1998 Ruling 9819593 - XXXXXXXXXX PROJECT, PARTNERSHIP V. JOINT VENTURE

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:

(A) Whether F Co. is the agent of the "joint venturers" of the Project (the "Participants") and whether the revenue received and expenses and expenditures incurred by F Co. could be considered as amounts received or incurred by the Participants, as the case may be?

(B) Whether several "joint ventures" formed to operate an oil and gas project (the "Project") would be considered as one or more partnership(s)?

Position:

(A) Provided that no one or more of the joint ventures of the Project will constitute one or more partnership(s) in law, and that F Co. will be acting solely in the capacity of an agent for the Participants in the Project in law, it is our view that the revenue received, expenses and expenditures incurred by F Co. will be considered as received or incurred by the Participants, as the case may be, in proportion to their interests in the Project.

(B) We do not rule on this issue. (We also do not rule that subdivision j in Division B under Part I of the Act would not apply to these joint ventures of the Project as such a ruling has not been specifically requested by the representative of the taxpayers.)

Reasons:

(A) Unlike other energy projects, the Project contemplates future regional development, as such, the Project agreements provide for future subdivision of the Project interests into functional units and third-party processing for fees and/or charges (i.e. which include imputed rate-of-return/profits). Sharing profits is the prima facie evidence of a partnership, so such processing may taint the relationship of the Participants as a partnership. However, since there are no definite creation of functional units and third-party processing in larger quantity within next few years, it has been agreed by the representative of the taxpayers that a separate ruling request would be made in the future, if necessary, to deal with the issue of functional units and third-party-processing. On the other hand, we are also concerned that by virtue of those provisions of functional units and third-party processing in the Project agreements, the relationship among the Participants might have been considered a partnership in law. We will request a written legal opinion on this matter upon receiving further information and representations from the representative of the taxpayers. In light of the above-noted discussion, a caveat in respect of partnership is provided in the ruling.

(B) We cannot rule as requested on whether F Co. is the agent of the Participants because it is always a question of fact and law to be determined. The revenue received, expenses and expenditures incurred by F Co. would be those of the Participants for income tax purposes only if: (a) the relationship among the Participants is not a partnership in law; and (b) F Co. acts solely as the agent of the Participants in respect of the Project.

XXXXXXXXXX
XXXXXXXXXX 980446/981959
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX wherein you have requested an advance income tax ruling on behalf of the above-noted corporations and partnership with respect to the XXXXXXXXXX Project. We acknowledge our subsequent telephone conversations (XXXXXXXXXX) and your additional information and documents provided to us.

We understand that to the best of your knowledge and that of the taxpayers involved in this ruling:

(a) none of the issues involved in the requested rulings is being considered by an office of Revenue Canada in connection with a tax return already filed, and

(b) none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.

We also understand that the above-noted corporations file their income tax returns at the XXXXXXXXXX Tax Centre or XXXXXXXXXX Tax Centre under the RC account numbers, and are served by the Tax Services Office, as follows:

						Account No.		Tax Services Office

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

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

Definitions

Unless otherwise stated, the terms and expressions used herein are defined as follows:

"A Co." means XXXXXXXXXX

"Act" means the Income Tax Act R.S.C 1985 (5th Supp.), c.1 as amended to the date of this ruling letter.

"Agreement #1" means the XXXXXXXXXX Agreement entered into by the parties on XXXXXXXXXX.

"Agreement #2" means the XXXXXXXXXX Agreement entered into by the parties on XXXXXXXXXX.

"Agreement #3" means the XXXXXXXXXX Agreement entered into by the parties on XXXXXXXXXX.

"Agreement #4" means the XXXXXXXXXX Agreement entered into by the parties on XXXXXXXXXX.

"Agreement #5" means the XXXXXXXXXX Agreement entered into by the parties on XXXXXXXXXX.

"B Co." means XXXXXXXXXX.

"Canadian-controlled private corporation" has the meaning assigned to the expression by subsection 125(7) of the Act.

"Canadian partnership" has the meaning assigned to the expression by subsection 102(1) of the Act.

"Canadian resource property" has the meaning assigned to the expression by subsection 66(15) of the Act.

"CBCA" means the Canada Business Corporation Act.

