1998 Income Tax Severed Letter 980551B - CANADIAN FILM OR VIDEO PRODUCTION TAX CREDIT

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

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

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

Principal Issues:

1. Will section 18.1 apply to restrict the deductibility of the production expenses incurred by the Production Partnership?

2. Will Creditco be an eligible production corporation for the purposes of section 125.5?

3. Will THC's investment in the Production Partnership represent a 96(2.2)(d) amount?

Position:

1. Not if before the end of the taxation year in which the production expenditures are made, income in respect of the film exceeding XXXXXXXXXX % of such production expenses is included in computing the Production Partnership's income for that year.

2. This involves a question of fact. We do not have sufficient information at this time to make that determination.

3. Not under the revised arrangement.

Reasons:

1. The application of paragraph 18.1(15*)(b) of the Act. xxxxxxxxxx.

2. Reading of the law (section 125.5 and draft Regulation 9300). Notwithstanding that THC only obtains a limited-use licence in the Studio's script copyright, THC is the maker of the Film and the copyright owner in the Film. For Creditco to be a eligible production corporation, one of the conditions to be met is that Creditco has contracted directly with the owner of the copyright in the accredited production [i.e. THC] to provide production services in respect of the production where the owner [TIIC] is not an eligible production corporation in respect of the production. The question remains as to whether THC is an eligible production corporation. We do not have sufficient information at this time to determine if the Production Partnership or Creditco are acting as agents of THC in respect of the Film. If so, then THC would be an eligible production corporation and Creditco would not be an eligible production corporation. Also, when THC becomes a partner in the Production Partnership, THC will be carrying on the film production services business of the Production Partnership with a permanent establishment in Canada. This being the case, THC would own the copyright in respect of the Film and would be an eligible production corporation.

3. We had concerns that a mandatory investment by THC in the Partnership would be subject to 96(2.2)(d). Consequently, the proposal was amended to make THC's investment in the Partnership optional. This alleviated our concerns.

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xxxxxxxxxx 980551
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Attention: xxxxxxxxxx

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX, as amended and restated XXXXXXXXXX, and our numerous telephone conversations, wherein you requested an advance income tax ruling on behalf of the proposed xxxxxxxxxx transactions described herein. Unless otherwise stated, all dollar amounts quoted in this letter are in U.S. dollars.

FACTS

1. xxxxxxxxxx is a corporation incorporated under the XXXXXXXXXX. Its principal office and its tax services office is in XXXXXXXXXX and its taxation centre is XXXXXXXXXX. It will be applying for a tax account number. XXXXXXXXXX shares are owned by XXXXXXXXXX.

2. XXXXXXXXXX ("Creditco") is incorporated under the laws of XXXXXXXXXX, as a wholly-owned subsidiary of XXXXXXXXXX. Creditco's principal office is in XXXXXXXXXX. Its principal business is the provision of production services which qualify as "Canadian labour expenditures” for the purposes of the film or video production services tax credit under section 125,5 of the Income Tax Act (Canada) (the "Act"), and any equivalent provincial tax credit programs. Creditco's tax services office is XXXXXXXXXX, its taxation centre is XXXXXXXXXX, and it will be applying for a tax account number.

XXXXXXXXXX is a corporation incorporated under the XXXXXXXXXX. Its principal office and its tax services office is in XXXXXXXXXX and its taxation centre is XXXXXXXXXX. It will be applying for a tax account number. Productions is a wholly-owned subsidiary of XXXXXXXXXX,

4. To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling

(i) is in an earlier return of the taxpayers or a related person,

(ii) is 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) is under objection by the taxpayers or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expi red,

(v) is the subject of a ruling previously issued by the Directorate.

PROPOSED TRANSACTIONS

5. THC is a corporation to be formed under the laws of XXXXXXXXXX to make motion picture films and television productions in Canada and other jurisdictions outside the United States. All of the shares in THC will be owned by XXXXXXXXXX a U.S. company.

6. XXXXXXXXXX (the "Production Partnership") is a limited partnership to be formed in XXXXXXXXXX. Its fiscal year-end will be XXXXXXXXXX. Its general partner will be Productions and its initial limited partner will be XXXXXXXXXX interest in the Production Partnership will be redeemed when Class A units of the Production Partnership are issued to the Master Limited Partnership (see paragraph 17, below). The redemption proceeds in respect of XXXXXXXXXX initial limited partnership unit in the Production Partnership will be the amount of the original investment, being the nominal sum of $XXXXXXXXXX.

