CRA to the General Partner, Producer or a related person.

This advance income tax ruling is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Unless otherwise stated, all references to a statute 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 definitions unless otherwise indicated. All amounts referred to herein are denominated in Canadian dollars, unless otherwise noted.

DEFINITIONS

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

(a) “Chain of Title Documentation” establishes ownership or licence to the intellectual property rights necessary to permit the Picture to be exploited fully and without restriction by the Producer and the Partnership;

(b) “CCA” means the capital cost allowance claimed in respect of capital property for a taxation year pursuant to paragraph 20(1)(a) of the Act and the Regulations;

(c) “Class A Priority Distribution Amount”, at any time, means the subscription price of the Class A Units less any cash or other Partnership property distributed or, in the opinion of the General Partner, distributable at or before that time to the holders of the Class A Units;

(d) “Class A Unitholder” means an owner of Class A Units;

(e) “Class A Units” means Class A Units of the Partnership having the rights and restrictions described in the Partnership Agreement, which rights and restrictions are summarized in paragraphs 10, 13 and 14 below;

(f) “Class B Priority Distribution Amount”, at any time, means XXXXXXXXXX % of the subscription price of the Class B Units less any cash or other Partnership property distributed or, in the opinion of the General Partner, distributable at or before that time of the holders of the Class B Units;

(g) “Class B Unitholder” means an owner of Class B Units;

(h) “Class B Units” means Class B Units of the Partnership having the rights and restrictions described in the Partnership Agreement, which rights and restrictions are summarized in paragraphs 10, 13 and 14 below;

(i) “Completion Bond” means a standard form of insurance obtained by the Producer from a third party guaranteeing that the Producer will complete and deliver the Picture to the Partnership;

(j) “Distribution Agreement” means the distribution agreement between the Partnership and Producer, whereby the Producer grants distribution rights in respect of the Picture to the Partnership, as described in paragraph 33;

(k) “Distribution Licence” means the rights acquired by the Partnership under the Distribution Agreement;

(l) “Excluded Receipts” means XXXXXXXXXX ;

(m) “Film Labour Credits” means the Canadian Film or Video Production tax credit pursuant to subsection 125.4(3) of the Act, the XXXXXXXXXX , and the XXXXXXXXXX ;

(n) “General Partner” means XXXXXXXXXX , the general partner of the Partnership;

(o) “Initial Limited Partner” means the initial limited partner of the Partnership, XXXXXXXXXX ;

(p) “Investor” means a Class A Unitholder in the Partnership;

(q) “Investor Loan” means a loan from the Lending Institution to an Investor in respect of the Investor’s purchase of Class A Units in the Partnership, as described below in paragraphs 25 to 28;

(r) “Lending Institution” means XXXXXXXXXX ;

(s) “Limited Partner” means a limited partner in the Partnership;

(t) “Partnership” means XXXXXXXXXX ;

(u) “Partnership Agreement” means the Limited Partnership Agreement dated XXXXXXXXXX ;

(v) “Picture” means the XXXXXXXXXX film that satisfies the conditions outlined in paragraph 8(b) herein, and which isXXXXXXXXXX ;

(w) “Producer” means XXXXXXXXXX ;

(x) “Production Loan” means amounts to be advanced XXXXXXXXXX , as described in paragraph XXXXXXXXXX ;

(y) “Regulations” means the Income Tax Regulations, C.R.C., c. 945, as amended to the date hereof;

(z) “Sales Agent” means XXXXXXXXXX ;

(aa) “Term” has the meaning ascribed thereto in the Distribution Agreement;

(BB) “Term Sheet” means the term sheet for the offering of Class A units of the Partnership.