"C Co." means XXXXXXXXXX.

XXXXXXXXXX

"D Co." means XXXXXXXXXX.

"Documents of Title" means any lease, license, permit or other document which grants an interest in any of the Joint Property including any amendments, renewals or replacements thereto pursuant to the Project Regulations.

"E Co." means XXXXXXXXXX.

"Effective Date" means the later of the date of this ruling letter and the date that the Project Facilities Agreements are executed.

XXXXXXXXXX.

"F Co." means XXXXXXXXXX.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

"Finished Products" means all components XXXXXXXXXX, including but not limited to, butane, propane and pentanes plus or any combination of the foregoing, XXXXXXXXXX.

"Functional Units" means the further subdivided units of the ownership interest in Project Facilities (i.e., the Project Interests in respect of the Project Facilities may be subdivided into smaller interests to be owned by the Project Owners and/or others) subject to the approval by the Management Committee.

"G Co." means XXXXXXXXXX.

"Gas Fields" means the gas fields XXXXXXXXXX.

"H Co." means XXXXXXXXXX.

"Joint Account" means the accounts set up to show the charges incurred and credits accrued in respect of the Project, and which are to be shared by the Project Owners (XXXXXXXXXX).

"Joint Property" means all property of the Project, whether real or personal, acquired or utilized by or for the benefit of the Project Owners and Joint Account, XXXXXXXXXX.

"Joint Ventures" means the XXXXXXXXXX joint ventures in respect of the Project, in each one of which Partnership Y, C Co., D Co., G Co. and H Co. are the joint venturers, as described in 12 below.

"Lands" means the lands of the Gas Fields and Reserves therein.

"Management Committee" means the management committee which is composed of the Project Owners' duly appointed representatives, and which has been established to supervise and control all operations of the Project and to provide for the orderly planning and execution of the joint operations pursuant to Agreement #2 and Project Facilities Agreements.

"Natural Gas" means Raw Gas, Raw Dehydrated Gas or Residue Gas produced and saved from the Wells located on the Lands.

"Operator" means an individual, firm, body corporate, partnership, trust, union, pension fund, government, government department or agency or other legal entity, as the case may be, who is designated or appointed as the operator of the Project, and who is the agent of the Project Owners and in some specific instance, the bare trustee in holding the Joint Property for the Project Owners, in performing its duties and discharging its obligations under the joint venture agreements referred to in 12 below.

"Outside Gas" means the raw or processed natural gas produced from the gas fields other than the Gas Fields.

XXXXXXXXXX

"Partnership Y" means XXXXXXXXXX general partnership.

"Petroleum Substances" means petroleum, natural gas and related hydrocarbons, and all other substances whether liquid or solid and whether hydrocarbons or not produced in association therewith.

"Plant Products" means all substances which are recovered from Raw Gas or Raw Dehydrated Gas XXXXXXXXXX but XXXXXXXXXX not limited to ethane, propane, butanes and pentanes plus, XXXXXXXXXX.

"private corporation" has the meaning assigned to the expression by subsection 89(1) of the Act.

"Project" means the XXXXXXXXXX Project as described in 5 to 7 below.

"Project Facilities" means XXXXXXXXXX.

"Project Facilities Agreements" means XXXXXXXXXX.

"Project Interest" means the respective ownership interest of each Project Owner in the Project and in each of the Joint Ventures.

"Project Owners" means the partnerships or corporations who are the beneficial owners of the Joint Property in proportion to their Project Interests, including the Lands, Wells and Project Facilities, and who are the joint venturers of the Joint Ventures.

"Project Regulations" means all statutes, laws, rules, orders, approvals and regulations having the force of law and in effect from time to time, made by governmental authorities or government appointed boards having jurisdiction over the Project or any part thereof or operations or ownership of the Lands, Wells or Project Facilities.

"Project Licenses" means the XXXXXXXXXX licenses issued to the Project Owners in respect of the Gas Fields, XXXXXXXXXX.

"Project Technology" means all knowledge, show how, know how, information, data, computer programs, inventions, copyrights and patents conceived, developed or obtained for the Project Owners and Joint Account.

"public corporation" has the meaning assigned to the expression by subsection 89(1) of the Act.