7. XXXXXXXXXX Master Limited Partnership (the "MLP") is a limited partnership to be formed in XXXXXXXXXX. Its fiscal year-end will be XXXXXXXXXX. Its purpose will be to subscribe for Class A units of limited partnership interest in a number of production limited partnerships, one of which will be the Production Partnership. Productions will be the general partner of the MLP, and its initial limited partner will be XXXXXXXXXX. As was the case for the Production Partnership, XXXXXXXXXX interest in the MLP will be redeemed when Class A units of the Production Partnership are issued to the Master Limited Partnership (see paragraph 17, below). The redemption proceeds in respect of XXXXXXXXXX initial limited partnership unit in the MLP will be the amount of the original investment, being the nominal sum of $XXXXXXXXXX.

8. XXXXXXXXXX will hire THC to produce and deliver the completed negative for a feature motion picture currently titled "XXXXXXXXXX" (the "Film"). THC will obtain from XXXXXXXXXX a limited-use licence to the copyright in the script for the Film to enable THC to produce the Film.THC will own the copyright in the Film during production.

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In turn, THC will loan these funds to Creditco and to the Production Partnership (refer below to paragraphs 10 and 13).

9. Pursuant to a production services agreement, THC will engage Creditco to perform $XXXXXXXXXX of production services in connection with the production of the Film. These services will require Creditco to perform production accounting services and audit and oversight services, in addition to paying salary and wages to Canadian residents in respect of the performance of production services in Canada. These salary and wage expenses will qualify Creditco to be entitled to the film or video production services tax credit in respect of "Canadian labour expenditures" in accordance with section 125.5 of the Act. The amount of this federal tax credit, plus the corresponding xxxxxxxxxx provincial tax credit (together referred to herein as the "Tax Credits"), is estimated to be $XXXXXXXXXX in aggregate. Creditco's consideration for the providing of its services will be the $XXXXXXXXXX of Tax Credits, plus a fee of $XXXXXXXXXX from THC.

10. THC will lend $XXXXXXXXXX to Creditco, without charging interest, to fund its production services on an interim basis. Creditco will repay this loan from THC as follows:

(a) $XXXXXXXXXX upon receipt of the proceeds of the fee that is referred to above in paragraph 9; and

(b) the balance, using a portion of the Tax Credits received by Creditco,

11. THC will then repay approximately $XXXXXXXXXX of its loan from Studio with the amount of the loan repayments received from Creditco, as described above in paragraph 10.

12. Pursuant to a production services agreement, THC will engage the Production Partnership to provide to THC $XXXXXXXXXX of production services in connection with the Film. These services will not qualify as Canadian labour expenditures under section 125.5 of the Act. The consideration payable by THC to the Production Partnership in respect of the production services will be a fixed amount (the "XXXXXXXXXX% Fee") equal to XXXXXXXXXX% of the amount of the production expenses of the Production Partnership payable upon satisfactory completion of the production services (generally upon completion and delivery of the Film). There are no guarantees or other unconditional commitments with respect to the entitlement of the Production Partnership to the XXXXXXXXXX% Fee, if it fails to provide the production services, XXXXXXXXXX. In addition, the Production Partnership will be entitled to XXXXXXXXXX% of the net profits from the Film, calculated in accordance with an industry standard definition. Further, the Production Partnership may earn bonuses if the Film is nominated for, or receives, certain industry-recognized awards for excellence, such as Golden Globes or Academy Awards. The net profits percentages and bonus amounts that the Production Partnership could earn will be open-ended, both as to amount and duration. It is expected that the quantum of these amounts, together with the XXXXXXXXXX% Fee, will be at least sufficient to give the Production Partnership a reasonable expectation of earning an amount in excess of its deductible production expenses, and in the case of a successful film, the potential to realize a significant amount.

13. THC will lend $XXXXXXXXXX to the Production Partnership, without charging interest, to fund the production services expenses noted above in paragraph 12, on an interim basis. The Production Partnership will repay this loan from THC as follows:

(a) XXXXXXXXXX% of the indebtedness when the XXXXXXXXXX% Fee is received; and

(b) the balance, using a portion of the capital raised by the sale of Class A units of the Production Partnership to the MLP (refer below to paragraph 17).