(cc) “The Listed Agreements” mean collectively the following agreements:

(dd) The “Term Sheet” which outlines the offering of Class A Units in the Partnership;

(ee) The “Partnership Agreement” which outlines the business of the Partnership for its ten-year term;

(ff) The “Investor Loan Application” and “Pledge Form” which apply to the loan portion of the subscription price;

(gg) The “Investor Purchase Agreement” and “Power of Attorney” which cover the purchase by accredited investors of Class A Units in the Partnership;

(hh) The “Producer Loan Agreement” which provides the terms and conditions of the production loan from the Partnership to the Producer;

(ii) The “Distribution Agreement” which governs the Producer’s license of XXXXXXXXXX distribution rights to the Partnership; and

(jj) The “Sub-Distribution Joint Venture Agreement” which governs the Partnership’s further license of some of the XXXXXXXXXX distribution rights it has obtained from the Producer.

The General Partner and Producer represent that there are no provisions in the Listed Agreements that conflict with the facts and proposed transactions outlined in this advance income tax ruling.

FACTS

1. The Producer is a corporation incorporated under the XXXXXXXXXX . Its principal office is located at XXXXXXXXXX . Its taxation centre is XXXXXXXXXX . The Producer’s business number is XXXXXXXXXX . All the shares of the Producer are owned by XXXXXXXXXX .

2. The General Partner is a corporation incorporated under the XXXXXXXXXX . The General Partner was incorporated on XXXXXXXXXX under the name XXXXXXXXXX . Its principal office is located in XXXXXXXXXX . Its Tax Services Office is XXXXXXXXXX and its taxation centre is XXXXXXXXXX . The General Partner’s business number is XXXXXXXXXX . The General Partner’s shares are owned by XXXXXXXXXX .

3. The Partnership is a limited partnership formed in XXXXXXXXXX on XXXXXXXXXX pursuant to the XXXXXXXXXX . The Partnership will have a calendar fiscal year-end commencing on XXXXXXXXXX . The general partner of the Partnership is XXXXXXXXXX . The Initial Limited Partner of the Partnership is XXXXXXXXXX .

4. The Sales Agent is XXXXXXXXXX .

5. The Sub-Distributor is XXXXXXXXXX .

6. The General Partner, on behalf of the Partnership, intends to acquire distribution rights to the Picture pursuant to the Distribution Agreement.

7. For the Picture, the General Partner established the Partnership for the following purposes:

(a) to acquire the XXXXXXXXXX distribution rights for the Picture and to exploit those rights as an active distributor;

(b) to lend monies to the Producer, thereby enabling the Producer to finance and produce the Picture;

(c) to invest any surplus funds of the Partnership in interest-bearing deposits pending the identification of other suitable investments consistent with its objectives; and

(d) to explore new initiatives in financing and acquiring distribution rights for one or more additional theatrical productions or television programs.

8. The following is a short outline of the General Partner’s application of its business purposes to the Picture:

(a) The General Partner established the Partnership to facilitate and encourage Canadian investment in distribution rights to XXXXXXXXXX films. On behalf of the Partnership, the General Partner intends to acquire distribution rights and provide distribution advances to a series of certified Canadian productions that will be produced by the Producer XXXXXXXXXX in XXXXXXXXXX , and released to exhibitors worldwide;

(b) In addition to obtaining the advance income tax ruling, the General Partner has established several criteria that must be satisfied before a limited partnership may invest in a motion picture. These include:

(i) the Producer must provide sources of funding to cover approximately XXXXXXXXXX the Picture’s budget;

(ii) the Producer must satisfy the General Partner that XXXXXXXXXX are sufficient to establish market interest in the Picture;

(iii) the Lending Institution must satisfy all of its internal, security and legal criteria, including a Completion Bond, and receive approval from its risk committee in order to complete the remaining financing of the Picture;

(iv) the Picture must qualify for certification as a Canadian Film or Video Production, as defined in the Regulations to the Income Tax Act (Canada); and

(v) the Partnership must be satisfied that the revenue estimates, XXXXXXXXXX , are a proper basis for the Partnership to reasonably expect to be profitable in relation to the cost of the Partnership’s interest in the Picture and other Partnership expenses.

