22 November 1994 External T.I. 9423745 - FILM TAX SHELTER

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

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

XXXXXXXXXX 942374

Attention: XXXXXXXXXX

November 22, 1994

Dear Sirs:

Re: Film Tax Shelter - Transitional Relief

This is in reply to your letter of September 9, 1994 in which you requested that the proposed transitional relief be applicable in respect of the production of

XXXXXXXXXX for which funds were raised prior to February 22, 1994.

During our recent telephone conversation (Fontaine/XXXXXXXXXX), you confirmed that:

(a) XXXXXXXXXX

(b)

(c) XXXXXXXXXX

Draft legislation issued by the Department of Finance under News Release 94-084 dated September 27, 1994 provides that a gain will be realized under (new) subsection 40(3.1) of the Income Tax Act where, at the end of a fiscal period, a limited partner holds a partnership interest that has a negative adjusted cost base. The draft legislation contains certain transitional relief such that the general rule does not apply where:

(1)at the end of a fiscal period, the partnership actively carries on a business that was carried on by it throughout the period commencing February 22, 1994 and ending at the relevant fiscal year-end,

(2)the limited partner held the partnership interest on February 22, 1994, and

(3)there has been no substantial contribution of capital to the partnership or substantial partnership borrowings after February 21, 1994 (other than in certain limited circumstances).

The transitional relief provided in the draft legislation include, inter alia, that:

(A)pursuant to certain documents,

(i)capital raised by a partnership after February 21, 1994 will not be considered to be a substantial contribution to the partnership,

(ii)a partner acquiring an interest in a partnership will be deemed to have been a partner on February 22, 1994, and

(B)a partnership carrying on a business contemplated in a document described in (A), shall be considered to have actively carried on the business on February 22, 1994 until the earlier of the closing date, if any, stipulated in the document and January 1, 1995.

For the purpose of the transitional relief, the documents referred to in the draft legislation include an offering memorandum distributed as part of an offering of securities where, inter alia,

(i) the memorandum contained a complete or substantially complete description of the securities and terms and conditions of the offering,

(ii) the memorandum was distributed before February 22, 1994,

(iii) solicitations in respect of the sale of the securities contemplated by the memorandum were made before February 22, 1994,

(iv) the sale of the securities was substantially in accordance with the memorandum, and

(v) funds are expended in accordance with the memorandum before 1995 (or before March 2, 1995 in the case of certain certified productions).

Based on our understanding of the situation as outlined in (a) to (c) above, it is our view that the transitional relief would not be applicable in the circumstances, for the following reasons:

1.In our opinion, the requirements described in (ii) and (iii) above that the memorandum be distributed, and solicitations for the sale of the securities contemplated by the memorandum be made, before February 22, 1994 would not be met. Accordingly, any capital raised by the partnership, pursuant to the memorandum, after February 22, 1994 from the sale of partnership units would be considered to be a substantial contribution of capital after February 22, 1994 as described in (A)(i) above. As a result, an investor who acquired such partnership units after that time would be considered not to have been a member of the partnership on February 22, 1994 and would be subject to the general rule described above.

2.The partnership was formed in

XXXXXXXXXX

On this basis, an argument could be made that the partnership may not have actively carried on a business or may have ceased to "actively carry on a business that was carried on by it" continuously since February 22, 1994. Accordingly, there is some doubt as to whether the partnership would meet the requirement described in (1) above.

The above opinions are subject to the proviso that legislation is enacted substantially in the form of the transitional relief as clarified by the Release. Also, these opinions are not rulings and accordingly they are not binding on Revenue Canada.

We trust these comments will be of assistance to you.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Policy and Legislation Branch