"Raw Dehydrated Gas" means raw dehydrated natural gas together with associated substances obtained from a field dehydration facility after the removal of water from Raw Gas.

"Raw Gas" means raw natural gas together with associated substances produced from the Gas Fields before being subjected to any conditioning.

"Regulations" means the Income Tax Regulations as amended to the date of this ruling letter.

"Reserves" means those Petroleum Substances recoverable from the Wells and the rights to which are made subject to the Project Licenses.

"Residue Gas" means that portion of Raw Dehydrated Gas which after conditioning is composed primarily of methane, XXXXXXXXXX.

"taxable Canadian corporation" has the meaning assigned to the expression by subsection 89(1) of the Act.

"Taxpayers" means Partnership Y, C Co., D Co. and G Co. as the joint venturers of the Joint Ventures.

"Wells" means all wells drilled XXXXXXXXXX on the Lands for the production of Petroleum Substances XXXXXXXXXX.

Facts

1. A Co. and its wholly-owned subsidiary, B Co., are corporations subject to the provisions of the CBCA. A Co. and B Co. are each XXXXXXXXXX a taxable Canadian corporation. XXXXXXXXXX. A Co. and B Co. are engaged in the business of the exploration for, and the development, production and marketing of, petroleum and natural gas and related substances primarily within Canada. XXXXXXXXXX Partnership Y, XXXXXXXXXX is a general partnership XXXXXXXXXX and a Canadian partnership. XXXXXXXXXX their respective interests are as follows:

					XXXXXXXXXX	Partnership Y

		A Co.			             XXXXXXXXXX
 		B Co.			             XXXXXXXXXX

2. C Co. is a corporation subject to the provisions of the CBCA. C Co. is XXXXXXXXXX a taxable Canadian corporation. C Co. is engaged in the business of the exploration for, and the development, production, refining and marketing of, petroleum and natural gas and related substances within and outside Canada both directly and through subsidiary corporations.

XXXXXXXXXX

3. D Co. is a taxable Canadian corporation and is a corporation subject to the provisions of the CBCA. XXXXXXXXXX. D Co. and its subsidiaries are engaged in the business of the exploration for, and the development, production and processing of petroleum, natural gas and related hydrocarbons. D Co. is wholly owned by E Co. which is a taxable Canadian corporation XXXXXXXXXX.

4. G Co. is a corporation subject to the provisions of the Companies Act (XXXXXXXXXX). G Co. is XXXXXXXXXX a taxable Canadian corporation XXXXXXXXXX. G Co. is engaged in the business of the exploration for, and the development, production and marketing of, petroleum and natural gas in Canada.

The Project

5. The Project involves the exploration for, and the development, production and processing of, petroleum and natural gas reserves located at the Gas Fields.

6. The Project requires the construction and operation of the Wells and Project Facilities in order to produce, transmit and process the Raw Gas into the Residue Gas and Finished Products for the Canadian and US markets.

XXXXXXXXXX

7. The Project commenced development following project sanction XXXXXXXXXX on

XXXXXXXXXX

Interim Joint Venture

8. Partnership Y, C Co., D Co. and G Co. entered into an interim joint venture in respect of the Project pursuant to Agreement #1 on XXXXXXXXXX. On the same date, certain other agreements in respect of the Project were also entered into by these corporations and partnership: Agreement #2, Agreement #3, Agreement #4 and Agreement #5. Agreement #1 sets out the interim arrangement in respect of the Project, including the drilling, testing and equipping of the Wells (or abandonment of Wells) and the design, engineering, construction, acquisition, installation and testing of the Project Facilities. Agreement #1 will remain a binding agreement until all of the Project Facilities Agreements are entered into by the Project Owners as described in 12 below. The Project Owners have retained and appointed F Co. as the Operator in respect of the Lands and Wells under Agreement #2. Because F Co. is the Operator and the agent of the Project Owners in respect of the Project, F Co. is also a party to these agreements.

9. The respective interests that are owned by Partnership Y, C Co., D Co., G Co. and H Co. in the Lands are each an undivided interest in a Canadian resource property. Pursuant to Agreement #2, their respective interests in the Lands are in proportion to their Project Interests referred to in 12 below XXXXXXXXXX.

10. The Project Owners entered into Agreement #5 XXXXXXXXXX in order to have certain restrictions on the powers of F Co's directors to manage the business and affairs of F Co. The persons elected as directors and appointed as officers of F Co. have agreed to serve as directors and officers respectively of F Co. at the request of the Project Owners and in consideration of the execution of Agreement #5 by the Project Owners and F Co. F Co. is a taxable Canadian corporation and is subject to the provisions of the CBCA. The share capital of F Co. is owned by the Project Owners XXXXXXXXXX F Co. will have no activity or undertaking other than the operation of the Project on behalf of the Project Owners. F Co. will have no right or opportunity to any Project revenues, nor will it have beneficial ownership in any property of the Project (even though F Co. may have legal title of such property). The property of the Project consists of the Joint Property.

11. Agreement #2 contains, inter alia, the following provisions (the terms and expressions used in this paragraph have the meaning assigned by Agreement #2):

Joint Account and Joint Property

"Joint Account means the account set up pursuant to Clause 501, showing the charges incurred and credits accrued, and which are to be shared by the Owners in accordance with the terms of this Agreement."

(XXXXXXXXXX)

"Joint Property means all property, whether real or personal, acquired or utilized by or for the benefit of the Joint Account pursuant to the terms of this Agreement, XXXXXXXXXX."

Canada and United States Taxes

"Nothing in this Agreement shall constitute or create a partnership among the Parties or between any of them. Except as expressly provided for in this Agreement, nothing in this Agreement shall constitute any Party as the agent of any other, nor shall any Party have, or represent that it has, the authority or power to act for or to undertake or create any obligation or responsibility as agent for or in the name of any other Party."

"The Parties agree that if this Agreement or the relationship established hereby constitutes a partnership as defined in Section 761(a) of the United States Internal Revenue Code, then they elect to be excluded from the application of any sections of Subchapter K of such Code, and XXXXXXXXXX or such other Party as may be appointed by the Management Committee from time to time is authorized to execute and file any forms or other documentation as is required for such election."

Operator as Agent

"The Owners declare and acknowledge that the Operator in performing its duties and discharging its obligations under this Agreement, shall be the agent and in the instances specified herein, trustee of the Owners. The Operator in such capacity shall not acquire nor be entitled to any beneficial interest whatsoever in the Joint Property or production from the Lands. The Operator, when entering into any contracts or agreements in writing relating to the Joint Property shall (i) specifically disclose such relationship, (ii) use reasonable efforts to ensure that the Owners are fully entitled to the benefits thereof and to enforce the same independent of the Operator, and (iii) specifically disclose that the liability of the Owners is not joint and several but separate and distinct and limited to their respective Joint Interests."

"F Co shall use reasonable efforts to ensure the following clause or similar clause is included in all contracts entered into with Third Parties with respect to the Joint Property:

'F Co hereby declares that it is the agent for and representative of the Owners in respect of this Agreement, and accordingly, all rights and interests acquired and all obligations undertaken by F Co hereunder are on behalf of the Owners. Contractor acknowledges and agrees that the liability of the Owners for any breach hereof is not joint and several but separate and distinct and limited to their respective Joint Interests. Further, all legal rights and remedies available to F Co also extend to the Owners on the same separate and distinct basis. Unless otherwise directed in writing by the Owners, Contractor agrees to deal solely with F Co.'"

Status of Operator

"The Operator shall: (a) at all times comply with the terms of this Agreement and the XXXXXXXXXX Agreement and the directions of the duly authorized Management Committee; and (b) except as otherwise expressly provided herein, render its services without profit or loss."

Control and Management of Joint Operations

"Subject to the provisions of this Agreement, the provisions of XXXXXXXXXX Agreement and any orders, directions and limitations given or imposed from time to time by the Management Committee in accordance with a vote taken pursuant to XXXXXXXXXX Agreement, the Operator shall have the sole and exclusive control of the Joint Property (and shall hold such Joint Property as agent and trustee for all Owners in accordance with their respective Joint Interests) and of the management and direction of all Joint Operations, with full power and authority to take whatever action may be necessary, to incur commitments for expenditures and to make such expenditures as may be required to carry out Joint Operations and as required by the Regulations.

Without limiting the foregoing, the Operator shall:

(a) obtain tenders for and/or act as agent of the Owners and on whose behalf the Operator shall enter into contracts for exploration and development of the Lands and the Reserves, the drilling and equipping of Wells, the conduct of seismic operations and the procurement and supply of goods and services in respect thereto in accordance with this Agreement;

(b) have direct charge and supervision of all matters arising under the contracts for exploration and development of the Lands and the Reserves, the drilling and equipping of Wells, the conduct of seismic operations and the procurement and supply of goods and services in respect thereto;

(c) make, as agent and trustee for all Owners, application for, and acquire, any and all licenses, permits, surface rights, rights-of-way and approvals or orders under all applicable Regulations which are necessary or convenient for the purpose of this Agreement and Joint Operations and upon request furnish each Owner with copies of all relevant documentation;

(d) conduct geophysical, geological and other exploratory or developmental work regarding the Lands;

(e) conduct the drilling, testing, completing, recompleting, abandoning, reworking, plugging, capping or equipping of Wells and all matters relating to the operation of the Lands;

(f) procure and maintain for the Joint Account for the benefit of the Parties and their respective Affiliates, directors, officers, consultants, agents and employees the insurance or other risk financing alternatives set forth in XXXXXXXXXX and require all contractors and subcontractors employed by it to carry the insurance set forth in the said Schedule;

(g) unless otherwise directed by the Management Committee, pay and discharge promptly all costs, taxes (other than income taxes, mineral taxes, or other taxes, assessments or levies based on reserves, on a unit of production or on the value thereof unless required to do so by the Regulations) and expenses incurred in connection with the Joint Operations conducted by the Operator pursuant to this Agreement;

(h) establish and maintain the Joint Account;

(i) keep within Canada true and correct financial books, accounts and records of the Joint Operations with respect to the development and progress made, drilling done, the conduct of other Joint Operations and the production of Petroleum Substances in compliance with the Accounting Procedure and at all reasonable times extend to each Owner the right to examine and inspect and audit same and to make extracts and copies thereof provided that nothing shall oblige the Operator to maintain any of these books, accounts and records for more than a period of seven (7) years from the date of creation, except for requirements in the Regulations, taxes and any undecided dispute, litigation, audit exception or records retention policy. All records of an engineering nature shall be kept for such time as may be determined by the Management Committee to be required for the operation or maintenance of the Lands and the Wells;

(j) extend to each Owner at such Owner's sole risk and expense the right to examine, inspect and observe the Joint Property and all Joint Operations being conducted upon the Lands in the presence of an Operator's representative at all reasonable times; and

(k) designate a representative to appear before any court or regulatory body considering matters pertaining to Joint Operations (provided that no such designation shall prevent any Owner from having its own representative appear on its own behalf).

Nothing in this Clause shall be construed to require or permit the Operator to conduct any Joint Operations without the approval of the Management Committee, if that approval is required pursuant to the terms of this Agreement."

Title

"The Operator shall hold bare legal title to the Joint Property and all associated licenses and approvals required under the Regulations in trust as agent and trustee for the Owners. Each Owner, however, shall retain its beneficial title to the Joint Property and all such associated titles, licenses and approvals. Except as otherwise provided herein, including XXXXXXXXXX, or as required by the Regulations, the Operator shall as agent for the Owners and for the Joint Account comply with all terms and conditions of the Documents of Title and maintain them in good standing and in full force and effect (including, without limitation, continuation, lease selection and grouping decisions). The Operator shall advise the Owners of the amount of deposits or like financial commitments required to renew or continue such Documents of Title. The Operator shall keep the Joint Property free from all adverse claims, liens and encumbrances occasioned by Joint Operations hereunder, except claims or liens created under or pursuant to this Agreement and except claims and liens being contested in good faith and the Operator shall notify the Owners upon becoming aware of any such claim, lien or encumbrance. In this Clause nothing shall be construed to require the Operator to drill a Well or conduct any Joint Operation."

Burden of Responsibility

"All liabilities and indemnities arising from Joint Operations shall be for the Joint Account and shall be borne by the Owners in the proportions of their respective Joint Interests."

Proposed Transactions

XXXXXXXXXX Joint Ventures

12. The Project will be owned and operated by XXXXXXXXXX joint ventures among Partnership Y, C Co., D Co., G Co. and H Co. The respective Project Interests of the Project Owners in each of these XXXXXXXXXX joint ventures of the Project will be as follows:

XXXXXXXXXX

Agreement #2, Agreement #3, Agreement #4 and Agreement #5, which were referred to in 8 above, will continue to apply to the Joint Ventures. The Project Owners will also enter into the Project Facilities Agreements in respect of the Project and the Joint Ventures. One of the Joint Ventures will be entered into by the Project Owners with respect to the ownership, development, construction, operation and abandonment of the Lands and Wells. This Joint Venture will be governed by Agreement #2, Agreement #3, Agreement #4 and Agreement #5. There will be a separate Joint Venture entered into by the Project Owners with respect to the ownership, construction, operation and abandonment of each of XXXXXXXXXX, that comprises the Project Facilities. Each of these XXXXXXXXXX Joint Ventures will be governed by Agreement #3, Agreement #4, Agreement #5 and the respective Project Facilities Agreement. Each of the Joint Ventures, in and by itself, will not be considered to be a separate business. Each of the Joint Ventures will have the same fiscal year end.

XXXXXXXXXX

F Co. will be the Operator and the agent of the Project Owners in respect of the Project Facilities, consequently F Co. will be a party to the Project Facilities Agreements solely in the capacity of an agent.

13. Pursuant to Agreement #2 and the Project Facilities Agreements, the rights, duties, obligations and liabilities of the Project Owners will be several, and not joint, nor joint and several, it being the express purpose and intention of the Project Owners that their interests in the Joint Property will be held as tenants in common. Furthermore, each Project Owner will separately own and, at its cost, will take in kind or dispose of, or make arrangements for the taking, disposition or handling of its share of the Residue Gas and Finished Products in proportion to its Project Interest. However, in an exception situation where a Project Owner fails to perform these obligations, the Operator will so notify such Project Owner and the other Project Owners. In order to avoid curtailment of production and to maintain throughput volumes in the Project Facilities, and for so long as such Project Owner fails to take in kind its share of the Residue Gas and the Finished Products, the Operator in its sole discretion, as agent and for the account and at the sole expense and risk of such Project Owner, may sell at market prices, store or otherwise dispose of all or any portion of the untaken Residue Gas and Finished Products. XXXXXXXXXX Notwithstanding the above, there will be no joint sales or disposition of the Residue Gas and Finished Products by the Operator, nor sharing of profits by the Project Owners. Occasionally, a particular Project Owner may have excess or surplus production, processing or transportation capacity in the Project Facilities and such capacity can be used to produce, process or transport the raw natural gas or/and related substances owned by another Project Owner. In this case, use of this excess or surplus capacity will be incidental to the particular Project Owner's production, processing and transportation of its own raw natural gas and related substances from the Lands. Charges or/and fees will be paid or payable to the particular Project Owner in respect of the utilization of such excess or surplus production, processing and transportation capacity in the Project Facilities.

Operational Arrangements

14. The Project Owners will retain and appoint F Co. as the Operator in respect of the Project Facilities under the Project Facilities Agreements. The share capital of F Co. will continue to be owned by the Project Owners as follows:

XXXXXXXXXX

15. Pursuant to the Project Facilities Agreements and Agreement #2, each Project Owner's contribution towards costs and expenses and capital expenditures, undivided ownership in the assets, and share of production from the Project will be calculated based on its Project Interest.

16. A Project Owner would be required to contribute into the ER Fund if and so long as such Project Owner does not meet certain credit rating requirements.

XXXXXXXXXX

You have advised that the Taxpayers are likely to meet the credit rating requirements.

17. The Project Facilities Agreements will contain the same or similar wording as set out in 11 above in respect of the joint account and joint property, Canadian and US taxes, Operator as agent, status of Operator, control and management of joint operations, title and burden of responsibility.

18. Pursuant to the Project Facilities Agreements and Agreement #2, F Co. will carry out the following activities as the Operator (i.e., as the operator of the Project) and as the agent for and on behalf of the Project Owners after the date of this ruling letter and after these agreements have been executed:

(a) obtain tenders and enter into contracts for exploration and development of the Lands, the drilling and equipping of the Wells, the conduct of seismic operations and the procurement and supply of goods and services;

(b) supervise all matters arising under the contracts referred to in (a) above;

(c) make, as agent and trustee for Project Owners, an application for and acquire licenses, permits, surface rights, rights of way and approvals or orders that are necessary for the operation of the Project, the Joint Ventures, the Project Facilities Agreements and Agreement #2;

(d) conduct geophysical, geological and other exploratory or development work;

(e) conduct drilling, testing, completing, recompleting, abandoning, reworking, plugging, capping or equipping of wells and other matters relating to operation of the Lands;

(f) maintain the insurance or the other risk financing alternatives;

(g) unless directed otherwise, pay and discharge all costs, taxes (other than income taxes, royalties, mineral taxes or other taxes, assessments or levies based on reserves on a unit of production or on the value thereof unless required to do so by the regulations) and expenses incurred in connection with the joint operations of the Project;

(h) establish and maintain the joint accounts (i.e., one in respect of capital expenditure and another one in respect of operating costs and expenses), the amounts of which will be credited or charged to the Project Owners on a timely basis;

(i) keep all financial books, accounts and records as is required in the joint venture agreements referred to in 12 above;

(j) extend to each Project Owner at their risk and expense the right to examine, inspect and observe the Joint Property and joint operations of the Project;

(k) designate a representative to appear before any court or regulatory body considering matters pertaining to joint operations of the Project;

(l) hold legal title to the Joint Property; and

(m) hold legal title to certain technology of the Project.

F Co. will also incur the necessary expenses for and on behalf of the Project Owners relating to the Project which include, inter alia, the purchasing of supplies and expenses relating to the hiring of employees.

Purposes of the Proposed Transactions

The purpose of the Proposed Transactions is to enable the Project Owners to efficiently operate the Project through a number of joint ventures allowing each Project Owner to contribute towards Project costs, to maintain an undivided ownership in the Project assets and to maintain undivided ownership in their respective share of production based on their Project Interests.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that no one or more of the Joint Ventures will constitute one or more partnership(s) in law, our rulings are as follows:

For the sole purpose of determining the relevant taxpayer (in respect of which sections 9, 12, 13, 20, 37, 65, 66-66.7, 96, 110.1, 124, 127 and 127.3 of the Act and Parts IV, XI, XII, XXIX and XLVI of the Regulations may become relevant) as a result of transactions undertaken by the Operator on the Project, we confirm that,

A. (i) amounts received by,

(ii) revenues credited to, and

(iii) costs or expenses incurred (including wages and salaries of employees of the Operator) by

the Operator as the agent for and on behalf of a Taxpayer, as described in 17 and 18 above, after the Effective Date in respect of the Project will be considered amounts received by, revenues, costs, or expenses, as applicable, of that Taxpayer as to its proportionate Project Interest;

B. the portion of the Joint Property acquired by the Operator as the agent for and on behalf of a Taxpayer, as described in 17 and 18 above, after the Effective Date will be considered property of that Taxpayer as to its proportionate Project Interest; and

C. the activities carried on by the Operator as the agent for and on behalf of a Taxpayer, as described in 17 and 18 above, after the Effective Date in respect of the Project will be considered as being carried on by that Taxpayer.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3, as amended, and are binding on Revenue Canada, provided that all of the Project Facilities Agreements are entered into by XXXXXXXXXX.

Nothing in this ruling letter should be construed as confirming the cost of any property or the amount of any expense described herein. For greater certainty, we are not ruling nor expressing any opinion:

(a) on the application or non-application, as the case may be, of any of the provisions of the Act and Regulations, including those listed above in the preamble to the rulings, to any of the amounts, property or activities that are the subject of rulings A to C above;

(b) with respect to the XXXXXXXXXX Agreement, XXXXXXXXXX, payments to and from the ER Fund, production or/and processing of the Outside Gas, and the Functional Unit(s); and

(c) on whether any of the XXXXXXXXXX joint ventures separately or together, in any number or combination, form or constitute a partnership.

Furthermore, the rulings given above do not imply acknowledgement, acceptance or confirmation by Revenue Canada of any tax consequences arising out of the facts and proposed transactions described herein except as expressly stated in the above under the heading of Rulings Given.

Yours truly,

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