(c) The Producer will be required to prove to the satisfaction of the Partnership and the Lending Institution that:

(i) the Producer has licensed clear chain of title to the Picture, as supported, inter alia, by fully-executed Chain of Title Documentation;

(ii) the Picture’s financing is likely to close within the XXXXXXXXXX month period following the issuance of this ruling letter;

(iii) the Producer has obtained a Completion Bond for the Picture with takeover rights that the completion guarantor can exercise on behalf of the Partnership; and

(iv) all of the criteria in paragraph 8(b), above, have been met.

(d) The Picture will be a XXXXXXXXXX film intended for worldwide theatrical release that will be produced at XXXXXXXXXX .

(e) The Producer will produce the Picture.

(f) Subject to execution of all the Chain of Title Documentation, the Producer will acquire or be assigned the film rights to the Picture.

(g) The Producer will retain XXXXXXXXXX rights to the Picture and share in up to XXXXXXXXXX percent (XXXXXXXXXX %) of the net revenues earned by the Picture XXXXXXXXXX .

(h) In exchange for providing XXXXXXXXXX to the Producer and providing XXXXXXXXXX to finance XXXXXXXXXX , the Partnership will licence XXXXXXXXXX rights to the Picture XXXXXXXXXX for a term of XXXXXXXXXX years. Once the Partnership accepts the Picture from the Producer, the Partnership will be responsible to fulfill all delivery requirements outside Canada.

(i) For its aggregate investment, the Partnership will be entitled to XXXXXXXXXX , and the remaining XXXXXXXXXX percent (XXXXXXXXXX %) share of the net revenues generated in all media.

(j) The Partnership will recoup its contributions to the Picture before the Producer and any other net revenue participants receive their shares. The net revenues are the gross receipts from all media earned XXXXXXXXXX less the costs of prints, advertising, and marketing; commissions (including those payable to the Partnership); distribution expenses; XXXXXXXXXX ; repayments of deferrals; and any “participations” or residual payments. On behalf of the Partnership, the General Partner will negotiate, coordinate and monitor the distribution transactions. Gross receipts do not include XXXXXXXXXX .

(k) In exchange for distribution rights, the Partnership will provide XXXXXXXXXX $XXXXXXXXXX to the Picture and participate in the Picture’s financing by XXXXXXXXXX $XXXXXXXXXX to the Producer. The Partnership’s XXXXXXXXXX will be a XXXXXXXXXX ; will bear interest at a rate of XXXXXXXXXX %, computed annually; interest will be payable annually; and the full amount of the principal will be repayable in full by no later than XXXXXXXXXX .

9. To determine the profitability of the Partnership’s XXXXXXXXXX , the General Partner evaluated the Picture within a range of comparable XXXXXXXXXX movies and XXXXXXXXXX believes that the Partnership should reasonably expect to earn a profit for purposes of subsection 9(1) of the Act.

10. Limited partnership interests in the Partnership are divided into the General Partner Interest, the Initial Limited Partner Interest, Class A Units and Class B Units, having the following rights and restrictions:

(a) The General Partner Interest is XXXXXXXXXX % of all profits and losses of the Partnership from any source;

(b) The Initial Limited Partner Interest is XXXXXXXXXX % of all profits and losses of the Partnership from any source until such time as the Initial Limited Partner’s interest is redeemed (following admission of one or more Class B Unitholders), after which the Initial Limited Partner will cease to have any interest in the profits or losses of the Partnership;

(c) Class B Unitholders will be allocated XXXXXXXXXX % of all profits and losses of the Partnership from any source until they have been allocated sufficient aggregate net profits (that is, total allocated profits minus total allocated losses) to XXXXXXXXXX of $XXXXXXXXXX ;

(d) Thereafter, Class A Unitholders will be allocated XXXXXXXXXX % of all profits and losses of the Partnership from any source until they have been allocated sufficient aggregate net profits (that is, total allocated profits minus total allocated losses) to XXXXXXXXXX of $XXXXXXXXXX ;

(e) Once both the Class A Priority Distribution Amount and the Class B Priority Distribution Amount are XXXXXXXXXX , and at all times thereafter, the Class A and Class B Unitholders will be allocated XXXXXXXXXX % of all profits and losses of the Partnership from any source on a pro-rata basis according to the number of Units held and the General Partner will be allocated XXXXXXXXXX % of such profits and losses, provided that:

(i) Once the Partnership collects additional profits of $XXXXXXXXXX , the Class A and Class B Unitholders will be allocated XXXXXXXXXX % of all profits and losses of the Partnership from any source on a pro-rata basis according to the number of units held and the General Partner will be allocated XXXXXXXXXX %;

(ii) Once the Partnership collects additional profits of $XXXXXXXXXX , the Class A and Class B Unitholders will be allocated XXXXXXXXXX % of all profits and losses of the Partnership from any source on a pro-rata basis according to the number of units held and the General Partner will be allocated XXXXXXXXXX %; and

(iii) Once the Partnership collects additional profits of $XXXXXXXXXX , the Class A and Class B Unitholders will be allocated XXXXXXXXXX % of all profits and losses of the Partnership from any source on a pro-rata basis according to the number of units held and the General Partner will be allocated XXXXXXXXXX %.

11. Until the Class B Priority Distribution Amount and the Class A Priority Distribution Amount have been XXXXXXXXXX , as contemplated by sections 10(c) and 10(d), above, the General Partner will be entitled to earn a management fee equal to XXXXXXXXXX percent (XXXXXXXXXX %) of the gross revenues of the Picture. Once the General Partner is entitled to an allocation pursuant to section 10(e), above, the allocation will be inclusive of the management fee. The General Partner’s management fee is not calculated or collected on XXXXXXXXXX .

12. The Partnership’s profit or loss will be computed at the end of each Partnership fiscal period in accordance with well-accepted business principles in the motion picture industry. The Partnership’s income or loss for tax purposes will be computed on the same principles except: (i) that the Partnership may in its discretion also claim XXXXXXXXXX ; and (ii) where other specific provisions of the Act apply.

13. Other than the allocations and distributions described above, the Class A Units will have the same rights and restrictions as the Class B Units. Each Limited Partner will have one vote per partnership unit held.

14. Cash distributions will be made to Class A and Class B Unitholders in accordance with section 10, above.

15. The Producer is unrelated to the General Partner and will be unrelated to each of the Limited Partners of the Partnership.

16. All Limited Partners will be unrelated to one another and the General Partner.

17. The Lending Institution is XXXXXXXXXX .

PROPOSED TRANSACTIONS

18. The Partnership will offer Class B Units for sale to XXXXXXXXXX (the “Class B Unitholders”).

19. The Class B Unitholders will subscribe for Class B Units at $XXXXXXXXXX per unit and aggregate subscription proceeds of approximately $XXXXXXXXXX .

20. The Class B Unitholders may pay the purchase price for their Class B Units from their own cash sources or may finance the purchase price. The Class B Unitholders will be responsible for arranging their own financing, if required or desired. The Partnership will have no involvement in any financing arrangements made by Class B Unitholders. Class B Unitholders will be required to represent in their subscription agreements that any debt financing is not a “limited recourse amount” as defined in subsections 143.2(6), (7) or (13) of the Act, nor is recourse limited in any manner whatsoever under the ordinary legal meaning of that term.

21. The full subscription price for Class B Units will be due and paid on the initial closing date. Class B Units will be issued by the Partnership once the purchase price is fully paid.

22. Immediately following the first subscription for Class B Units by a Class B Unitholder, the Initial Limited Partner’s interest in the Partnership will be redeemed for the amount of the Initial Limited Partner’s original capital contribution of $XXXXXXXXXX .

23. Once the Class B Units are fully subscribed, the Partnership will then offer Class A Units to Investors pursuant to registration and prospectus exemptions available where the Class A Units are offered for sale. The sale of Class A Units will occur without issuing an Offering Memorandum, if it is determined that a potential Investor meets eligibility requirements under applicable securities laws, although a Term Sheet will be distributed to Investors. XXXXXXXXXX

XXXXXXXXXX

24. Investors will subscribe for Class A Units for $XXXXXXXXXX each, with targeted aggregate subscription proceeds of $XXXXXXXXXX .