14. THC will then repay approximately another $XXXXXXXXXX of its loan from Studio with the amount of the loan repayments received from the Production Partnership, as described above in paragraph 13. The balance of the loan from Studio to THC will be repaid from the sales proceeds THC receives from Studio when, upon completion of the Film, THC assigns to Studio any intellectual property and other rights that it acquires in the Film, including the underlying copyright in the Film and sells to Studio, for fair market value, all exploitation rights in the Film in all media throughout the universe in perpetuity.

15. Units of limited partnership interest in the MLP will be offered to Canadian investors ("Investors") pursuant to prospectus exemptions available in the Provinces of Canada where the units are offered for sale. The sale will occur without issuing an offering memorandum, if it is determined that the Investors do not require one.

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In any event, the offering documents or executive summary will contain the following mention:

"THE RULING OBTAINED FROM REVENUE CANADA, CUSTOMS, EXCISE AND TAXATION CONTAINS CAVEATS. THE RULING MAY BE VIEWED ON REQUEST, SUBJECT TO THE SIGNING OF A CONFIDENTIALITY AGREEMENT."

The total subscription amount from selling limited partnership interests in the MLP will be approximately $XXXXXXXXXX. The subscription price will be $XXXXXXXXXX per unit, payable as to $XXXXXXXXXX from a full-recourse loan from a Canadian financial institution (the "Financial Institution") and as to $XXXXXXXXXX from each Investors' own sources, none of which will be obtained from the proceeds of any limited-recourse financing. The loans from the Financial Institution to the Investors (the 4'Investment Loans") will have a 10-year term and will bear interest at a rate equal to the greater of 10% per annum and the prescribed rate (for purposes of section 143.2 of the Act) prevailing at the time the Investor Loans arise. Interest for the 10-year term of the Investment Loans will be due and payable annually. Interest will be paid by the Investors, in respect of each year, no later than 60 days after the end of the particular taxation year. At the time of closing of subscription for their units in the MLP, each Investor will pay an amount equal to the first year's interest on their Investment Loan. Financing charges (e.g. loan commitment fees and legal fees) in respect of the Investment Loans will be paid by the Investors to the Financial Institution at the time of subscription.

16. It is anticipated that the Investors will invest in units in the MLP at various times throughout the year. Subscription proceeds will be held by the MLP and applied to acquire Class A units in the various production partnerships at various times during the year, but in each case before any fee similar to the XXXXXXXXXX% Fee is earned by a particular production partnership.

$XXXXXXXXXX per unit of the proceeds of subscription for units in the MLP will be used by the MLP to subscribe for Class A units of the Production Partnership (the "Class A Units"). $XXXXXXXXXX per unit of the subscription proceeds received by the MLP will be used to pay the fees, costs, expenses and commissions related to the MLP's offering. The Class A Units will each have a cost of $XXXXXXXXXX and it is estimated that a maximum amount of $XXXXXXXXXX will be raised from their sale. As noted above in paragraph 16, the MLP will use the estimated $XXXXXXXXXX balance of the subscription.proceeds from the sale of units in the MLP to acquire Class A units in various other production partnerships

18. a) THC will, on closing, have the option, but will not be required, to subscribe for XXXXXXXXXX Class B units of the Production Partnership (the "Class B Units") at a purchase price of $XXXXXXXXXX per unit, for an aggregate subscription amount (the "Subscription Amount") of $XXXXXXXXXX. THC may exercise this option at any time, up to and including the beginning of the tenth year following the closing of subscriptions for Class A Units (see paragraph 17, above). Upon such a subscription, THC can chose to immediately pay the full amount of the Subscription Amount in cash, or it can chose to defer its obligation to pay the Subscription Amount to the tenth year following the closing of subscriptions for Class A Units. THC may pay for its investment in the Class B Units at any time, thereby entitling it to a share of any income or losses of the Production Partnership, as outlined below in paragraph 19. THC will not become a partner in the Production Partnership until the full amount of the Subscription Amount is paid in cash. The Subscription Amount will represent an amount equal to the fair market value of the Class B Units at the time of closing of subscription for the Class A Units (see paragraph 17, above).

b) At the time of payment of the Subscription Amount, the Production Partnership will decide whether the Subscription Amount will be included in the amount of cash on hand to be distributed to its partners, as noted below i~ paragraph 19, or whether it will be used by the Production Partnership to make additional investments in, for example, another film.

19. Under the partnership agreement for the Production Partnership:

a) the Class A Units, in the aggregate, will represent a 99. 99% interest and entitlement to the income and losses of the Production Partnership, unless and until the Class B Units have been subscribed for and paid in full (see paragraph 18, above). The general partner of the Production Partnership will own a 0.01% interest;

b) once the substription price for Class B Units has been paid in cash, subject to the exemption described below in paragraph c), 99.99% of the profits and losses of the Production Partnership will be allocated rateably between the holders of the Class A Units and the Class B Units, based upon the amount of their partnership capital at the end of the relevant fiscal period (i.e. approximately XXXXXXXXXX % of the 99.99% share of the Production Partnership's profits and losses for the MLP, and approximately XXXXXXXXXX % of the 99.99% share for THC). In computing partnership capital for these purposes, adjustments will be made for each partner's share of the net income and losses of the Production Partnership, the amount of any distributions made to each partner, and contributions to the Production Partnership's capital. These capital contributions will only include amounts paid in cash and not amounts owning to the Production Partnership;

c) if the Class B Units are not subscribed for in cash by the end of a particular fiscal period of the Production Partnership and, in the result, losses are allocated solely to the holder of the Class A Units (i.e. the MLP), profits of the Production Partnership for subsequent fiscal periods will be allocated solely to the holder of the Class A Units in an amount equal to the losses previously allocated to the holder of the Class A Units, and, other than a liquidating distribution on the termination of the Production Partnership, no cash distributions will be made to the holder of the Class A Units that would reduce its capital account to an amount less than its original capital account (see paragraph 17);

d) once the Production Partnership has repaid in full its interim production loan to TIIC (see paragraph 13, above), any additional cash on hand, after paying its operating expenses, will be distributed by the Production Partnership to the holders of Class A Units and Class B Units in accordance with their respective participating. interests, as described above in c) and below in e);

e) subject to c) above, the Class A Units will be entitled to a priority distribution of cash on hand, to a maximum amount equal to their investment in respect of the Class A Units (refer to paragraph 17, above). The Class B Units will be entitled to cash on hand which is distributed after the priority distribution to the holder of the Class A Units, to a maximum of the Class B Unit holders' investment in respect of the Class B Units (refer to paragraph 18, above). However, no cash distributions will be made to either partner, except on dissolution of the Production Partnership, if such distributions. would reduce either of their capital accounts below the amount of their initial capital investments in the Production Partnership (i.e. approximately $XXXXXXXXXX and $XXXXXXXXXX for the MLP and THC, respectively). In addition, any such cash distributions must be made in a manner that the relative capital accounts of the partners are maintained (i.e. approximately XXXXXXXXXX% for the MLP and XXXXXXXXXX% for THC); and

f) each Class A Unit and Class B Unit will have equal voting rights. Other than the revenue sharing entitlements, described in this paragraph, owners of the Class A Units will have the same rights and obligations as the owners of the Class B Units,

20. If and when any XXXXXXxxxx% Fees, percentage of net profits payments or bonuses (all as described above in paragraph 12, and together referred to hereafter as the "Revenues") are earned by the Production Partnership, they will be paid by THC to the Production Partnership. These payments will be made, regardless of whether the Investors are able to repay their Investment Loans to the Financial Institution.

21. Under the partnership agreement for the MLP,

a) the limited partners of the MLP will be entitled to 99.99% of the profits and losses allocated to the MLP by the Production Partnership, and

b) the general partner of the MLP will be entitled to 0.01% of the profits and losses allocated to the MLP by the Production Partnership.

22. MLP will pay out to its partners all revenues it receives from the Production Partnership. In the event that cash distributions from the MLP are insufficient to enable Investors to repay their Investment Loans, the Investors will be responsible for the shortfall on the basis that the Investment Loans r'epresent unconditional, full-recourse obligations of each Investor. There will be no set-off, or other mechanisms, that will protect the Investors from an insolvency at either the Production Partnership or the MLP level. For greater certainty, there are no assurances of the amount of any cash distributions from the Production Partnership to the MLP or from the MLP to the Investors.

23. The MLP and the Production Partnership will be tax shelters within the meaning assigned by subsection 237.1(1) of the Act. The general partner of the MLP and the general partner of the Production Partnership will apply for tax shelter identification numbers for the MLP and the Production Partnership, respectively, and upon receipt of the number will file annual tax shelter information returns, pursuant to and in accordance with subsections 237.1(2) and (7) of the Act.

24. Neither Creditco nor the Production Partnership will be in an agency relationship with THC or Studio in respect of the production of the Film.

25. In your letter of XXXXXXXXXX, you provided us with copies of the following draft documents in support of your ruling request:

• Production, Finance, Distribution Agreement;
• CLE Production Services Agreement;
• NCLE Production Services Agreement;
• Co-Production and Services Allocation Agreement;
• Guaranty Agreement;
• Master Loan Agreement;
• Master Security Agreement;
• Unit Loan Agr?ement;
• Collateral Security Agreement;
• PLP Partnership Agreement;
• MLP Partnership Agreement;
• Offering Memorandum;
• Waiver and Indemnity Agreement; Option Agreement; and the B Unit Subscription Agreement.

PURP0SE OF THE PROPOSED TRANSACTION

26. The purpose of the proposed transactions is as follows:

a) to afford private Canadian investors the opportunity to invest in the motion picture and television industry, through the provision of production services in Canada, thereby providing investors with the opportunity to participate financially in the receipts generated from the worldwide exploitation of the films; and

b) in tandem with the federal and provincial tax credit system for film and television production services, to encourage and facilitate the production of film in Canada by non-resident producers, thereby creating employment in Canada and utilizing and enhancing the expertise of Canadian production personnel.

RULINGS

27. 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 prbposed transactions are carried out as described above, and that the offering documents or executive summary contain a reference, such as described on page 6 of this letter, in respect of the existence of caveats in the rulings given, and provided the final documents listed above in paragraph 25 are as submitted in draft, and provided that the Production Partnership and the MLP are partnerships at law, we confirm the following:

A. The production services expenses incurred by the Production Partnership after the date of this letter and forming part of the production services rendered by it pursuant to the agreement referred to above in paragraph 12, will, subject to the provisions of section 18.1 of the Act, be deductible in the computation of the Production Partnership's income or loss for the relevant taxation year in which the expenses are incurred, pursuant to section 9 of the Act, to the extent that:

i) such reporting conforms with generally accepted accounting principles;

ii) the outlays and expenses are reasonable in amount and are not on account of capital; and

the outlays and expenses are made or incurred for the purpose of gaining or producing income from a business with a reasonable expectation of profit.

B. Section 18.1 of the Act will not apply to restrict the deductibility of the production expenses incurred by the Production Partnership pursuant to he proposed transactions (referred to above in paragraph 12), so long as before the end of the taxation year in which the production expenditures are made, Revenues included in computing the Production Partnership's income for that year (other than any portion of such an amount that is the subject of a reserve claimed by the Production Partnership for the year under the Act) in respect of the Film, exceed XXXXXXXXXX% of such production expenses.

C. Losses for a taxation year of the Production Partnership which are allocated by the Production Partnership, in accordance with the terms of the partnership agreement referred to above in paragraph 19, to the holders of Class A Units and Class B Units will be deductible in computing the income or loss of such holders of Class A Units and Class B Units at the end of the taxation year of such holders in which such fiscal year-end of the Production Partnership ends, to the extent of the at-risk amount (as defined in subsection 96(2.2) of the Act) of the holder in respect of the Production Partnership at the end of that taxation year.

D. THC will be considered to be carrying on business in Canada when it is a partner of the Production Partnership.

E. Losses for a taxation year of the MLP which are allocated by the MLP to an Investor, in accordance with the terms of the partnership agreement referred to above in paragraph 21, will be deductible in computing the income or loss of the Investor at the end of the taxation year of that Investor in which such fiscal year-end of the MLP ends, to the extent of the at-risk amount (as defined in subsection 96(2.2) of the Act) of the Investor in respect of the MLP at the end of that taxation year.

F. Subject to the application of paragraphs (b), (b.1) and (c) of subsection 96(2.2) of the Act, the at-risk amount, withi~ the meaning of subsection 96(2.2) of the Act, of the MLP in the Production Partnership, at the end of the 1998 fiscal year of the Production Partnership, will be equal to the amount of the MLP’s investment in the Class A Units, as described above in paragraph 17, to the extent that the MLP, or a person with whom the 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) of the Act, other than an amount or benefit excluded by one of subparagraphs (i), (iii), (vi) or (vii) of that paragraph.

G. Subject to the application of paragraphs (b), (b.1) and (c) of subsection 96(2.2) of the Act, the at-risk amount, withip the meaning of subsection 96(2.2) of the Act, of an Investor in the MLP, at the end of the XXXXXXXXXX fiscal year of the MLP, will be equal to the amount of the Investors investment in units of the MLP, as described in 15 and 16 above, 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) of the Act, other than an amount or benefit excluded by one of subparagraphs (i), (iii), (vi) or (vii) of that paragraph.

For greater certainty, in calculating the at-risk amount of an Investor in the MLP or in calculating the at-risk amount of the MLP in the Production Partnership, the Production Partnership's entitlement to the XXXXXXXXXX% Fees, referred to above in paragraph 12, will not constitute an amount or benefit for the purposes of paragraph 96(2.2)(d) of the Act.

H. Subject to the application of subsections 18(9) and (9.2) to (9.8) of the Act, interest paid in a taxation year or payable in respect of a taxation year by an Investor (depending upon the method regularly followed by the Investor in computing income) in connection with their Investment Loan will be deductible in computing income in that taxation year in accordance with paragraph 20(1)(c) of the Act, to the extent that the amount thereof is reasonable and paid pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property with a reasonable expectation of profit.

I. Any amount of unpaid principal which the Production Partnership owes to JHC (refer above to paragraph 13) will be a limited-recourse amount of the Production Partnership, and the provisions of subsection 143.2(6) of the Act will apply, thereto. To the extent the amount owing to THC is repaid by the Production Partnership, the provisions of subsection 143.2(10) of the Act will apply.

J. If any Investor funds any portion of the balance of their $XXXXXXXXXX investment in a unit in the MLP (as described above in paragraph 15) with limited-recourse financing, the provisions of subsection 143.2(6) of the Act will apply

K. Subsection 143.2(6) of the Act will not apply to reduce the amount of an Investor's expenditure to acquire units of the MLP:

i) by reason of the distribution of capital by the Production Partnership to the MLP as described above in paragraph 19(e); or

ii) by reason of the Production Partnership's entitlement to the Revenues as described above in paragraphs 12 and 20.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada December 30, 1996, and are binding provided the proposed transactions are entered into on or before XXXXXXXXXX These rulings are based on the draft documents referred to above in paragraph 25, and are based on the Act in its present form and do not take into account the effect of any proposed amendments. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly

a) the reasonableness or fair market value of any expenditures referred to in this letter;

b) the proper generally accepted accounting principle applicable in the determination of the timing of the deduction of the cost of any of the production expenses incurred by the Production Partnership

c) the existence of reasonable expectation of profit of Creditco, the Production Partnership, the MLP or any of the Investors;

d) whether Creditco will be an eligible production corporation in respect of the Film, for the purposes of section 125.5 of the Act;

e) whether the Production Partnership or Creditco will be acting as legal agents for THC or Studio in respect of the making of the Film;

f) the applicability or non-applicability of subsection 245(2) of the Act;

g) the GST implications of any of the proposed transactions;

h) the applicability or non-applicability of paragraph 96(2.2)(d) of the Act. In this regard, it is our opinion that if any amount of gross revenue related to the Film is ascertainable, whether contingent or otherwise, at the time that an Investor acquires an interest in the MLP, or at the time the MLP acquires a unit of the Production Partnership, this would affect the at-risk amount of the Investor and the MLP; and

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

As stated in paragraph .7 of Information Circular 70-6R3, rulings are not provided for transactions that are not seriously contemplated and are hypothetical in nature. Therefore, notwithstanding that the MLP will be subscribing for Class A units of limited partnership interest in a number of production limited partnerships (refer to paragraphs 7, 16 and 17, above), we are not ruling on the MLP's investment in any limited partnerships other than their investment in the Production Partnership, as described herein. In addition, notwithstanding that the Production Partnership may invest in other films (refer to paragraph 18(b), above), we are also not ruling on the Production Partnership's investment in any films other than the Film.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch