1999 Ruling 9922493 - LIMITED PARTNERSHIP - FILM FINANCING

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: Multi-level partnership structure to provide financing through a limited partnership for film and television industry production in Canada for those costs not eligible for tax credits. (1) Are the "operating" partnership's costs deductible? (2) Does section 18.1 apply to the "operating" partnership? (3) Are losses deductible? (4) What impacts upon the "at-risk" amount of the investors? (5) Is interest borrowed to invest deductible?

Position: (1) Yes, subject to eligibility under the Act and caveats described in the ruling.

(2) No.

(3) Losses would be deductible to the extent of the at-risk amount of the limited partner and subject to 143.2.

(4) Caveats provided in rulings, but generally, in this case, the at-risk amount would be the full outlay by the partners and partnership.

(5) Yes, subject to caveats in standard ruling provided.

Reasons: (1) Incurred in course of earning income from business or property (subject to reasonable expectation of profit).

(2) The exception in paragraph 18.1(15)(b) is met.

(3) To the extent realized in course of earning income from business or property (subject to reasonable expectation of profit).

(4) Application of 96(2.2).

(5) Application of 20(1)(c).

XXXXXXXXXX
XXXXXXXXXX 992249
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

We are writing in reply to your XXXXXXXXXX request for an advance income tax ruling on behalf of XXXXXXXXXX (the "Offering Partnership") and XXXXXXXXXX (the "Production Services Partnership").

You advise that to the best of the knowledge of the Offering Partnership, the Production Services Partnership and XXXXXXXXXX, none of the issues contained herein:

(a) is in an earlier return of the Offering Partnership, the Production Services Partnership or a related person;

(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Offering Partnership, the Production Services Partnership or a related person;

(c) is under objection by the Offering Partnership, the Production Services Partnership or a related person;

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

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate of Revenue Canada.

In this advance ruling, the following definitions are used.

"Act" means the Income Tax Act (Canada) R.S.C. 1985 (5th Supp) C.1 as amended to the date hereof;

"CLE Production Expenses" means those salary, wage and remuneration expenses that will be incurred by the Production Co. in respect of the production of the Series which are intended to qualify for the Tax Credits;

"CLE Production Services Agreement" means the production services agreement to be executed between the Studio and the Production Co., as described in 9 below;

"Class A Units" means Class A units of the Production Services Partnership;

"Class B Units" means Class B units of the Production Services Partnership;

"Class B Unit Option" means the option or options to acquire Class B Units that will be granted by the Production Services Partnership as described in 27 below;

"Closing" or "Closings" means the date or dates on which subscriptions for certain Units of the Offering Partnership are accepted;

"Exercise Period" means the period from the date the Class B Unit Option is granted until XXXXXXXXXX;

XXXXXXXXXX;

"General Partner" means XXXXXXXXXX as described in 1 below. The General Partner is the general partner of both the Offering Partnership and the Production Services Partnership;

XXXXXXXXXX;

"XXXXXXXXXX Sales Agency Agreement" means the sales agency agreement to be executed between XXXXXXXXXX and the Offering Partnership as described in 25 below;

"XXXXXXXXXX Sales Commission" means the sales agency commission payable by the Offering Partnership to XXXXXXXXXX pursuant to the XXXXXXXXXX Sales Agency Agreement;

"Initial Limited Partner" means XXXXXXXXXX as described in 1 above. The Initial Limited Partner is the initial limited partner of both the Offering Partnership and the Production Services Partnership;

"Interim Production Loan" means the interim production loan that will be granted by the Studio to the Production Services Partnership to finance the Non-CLE Production Expenses as described in 18 below;

"Interim Production Loan Agreement" means the interim production loan agreement to be executed between the Studio and the Production Services Partnership as described in 18 below;

"Investor" or "Investors" means a person or persons who will acquire one or more Units in the Offering Partnership during the XXXXXXXXXX year;

XXXXXXXXXX;

"Non-CLE Production Expenses" means those production expenses that will be incurred by the Production Services Partnership in respect of the production of the Series which do not qualify for the Tax Credits;

"Non-CLE Production Services Agreement" means the production services agreement to be executed between the Producer and the Production Services Partnership as described in 11 below;

XXXXXXXXXX;

"Offering Partnership XXXXXXXXXX Agreement" means the XXXXXXXXXX agreement to be executed between the Offering Partnership, the General Partner and XXXXXXXXXX as described in 25 below;

"Offering Partnership XXXXXXXXXX Fee" means the XXXXXXXXXX fee payable to XXXXXXXXXX under the Offering Partnership XXXXXXXXXX Agreement;

"Producer" means XXXXXXXXXX, as described in 6 below;

"Producer Services Agreement" means the producer services agreement to be executed between the Studio and the Producer as described in 10 below;

"Production Co." means XXXXXXXXXX as described in 5 below;

"XXXXXXXXXX" means the XXXXXXXXXX to be executed between the Production Services Partnership and the Production Co. as described in 12 below;

"Production Co. XXXXXXXXXX Fee" means the XXXXXXXXXX fee that will be paid by the Production Services Partnership to the Production Co. pursuant to the Production Co. Agency Agreement;

"Production Services Partnership XXXXXXXXXX Agreement" means the XXXXXXXXXX agreement to be executed between the Production Services Partnership, the General Partner and XXXXXXXXXX as described in 30 below;

"Production Services Partnership XXXXXXXXXX Fee" means the XXXXXXXXXX fee payable to XXXXXXXXXX under the Production Services Partnership XXXXXXXXXX Agreement;

"Release Date" means the date (to be negotiated) by which the Studio or its appointed distributor is to release or distribute the Series for commercial exploitation;

"Series" means the television series, consisting of XXXXXXXXXX episodes, to be produced in Canada currently entitled "XXXXXXXXXX";

"Studio" means XXXXXXXXXX as described in 4 below;

"Subscription Agreement" means each subscription agreement pursuant to which an Investor will acquire Units of the Offering Partnership;

"Tax Credits" means the film and video production services tax credits that are available pursuant to section 125.5 of the Act and the corresponding film and video production services tax credits that are available under provincial legislation in respect of certain salary, wage and remuneration expenses incurred in Canada in relation to the production of a film or video;

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

"Unit" or "Units" means a unit or units of the Offering Partnership;

"Unit Lender" means XXXXXXXXXX, a private financial institution described in 7 below;

"Unit Loan" means a loan to be made available to each Investor pursuant to which the Unit Lender will lend, and an Investor will borrow, an amount to finance approximately XXXXXXXXXX% of the subscription price for an Investor's Units;

"Unit Loan Agreement" means the unit loan agreement to be executed between the Unit Lender and an Investor, as described in 21 below.

Our understanding of the facts, proposed transactions and their purposes is as follows.

FACTS

1. The Offering Partnership was formed on XXXXXXXXXX as a limited partnership pursuant to the Limited Partnerships Act. The General Partner, a corporation incorporated under the XXXXXXXXXX on XXXXXXXXXX, is the general partner of the Offering Partnership. The General Partner conducts its business from XXXXXXXXXX. Its tax identification number is XXXXXXXXXX and it files its tax return with the XXXXXXXXXX Tax Services Office. The General Partner is solely responsible for the daily operating activities of the Offering Partnership. The Initial Limited Partner, a corporation also governed by the XXXXXXXXXX and incorporated on XXXXXXXXXX, is the initial limited partner of the Offering Partnership. Both the General Partner and the Initial Limited Partner are taxable Canadian corporations and both are wholly-owned subsidiaries of XXXXXXXXXX.

The Offering Partnership conducts its business from the office of the General Partner. The fiscal year end of the Offering Partnership is XXXXXXXXXX. The Offering Partnership's tax shelter identification number is XXXXXXXXXX.

The business of the Offering Partnership includes acquiring, holding and exploiting an equity interest in Class A Units of the Production Services Partnership and such other business as may be determined by the Offering Partnership from time to time. (It is intended that the Offering Partnership will acquire interests in other production partnerships that will provide production services for other films or television programs produced in whole or in part in Canada; however, these are not the subject of this advance ruling.)

2. The Production Services Partnership was formed on XXXXXXXXXX as a limited partnership pursuant to the Limited Partnerships Act. Its business address is the same as that of the General Partner as described above. The Production Services Partnership will obtain a partnership identification number for purposes of the Act and will file its partnership information returns with the XXXXXXXXXX Taxation Centre. The Production Services Partnership will be a tax shelter and will apply for a tax shelter identification number. The Production Services Partnership will be extra-provincially registered in the province of XXXXXXXXXX. The fiscal year end of the Production Services Partnership is XXXXXXXXXX. The General Partner and the Initial Limited Partner are also the general partner and initial limited partner respectively of the Production Services Partnership.

The business of the Production Services Partnership includes arranging for, and/or providing, certain production services for the Series, the expenses of which will be Non-CLE Production Expenses, and any other activities or businesses determined to be incidental to the foregoing.

3. XXXXXXXXXX is a taxable Canadian corporation incorporated pursuant to the XXXXXXXXXX. The shares of XXXXXXXXXX are owned by XXXXXXXXXX owns all of the issued and outstanding shares of the General Partner, the Initial Limited Partner and XXXXXXXXXX, all of which are taxable Canadian corporations governed by the XXXXXXXXXX.

The business offices of XXXXXXXXXX, the Initial Limited Partner and XXXXXXXXXX are XXXXXXXXXX. The tax identification numbers and tax services offices of each are as follows:

XXXXXXXXXX.

4. The Studio is a XXXXXXXXXX corporation which will own, acquire or control the exclusive underlying rights to authorize production of, and commercially exploit, the Series. The Studio does not have a permanent establishment in Canada in connection with a film or video production business or a film or video production services business.

5. The Production Co. is a corporation incorporated in the XXXXXXXXXX and is an affiliate of the Studio. The Production Co. has a permanent establishment in Canada and will carry on its business in Canada through its permanent establishment. Production Co. will primarily carry on a film or video production services business in Canada for owners of copyrights in productions which will meet the definition of "accredited production" in subsection 125.5(1) of the Act. Included in Production Co.'s business activities will be the provision to Studio of certain production services for the Series, the expenses of which will be CLE Production Expenses.

6. The Producer is a corporation governed by the laws of XXXXXXXXXX. The Producer's address is XXXXXXXXXX. The Producer will carry on the business of, among other things, arranging for the provision of certain production services for the Series, the expenses of which will be Non-CLE Production Expenses.

7. The Unit Lender is a private financial institution incorporated under the laws of the province of XXXXXXXXXX. Its address is XXXXXXXXXX. The Unit Lender carries on the business of, inter alia, lending money to Canadian resident investors. The Unit Lender is, and at all material times will be, at arm's length with the Offering Partnership, the Production Services Partnership, and each of the Investors.

PROPOSED TRANSACTIONS

8. As described more fully below, the Production Services Partnership has agreed to provide certain production services for XXXXXXXXXX of the Series, the expenses of which will be Non-CLE Production Expenses, and Production Co. will provide certain other production services, the expenses of which will be CLE Production Expenses. The total estimated amount of the production budget is approximately $XXXXXXXXXX as follows: Non-CLE Production Expenses - $XXXXXXXXXX; CLE Production Expenses - $XXXXXXXXXX.

9. The Studio will enter into the CLE Production Services Agreement with Production Co. whereby the Studio will engage the Production Co. to provide, or arrange for the provision of, certain production services for the Series. The Production Co. will incur expenses in connection with providing the production services, which expenses will be CLE Production Expenses and which are expected to entitle the Production Co. to receive the Tax Credits. Production Co. will be responsible to apply for the available Tax Credits and will be entitled to retain the sole benefit of the Tax Credits. The Production Co. will be solely responsible for the payment of the CLE Production Expenses.

As consideration for providing or arranging for the provision of production services, the Production Co. will receive a production services fee from Studio. The production services provided or arranged for by the Production Co. will generally include the supply and provision of technical knowledge and expertise by Canadian personnel, and the services of Canadian cast and crew for the Series. The Production Co. will be responsible for all costs in connection with the remuneration of Canadian personnel, cast and crew for the Series.

10. The Studio will also enter into the Producer Services Agreement with the Producer (a corporation with which the Studio deals at arm's length) pursuant to which the Producer will agree to arrange for the provision of production services for the Series, the expenses of which will be Non-CLE Production Expenses. The Producer will be solely responsible for the payment of the Non-CLE Production Expenses. As consideration therefor, the Producer will receive a fee from Studio equal to the aggregate of:

(a) XXXXXXXXXX; and

(b) XXXXXXXXXX.

11. Concurrently with entering into the Producer Services Agreement, the Producer will enter into the Non-CLE Production Services Agreement with the Production Services Partnership. Under the terms of the Non-CLE Production Services Agreement, the Production Services Partnership will agree to provide the production services for the Series, the expenses of which will be Non-CLE Production Expenses. Such production services will generally include the production services for the Series stemming from all production expenditures incurred except the CLE Production Expenses. The Non-CLE Production Services Agreement will provide that the Production Services Partnership will be responsible for all costs associated with such production services. As consideration for providing the production services, the Production Services Partnership will receive a production services fee equal to the aggregate of: XXXXXXXXXX.

The Non-CLE Production Services Agreement will further provide that principal photography for the Series must commence prior to XXXXXXXXXX. Moreover, the Non-CLE Production Services Agreement will stipulate as to the nature and scope of the production as well as the particulars of the production schedule and the production budget for the Series.

12. The Production Services Partnership and the Production Co. will enter into the XXXXXXXXXX Agreement pursuant to which the Production Services Partnership will be provided with certain XXXXXXXXXX services by the Production Co. (XXXXXXXXXX). As consideration therefor, the Production Services Partnership will pay the XXXXXXXXXX Fee to Production Co.

13. The Studio and/or Producer will exercise its approval rights in relation to a variety of artistic and creative decisions for the Series in accordance with industry practice. In accordance with standard industry practice, the Studio, and/or Production Co. and/or the Production Services Partnership and/or the Producer will maintain a policy or policies of insurance (with each named as an insured beneficiary) to insure against all appropriate risks including the following:

(a) death or disability of a principal performer;

(b) loss or destruction of the master tape, original negative or sound track of the Series, or of sets, props or equipment;

(c) errors and omissions in the Series;

(d) third party liability; and

(e) infringement of copyright, libel and slander, defamation of character, invasion of privacy and right of publicity.

14. The Non-CLE Production Services Agreement will further provide that ownership of all results of the production services referred to herein, including any tangible property and equipment purchased and supplied in connection with the production services, will immediately vest in and be retained by the Studio. Copyrights and rights of exploitation in the Series will be owned by the Studio. The Non-CLE Production Services Agreement will also stipulate that the Studio will own the entire interest in the Series, including copyrights, and will have control over decisions respecting the exploitation of the Series. All copyrighted works incorporated into the Series, or upon which the Series is based, will be owned by the Studio as "works made for hire" for purposes of US copyright law, and/or "works done in the course of employment" for purposes of Canadian copyright law.

15. Pursuant to the Non-CLE Production Services Agreement, the Production Services Partnership will prepare or cause to be prepared any production reports that may be reasonably required. All applicable laws, statutes, levies, regulations and requirements of all governmental agencies and regulatory bodies will be complied with by the Production Services Partnership. In addition, the Production Services Partnership will duly apply for all necessary consents, licenses and permits which may be necessary in connection with the Series. In addition, the Production Services Partnership will, where necessary, recognize the rules of applicable film industry guilds and unions. The Production Services Partnership will also take all reasonable steps to ensure that any of its personnel who provide services for the Series and who claim any copyright or moral rights related to the Series will execute such assignments and waivers that may reasonably be required.

16. If the Studio or an appointed distributor has not released or distributed the Series prior to the Release Date in a manner consistent with the Non-CLE Production Service Agreement, the Production Services Partnership will be entitled to elect to substitute another series or production for the purpose of calculating the production services fee owing to it. For this purpose, the Production Services Partnership will have the exclusive discretion to designate a substituted series or production owned by the Studio provided that such substituted series or production is a comparable series or production produced in whole or in part during the XXXXXXXXXX years which has not been released or distributed prior to the Release Date and for which there is no ascertainable revenue at the time the substitution is made.

17. The Studio will lend, and the Production Co. will borrow, an amount on terms and conditions to be negotiated. The proceeds of the loan will be used by the Production Co. to meet its interim funding requirements for the production services to be performed by it, the expenses of which will qualify as CLE Production Expenses.

18. The Studio will also enter into the Interim Production Loan Agreement with the Production Services Partnership pursuant to which the Studio will establish a credit facility in favour of the Production Services Partnership. The purpose of the Interim Production Loan is to fund the Non-CLE Production Expenses that will be incurred by the Production Services Partnership pending the issuance of the Class A Units and any Class B Units and the receipt of the production services fees from the Producer. The Interim Production Loan will be a revolving line of credit to be drawn in several installments as required to meet the Non-CLE Production Expenses on a current basis. The Interim Production Loan will be non-interest bearing and the maximum amount that may be drawn by the Production Services Partnership is an amount equal to the Non-CLE Production Expenses, being approximately $XXXXXXXXXX, plus XXXXXXXXXX% to finance interim GST obligations. Any amounts drawn down under the credit facility will be repayable in that year and the Production Services Partnership will be authorized to prepay the whole or any part of the loan at any time without bonus or penalty. The Interim Production Loan will be full recourse to all assets of the Production Services Partnership. The Production Services Partnership will grant to the Studio a continuing first priority security interest in all of its assets and all present and subsequently acquired property of the Production Services Partnership.

19. In contemplation of the execution of the above agreements, XXXXXXXXXX episodes of the Series have been produced to date or are in the course of production, with delivery of each to the Studio to occur on the intended date of broadcast, the first of which is XXXXXXXXXX, and the Production Services Partnership has incurred Non-CLE Production Expenses in respect thereof in the amount of approximately $XXXXXXXXXX, Production Co. has incurred CLE Production Expenses in respect thereof, and the Production Services Partnership has borrowed from Studio in respect thereof.

20. There will be a confidential offering memorandum (the "Offering Memorandum") provided to prospective investors of the Offering Partnership. At various times throughout XXXXXXXXXX Investors will enter into Subscription Agreements with the Offering Partnership and thereby agree to acquire Units of the Offering Partnership. It is anticipated that there will be a number of Closings but in no event will a Closing occur after XXXXXXXXXX. The Offering Memorandum will contain the following:

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

The offering of Units by the Offering Partnership will consist of an unlimited number of Units*. There will be certain minimum purchase requirements which vary based on the jurisdiction of residence of the subscriber. Provided the minimum number of Units is purchased by a subscriber, fractional Units may be acquired. The total amount expected to be raised by the Offering Partnership with respect to the proposed transactions described herein relating to the Series is $XXXXXXXXXX. The Unit subscription price is $XXXXXXXXXX per Unit. The total number of Units expected to be sold with respect to the proposed transactions described herein relating to the Series is approximately XXXXXXXXXX.

*Given the Offering Partnership's intention to acquire units in a number of other production services partnerships that will provide production services for other films or television programs to be produced in whole or in part in Canada in XXXXXXXXXX but that such acquisitions have not yet been determined (and which are not the subject of this advance ruling), there is no certainty at the present time regarding the number of Units that will be offered under the Offering Memorandum.

21. Investors may choose to finance up to approximately XXXXXXXXXX % of their investment in Units by way of a Unit Loan from the Unit Lender. The Unit Loan Agreement will provide, inter alia, that the Unit Loan will be a full recourse loan to the Investor such that the Investor will be obligated to repay its Unit Loan in its entirety and all interest thereon. Amounts owing under the Unit Loan will be due and payable on or before the tenth anniversary date of the Unit Loan. Interest accruing in any year on a Unit Loan must be paid by the Investor to the Unit Lender on or before XXXXXXXXXX of the next year. The interest rate payable on the unpaid principal amount of a Unit Loan will be equal to or greater than the lesser of: XXXXXXXXXX. A Unit Loan may be prepaid at any time by an Investor in whole or in part without penalty. Each Unit Loan will be evidenced by a promissory note and will be secured by a pledge and assignment of the Investor's Units in favour of the Unit Lender and an assignment of the right to receive any and all distributions from the Offering Partnership.

22. Investors must arrange for the financing of the balance of the subscription price for their Units and must represent and warrant in the Subscription Agreement that all financing arranged for the subscription of Units (including any financing for an Investor who chooses not to enter into a Unit Loan Agreement) will not constitute a "limited recourse amount" for purposes of the Act.

23. Following the acquisition of Units by Investors, the Units of the Offering Partnership owned by the Initial Limited Partner will be redeemed.

24. The partnership agreement of the Offering Partnership will provide that all allocations of income and losses and all distributions of cash from the Offering Partnership will be XXXXXXXXXX% to the Investors and XXXXXXXXXX% to the General Partner.

25. The Offering Partnership will pay a fee to the General Partner for the XXXXXXXXXX services provided to the Offering Partnership by the General Partner, including XXXXXXXXXX. The fee payable by the Offering Partnership to the General Partnership for the provision of these services until XXXXXXXXXX will be approximately $XXXXXXXXXX.

From this fee the General Partner will be obligated to pay all of the operating expenses of the Offering Partnership.

Pursuant to the XXXXXXXXXX Agreement, XXXXXXXXXX will exclusively co-ordinate the XXXXXXXXXX of the sale of the Units and as consideration therefor, XXXXXXXXXX will receive the XXXXXXXXXX Sales Commission from the Offering Partnership, being XXXXXXXXXX will introduce licensed brokers or investment dealers and, where permitted under applicable securities laws, unregistered agents, to the General Partner to serve as the Offering Partnership's sub-agents in connection with the sale of Units. XXXXXXXXXX is solely responsible for compensating any of its subagents.

The Offering Partnership, the General Partner, and XXXXXXXXXX will enter into the Offering Partnership XXXXXXXXXX Agreement and in accordance therewith the General Partner will pay the Offering Partnership XXXXXXXXXX Fee to XXXXXXXXXX, or such other third party, for certain consultation and XXXXXXXXXX services as are necessary to complete the offering in accordance with its terms and conduct the ongoing business operations of the Offering Partnership. Any amount payable to XXXXXXXXXX, will be paid by the Offering Partnership and will be deducted from any amounts payable to the General Partner. The Offering Partnership may also incur certain additional and other fees and expenses in connection with the issuance of Units and its operations.

26. The number of authorized Class A Units to be issued by the Production Services Partnership is unlimited. The Class A Unit subscription price will be $XXXXXXXXXX per unit. Each Class A Unit will entitle the holder to one vote per unit at any meeting of the Production Services Partnership.

The Offering Partnership will use approximately $XXXXXXXXXX of the subscription proceeds from the Units to acquire approximately XXXXXXXXXX Class A Units of the Production Services Partnership. Thereafter, the units of the Initial Limited Partner in the Production Services Partnership will be redeemed.

27. The Production Services Partnership will also grant, for nominal consideration, Class B Unit Options to the Producer pursuant to which the holder of the Class B Unit Options will be entitled to acquire a certain number of Class B Units (XXXXXXXXXX) at their exercise price at any time during the Exercise Period. The exercise price for each Class B Unit will be the fair market value of the Class B Unit as reasonably determined by the General Partner. XXXXXXXXXX.

28. If a holder of a Class B Unit Option exercises the option during the Exercise Period, the holder will have the right to pay the Class B Unit Option exercise price at any time up to and including XXXXXXXXXX. However, the holder will be required to pay interest, at a negotiated rate, to the Production Services Partnership on any unpaid balance for the Class B Units from the date of exercise of the option to the date of full payment. Once issued, each Class B Unit will entitle the holder to one vote per unit at any meeting of the Production Services Partnership. The Class B Unit Options are discretionary and there is no guarantee that Class B Unit Options will ever be exercised.

29. The partnership agreement of the Production Services Partnership will provide that all allocations of income and losses will be XXXXXXXXXX% to the limited partners and XXXXXXXXXX% to the General Partner. Moreover, it will provide that the income and losses of the Production Services Partnership will be allocated in each fiscal period to the holder of Class A Units (being the Offering Partnership) and the holders (if any) of Class B Units based upon their respective XXXXXXXXXX contributions to the Production Services Partnership as at the last day of the relevant fiscal period. Allocations for income tax purposes may not correspond with the distribution of any available cash during that fiscal period.

XXXXXXXXXX

30. The subscription proceeds from the Class A Units, and the subscription proceeds, if any, from the Class B Units will used primarily to repay the Interim Production Loan and may also be used to fund a portion of the Non-CLE Production Expenses that will be incurred by the Production Services Partnership, and the XXXXXXXXXX. In part, the funds from the subscriptions and/or from the production services fees that are earned by the Production Services Partnership will be used to pay a XXXXXXXXXX fee to the XXXXXXXXXX and the XXXXXXXXXX Fee to XXXXXXXXXX pursuant to the XXXXXXXXXX. The Production Services Partnership may also incur certain additional fees and expenses in connection with its operations.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to:

(i) afford Canadian subscribers the opportunity to invest in the film 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 exploitation of films and television programs; and

(ii) to encourage and facilitate the production of films and television programs in Canada by foreign producers, thereby creating employment in Canada and utilizing and enhancing the expertise of Canadian production personnel.

RULINGS GIVEN

Provided that: (a) all relevant facts, proposed transactions and the purposes thereof have been fully disclosed and, as summarized above, are accurate and in all material respects are as will be reflected in the final versions of the documentation referred to above; (b) all of the proposed transactions are carried out as described above; (c) the offering documents contain a reference, such as described in 20 above, in respect of the existence of caveats in the rulings given; and (d) the Offering Partnership and the Production Services Partnership are partnerships at law, we confirm the following:

A. The production services expenses incurred by the Production Services Partnership after the date of this letter and forming part of the production services rendered by it pursuant to the agreement referred to in 11 above will, subject to the application of subsections 143.2(6) and (10) of the Act and subject to the provisions of section 18.1 of the Act, be deductible in the computation of the Production Services 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 well accepted business
principles;

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

iii) 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 services expenses incurred by the Production Services Partnership pursuant to the proposed transactions referred to in 11 above provided that before the end of the taxation year in which such production services expenditures are made, amounts included in computing the Production Services 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 Services Partnership for the year under the Act) in respect of the Series, exceed 80% of such production services expenses.

C. Losses for a taxation year of the Production Services Partnership which are allocated to the holders of Class A Units and Class B Units by the Production Services Partnership, in accordance with the terms of the partnership agreement referred to in 29 above will, subject to the application of subsections 143.2(6) and (10) of the Act, 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 taxation year of the Production Services 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 Services Partnership at the end of that taxation year.

D. Losses for a taxation year of the Offering Partnership which are allocated by the Offering Partnership to an Investor, in accordance with the terms of the partnership agreement referred to in 24 above, will be deductible in computing the income or loss of such Investor at the end of the Investor's taxation year in which such taxation year of the Offering Partnership ends, to the extent of the at-risk amount (within the meaning of subsection 96(2.2) of the Act) of such Investor in respect of the Offering Partnership at the end of that taxation year.

E. Subject to the application of paragraphs 96(2.2)(b), (b.1) and (c) of the Act, the at-risk amount, within the meaning of subsection 96(2.2) of the Act, of the Offering Partnership in respect of the Production Services Partnership, at the end of the XXXXXXXXXX taxation year of the Production Services Partnership, will be equal to the amount of the Offering Partnership's investment in the Class A Units, as described in 26 above, to the extent that the Offering Partnership, or a person with whom the Offering Partnership 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) thereof.

F. Subject to the application of paragraphs 96(2.2)(b), (b.1) and (c) of the Act, the at-risk amount, within the meaning of subsection 96(2.2) of the Act, of an Investor in respect of the Offering Partnership, at the end of the XXXXXXXXXX taxation year of the Offering Partnership, will be equal to the amount of the Investor's investment in Units of the Offering Partnership, as described in 20 above, to the extent that there is no amount owing by such Investor to the Offering Partnership in respect of such Units, and further, to the extent such Investor or a person with whom such 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) thereof.

G. For greater certainty, in calculating the at-risk amount, within the meaning of subsection 96(2.2) of the Act, of: (a) an Investor in respect of the Offering Partnership or (b) the Offering Partnership in respect of the Production Services Partnership, the Production Services Partnership's entitlement to the fees referred to in 11 above 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 such Investor in computing income) in connection with the Unit Loan will be deductible by such Investor 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. The cost of the Units to an Investor and the expenses of the Offering Partnership and the Production Services Partnership will be reduced by the amount of any limited recourse amount, as defined in subsection 143.2(1) of the Act, to the extent that such limited recourse amount can reasonably be considered to relate to such cost or expense.

J. Any amount of unpaid principal which the Production Services Partnership owes to the Studio under the Interim Production Loan will be a limited-recourse amount, as defined in subsection 143.2(1) of the Act, of the Production Services Partnership, and the provisions of subsection 143.2(6) of the Act will apply thereto and to the extent the amount owing to the Studio is repaid by the Production Services Partnership, the provisions of subsection 143.2(10) of the Act will apply, provided such repayment is not part of a series of loans or other indebtedness and repayments by the Production Services Partnership.

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 Offering Partnership:

(i) by reason of the distribution of capital by the Production Services Partnership to the holders of Class A Units and Class B Units as described in 29 above; or

(ii) by reason of the Production Services Partnership's entitlement to the production services fees as described in 11 above.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996, and are binding provided the proposed transactions are entered into on or before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto. 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 Services Partnership;

c) the existence of reasonable expectation of profit of any of the Production Services Partnership, the Offering Partnership or any Investor;

d) whether Production Co. will be an eligible production corporation in respect of the Series for the purposes of section 125.5 of the Act;

e) whether the Production Services Partnership or Production Co. will be acting as legal agents for the Studio in respect of the making of the Series;

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, except as otherwise stated herein; 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 Offering Partnership will be subscribing for Class A units of limited partnership interest in a number of production limited partnerships, we are not ruling on the Offering Partnership's investment in any limited partnerships other than their investment in the Production Services Partnership, as described herein.

Yours truly,

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