25. Investors will have the option but will not be required to finance approximately XXXXXXXXXX % of the purchase price of their Class A Units by way of an Investor Loan.

26. Each potential Investor wishing to finance a portion of the purchase price of their Class A Units will apply to the Lending Institution for an Investor Loan. The Lending Institution will use its own internal criteria for the approval of a potential Investor for an Investor Loan, and will do its own due diligence in assessing the credit-worthiness of a potential Investor. It is expected that the criteria adopted by the Lending Institution for approval of a potential Investor will be the same criteria used by the Lending Institution for making personal loans of equivalent value to Canadian resident individuals. Each Investor must be approved by the Lending Institution before obtaining an Investor Loan, and the Lending Institution will be free to accept or reject any potential Investor on any terms it considers fit.

27. Under the terms of each Investor Loan:

(a) the principal amount (and any accrued, unpaid interest to date) will be due on or before the XXXXXXXXXX anniversary of the date on which the Investor Loan is made, and will bear interest at a commercial rate which will be at least equal to the prescribed rate (for purposes of section 143.2 of the Act) prevailing on the date the Investor Loan is made;

(b) interest on the outstanding loan balance for any particular year will be due and payable on or before XXXXXXXXXX of the next calendar year; and

(c) the Lending Institution will have unlimited recourse to an Investor’s assets for payment of any outstanding amount in respect of an Investor Loan in the event of default.

28. The Investor Loans will be secured by the Investors’ Class A Units in the Partnership and by any other security that the Lending Institution requires in respect of a particular Investor. The Lending Institution’s recourse on the Investor Loans will be unlimited. Class A Unitholders will be required to represent in their subscription agreements that any debt financing is not a “limited recourse amount” as defined in subsections 143.2(6), (7) or (13) of the Act, nor is recourse limited in any manner whatsoever under the ordinary legal meaning of that term.

29. The Partnership will distribute to its partners the profits it earns from the exploitation of the Distribution Licence, in accordance with the terms of the Partnership Agreement. In the event that cash distributions from the Partnership are not sufficient to allow an Investor to repay any portion of his/her Investor Loan, that Investor will be personally responsible for any remaining outstanding portion. The Investor Loan agreements will not, nor will any other agreements, contain any set-off or other mechanism that will protect the Investors from an insolvency of the Partnership or of any exhibitor, broadcaster or sub-distributor or from a decrease in the value of the Distribution Agreement and consequent decrease in the value of the Investor’s Partnership units. For greater certainty, there are no assurances that the amount of cash distributions from Partnership to the Investors will be sufficient to fund interest and principal payments under the Investor Loans.

30. The cash portion of the subscription price for all Class A Units will be due on the closing date. Each Investor who finances a portion of the purchase price of his/her Class A Units will sign an Investor Loan agreement with the Lending Institution on the closing date. The Partnership will be authorized to issue Class A Units to Investors upon receipt of the cash portion of their subscription price and an executed Investor Loan agreement.

31. Prior to the closing date, the Partnership will enter into the Distribution Agreement.

32. Pursuant to the Distribution Agreement and the Distribution Licence granted therein, the Partnership will acquire from the Producer the sole and exclusive right, licence and privilege to exhibit, distribute, sub-distribute, transmit, lend, broadcast and otherwise exploit the Picture, or any part thereof, and the sole and exclusive right to licence others to do so, throughout the world, excluding Canada, for XXXXXXXXXX years from the date of confirmation of the Completion Bond.

33. Pursuant to the Distribution Agreement:

(a) the Producer has or will obtain all of the rights, permissions and licences required to enable the Partnership to fully exploit the Distribution Licence;

(b) the Partnership will distribute and exploit the Picture;

(c) the Partnership will enter into a XXXXXXXXXX with the Producer whereby the Partnership will XXXXXXXXXX ;

(d) the Partnership will be entitled to deduct from gross receipts its actual paid distribution expenses;

(e) the Producer agrees that the terms and conditions of the Sub-Distribution Joint Venture Agreement are acceptable to the Producer; and

(f) the Partnership will be entitled to a distribution fee of XXXXXXXXXX percent (XXXXXXXXXX %) of gross-receipts, except that the distribution fee will be XXXXXXXXXX percent (XXXXXXXXXX %) for XXXXXXXXXX sell-through rights.

34. The Partnership will pay the full purchase price, estimated to be $XXXXXXXXXX , for the Distribution Licence in the taxation year that the Distribution Licence is acquired.

35. Pursuant to a Sub-Distribution Agreement, the Partnership may exploit the Distribution Licence through a third party.

36. The Producer will retain XXXXXXXXXX in respect of the Picture, and will be entitled to all revenues from the exploitation of the Picture XXXXXXXXXX .

37. The Producer may license separately XXXXXXXXXX in respect of the Picture, XXXXXXXXXX , after the Term. XXXXXXXXXX will not be acquired at any time by the Partnership.

38. Upon the General Partner being satisfied that the conditions precedent to the advance of the Production Loan have been met by the Producer, the Partnership will XXXXXXXXXX . The Producer will be entitled to XXXXXXXXXX for the purpose of financing the Production.

39. The Producer will apply for the Film Labour Credits in respect of the Picture and will exploit XXXXXXXXXX in respect of the Picture. The Producer will use the Film Labour Credit refunds and, to the extent necessary, revenues from XXXXXXXXXX . It is estimated that the Film Labour Credits generated by the Picture’s production will be approximately $XXXXXXXXXX . The estimated refunds, discounted to reflect the risk of their financing, will XXXXXXXXXX .

40. The Producer expects to complete and deliver the Picture as set out in the Distribution Agreement, including promotional footage as agreeable to the Producer and the Partnership, by XXXXXXXXXX .

41. Any portion of the proceeds of the offering not immediately required by the Partnership to pay expenses, acquire the Distribution Licence, or XXXXXXXXXX will be placed in an interest-bearing deposit with the Lending Institution. Funds placed on deposit will remain available for withdrawal by the Partnership at such time as amounts are needed for the ongoing business expenses of the Partnership or in order to finance other similar projects.

42. Immediately upon acquisition of the Distribution Licence, the Partnership will begin XXXXXXXXXX for the purposes of earning business income. The Partnership will be responsible for performing the customary functions of a distributor, including:

(a) preparing the marketing plan and promotion & marketing budget;

(b) approving the timing and sequence of release in distribution channels;

(c) approving the budget for prints and advertising of the Picture;

(d) setting the release dates and pattern for release;

(e) negotiating and signing agreements with licensees;

(f) where practical, approving promotional artwork and material; and

(g) generally maintaining approval rights over all aspects of the Picture’s exploitation.

43. If the Partnership XXXXXXXXXX through XXXXXXXXXX , the Partnership must maintain approval rights over the following:

(a) XXXXXXXXXX ;

(b) XXXXXXXXXX ;

(c) XXXXXXXXXX ;

(d) packaging artwork and key promotional material; and

(e) generally, XXXXXXXXXX decisions.

44. The Partnership expects to generate income from distributing the film from the following sources:

(a) Its share of XXXXXXXXXX revenues;

(b) Sales revenues from home video sales, internet viewing by streaming or downloading to computers or other personal devices, television, and merchandising; and

(c) Other technologies or new media which may be developed over the Term and used commercially by consumers to view the Film.

45. The Partnership will engage XXXXXXXXXX to exploit the Distribution Licence on the Partnership’s behalf. XXXXXXXXXX will provide services under the direct supervision, direction and control of the Partnership and will not have the right or responsibility to bind the Partnership. The Sales Agent will procure offers that it will present to the Partnership. All agreements for exploitation of the Picture will be subject to approval by the Partnership and will be executed by and entered into by the Partnership. The agreements will contain provisions to direct all revenues to the Partnership.

46. Based on projected revenues from the Distribution Licence and in accordance with well-established business practices in the film distribution industry, for the purposes of computing its profit or loss under section 9 of the Act the Partnership will depreciate XXXXXXXXXX in accordance with revenue projections over its XXXXXXXXXX -year term XXXXXXXXXX as follows:

XXXXXXXXXX

47. The Partnership will allocate revenues and distribute cash amounts from the ongoing exploitation of the Distribution Licence and from any interest bearing instruments to the Limited Partners in accordance with the terms of the Partnership Agreement.

48. The Investors will use their cash distributions, to the extent required, to pay interest and principal amounts owing under their respective Investor Loan agreements. Revenues from exploitation of the Distribution Licence and income from interest-bearing deposits may or may not be sufficient to repay aggregate interest and principal amounts owing under the Investor Loans.

PURPOSE OF THE PROPOSED TRANSACTIONS

49. The purpose of the proposed transactions is to enable the Partnership and its partners to earn income from the exploitation of XXXXXXXXXX in respect of the Picture.

50. The proposed transactions will enable the Producer to:

(a) Produce the Picture;

(b) Retain the copyright to the Picture in perpetuity;

(c) Retain XXXXXXXXXX exploitation rights to the Picture in perpetuity;

(d) Obtain financing for the Picture;

(e) Share in XXXXXXXXXX revenues from the Picture; and

(f) Assemble and train a XXXXXXXXXX workforce.

51. The proposed transaction will enable the General Partner to establish a XXXXXXXXXX in XXXXXXXXXX , earn revenues for Limited Partners, and build a library of intellectual property rights.

RULINGS GIVEN

A. The cost of the Distribution Licence acquired by the Partnership will be added to the capital cost of the Partnership’s Class 14 assets for the purposes of paragraph 20(1)(a) of the Act and Schedule II to the Regulations.

B. In accordance with the provisions of paragraph 1100(1)(c) of the Regulations, the Partnership will be entitled to deduct amounts in respect of the capital cost of the Distribution Licence by apportioning the capital cost equally over the remaining term of the Distribution Licence.

C. Assuming that the Partnership exploits the Distribution Licence (either directly or through XXXXXXXXXX ), the Distribution Licence will not be a “leasing property” to the Partnership within the meaning of that term as defined in subsection 1100(17) of the Regulations.

The above advance income tax rulings are based on the Act and the Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 “Advance Income Tax Rulings”, dated May 17, 2002, and are binding on the CRA provided that all material facts are accurately described in the Facts and Proposed Transactions sections of this advance income tax ruling (including the provisions of the Listed Agreements), and that the proposed transactions are completed by XXXXXXXXXX .

Opinion

You have asked for an advance income tax ruling that the Partnership can deduct amounts in respect of the capital cost of the Distribution Licence using a XXXXXXXXXX method of depreciation resulting in the apportionment described in paragraph 46. This method is based on the financial projections of the Partnership described in an appendix to your ruling request. The XXXXXXXXXX method of depreciation proposed apportions the capital cost of the Distribution Licence to a fiscal year of the Partnership based on XXXXXXXXXX .

As described in paragraph 4 of Interpretation Bulletin IT-477 (Consolidated) — Capital Cost Allowance — Patents, Franchises, Concessions and Licences, while it is the CRA’s general position that deductions for the capital cost of a class 14 property should be made equally over the remaining life of the property, some other basis of deduction may be appropriate. The CRA’s general view as expressed in paragraph 4 of IT-477 is that the cost of a class 14 property “may be apportioned on another basis where, based on the legal agreements and other relevant factors, the taxpayer can clearly demonstrate that it is reasonable.”

Whether or not the Partnership may be entitled to deduct the capital cost of the Distribution Licence on the basis proposed in paragraph 46 above is not something on which we are able to give an advance income tax ruling that would be binding on the CRA. In our opinion, such a determination can only be made on an audit basis and will depend on a number of factors, which will include a verification of the Partnership’s XXXXXXXXXX and whether these XXXXXXXXXX have been properly attributed to XXXXXXXXXX .

Yours truly,

XXXXXXXXXX
For the Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency