1997 Administrative Letter 971152B - : Tax Shelter - Prescribed Benefits & Revenue Guarantees

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

Principal Issues:

1. Is an interest in the Partnership a tax shelter?

2. Is the Partnership's interest in XXXXXXXXXX a tax shelter?

3. (a) Are the XXXXXXXXXX contracts/XXXXXXXXXX agreements revenue guarantees for the purposes

of the prescribed benefit provisions in ITR 231(6)(b)(ii)?

(b) Are the letters of credit, provided by XXXXXXXXXX, revenue guarantees for the purposes of the prescribed benefit provisions in ITR 231(6)(b)(ii)?

4. Would the letters of credit be caught by 96(2.2)(d)?

5. Would draft Regulation 231(6.1) apply to treat the Full Recourse Debt of the Partnership as a prescribed benefit for the purposes of the definition of tax shelter in subsection 237.1?

6. Are the XXXXXXXXXX contracts/XXXXXXXXXX agreements revenue guarantees as contemplated in the at-risk provisions in 96(2.2)(d) or the at-risk adjustments in 143.2(2)?

7. Would the Full Recourse Debt be a prescribed benefit pursuant to ITR 231(6)(a)(iii), because the creditors rank equally (as opposed to having first priority) with the lenders under the Limited Recourse Debt in terms of priority against specified security (i.e. would this be a limitation by agreement for the purposes of the ITR)?

Position:

1 & 2. Not as of the date of the ruling, based on certain provisos.

3 to 7. No for all of them.

Reasons:

1 & 2. The statements and representations provided in Schedules "A" & "B" do not indicate that the interest in the Partnership would be a tax shelter and the statements and representations in Schedule "B" replace those in Schedule "A" and do not indicate that the Partnership's interest in XXXXXXXXXX would be a tax shelter. However, there may be other statements and representations made that we are not aware of, which could result in there being a tax shelter. This matter involves a question of fact.

3. XXXXXXXXXX

4. Purpose test not met. Letters of credit are to be given as part of package to get the commercial deal up and running. XXXXXXXXXX. Also, 96(2.2)(d)(v) would exclude this gross revenue guarantees since the "reasonably considered to ensure test" (similar to the test noted in issue 3. above) will not be met (i.e. revenue will not be generated unless XXXXXXXXXX is first completed. Also there is no guarantee that any funds will be available for distribution to the partners, as a result of the letter(s) of credit - see Rev. Canada comments page 53:12 of 88 Conference Report).

5. The most recent version of the draft regulation was contained in the June 20, 1997 Explanatory Notes. Therein it provides that a prescribed benefit (for the purposes of the definition of tax shelter in 237.1(1)(b)) includes an amount that is a limited- recourse amount because of 143.2(1), (7) or (13). It does not include amounts deemed to be limited-recourse amounts by virtue of 143.2(8). XXXXXXXXXX

6. The purpose test is not met (XXXXXXXXXX).

7. The creditors of the Full Recourse Debt still have full recourse against all the assets of the Partnership and of the General Partner. There was no limitation by agreement. XXXXXXXXXX

XXXXXXXXXX

Attention: XXXXXXXXXX

Dear Sirs:

Re: XXXXXXXXXX Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX, wherein you requested advance income tax rulings on behalf of the XXXXXXXXXX and the partners thereof, in connection with the proposed transactions described below.

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

FACTS

XXXXXXXXXX is a taxable Canadian corporation and a private corporation, as those terms are defined in subsection 89(1) of the Income Tax Act (Canada) (the "Act"). As noted below in paragraph 9, XXXXXXXXXX had a change of control in XXXXXXXXXX, subsequent to which XXXXXXXXXX disposed of all its interests in the XXXXXXXXXX project (the "Project").

XXXXXXXXXX

XXXXXXXXXX originally conceived the Project in XXXXXXXXXX. XXXXXXXXXX approached a number of XXXXXXXXXX to determine if they would participate in a XXXXXXXXXX study for the Project, and in response, XXXXXXXXXX agreed to participate in a XXXXXXXXXX study

XXXXXXXXXX

Late in XXXXXXXXXX, after completion of the XXXXXXXXXX Study, XXXXXXXXXX prepared an analysis of the investment that would be required and the cash flows that would result if the XXXXXXXXXX were to be built, and this analysis was delivered in early XXXXXXXXXX to no more than 35 prospective owners of the Project. All of these prospective owners were required to execute a confidentiality agreement with respect to the information contained in the analysis, and no persons outside of this limited group were privy to the analysis. Although the analysis changed slightly from time to time, a copy of one version of this analysis was provided to us during our meeting on XXXXXXXXXX, and is referred to as Schedule "A". The analysis included the aggregate estimated revenues and expenses that would be earned by and allocated to the owners of each component of the Project, XXXXXXXXXX. The analysis estimated the cumulative deductions that would be incurred by the Partnership, in respect of the XXXXXXXXXX, would exceed the cumulative net cost (i.e. the amount determined under paragraph (b) of the definition of "tax shelter" in subsection 237.1(1) of the Act) of XXXXXXXXXX.

As noted below in paragraph 33, the proposed transactions contemplate that shortly after the date of this letter, Schedule "B" will be issued and will supersede Schedule "A".

XXXXXXXXXX

A number of corporations within the XXXXXXXXXX industry responded to XXXXXXXXXX initiative and agreed to invest in the Project (see paragraph 8 below). The corporations that are currently the investors in the Project are affiliates of each of the corporations listed in XXXXXXXXXX (referred to herein as the "Sponsors").

As part of its agreement to participate in the Project, each Sponsor represented that it is engaged in the XXXXXXXXXX business or the XXXXXXXXXX business in Canada and that its direct or indirect investment in the Project would be an ordinary part of its business.

XXXXXXXXXX (the "Partnership") was formed as a limited partnership XXXXXXXXXX to undertake a further analysis of the design, engineering and economics of the XXXXXXXXXX and, if considered to be viable, to XXXXXXXXXX, own and XXXXXXXXXX. At the time of the formation of the Partnership, XXXXXXXXXX was the only limited partner of the Partnership and XXXXXXXXXX, which at that time was a subsidiary wholly-owned corporation of XXXXXXXXXX, was the general partner of the Partnership.

XXXXXXXXXX is a corporation incorporated on XXXXXXXXXX, and is a taxable Canadian corporation and a private corporation, as those terms are defined in subsection 89(1) of the Act. Its tax account number is XXXXXXXXXX and its tax services office is XXXXXXXXXX. XXXXXXXXXX is the general partner of the Partnership (the "General Partner") and has a XXXXXXXXXX% interest in the Partnership. See XXXXXXXXXX for the current listing of shareholders of XXXXXXXXXX.

On XXXXXXXXXX, XXXXXXXXXX transferred its interest as initial limited partner to its subsidiary wholly-owned corporation, XXXXXXXXXX.

XXXXXXXXXX, an agreement (hereinafter referred to as the "Partnership Agreement") was completed whereby the Sponsors agreed that the XXXXXXXXXX Project would thereafter be pursued by the Partnership. Accordingly, each Sponsor agreed to become or to cause an affiliate to become a shareholder of XXXXXXXXXX, and to cause an affiliate to become a limited partner in the Partnership and to make capital contributions to the Partnership to fund its activities. The interest of XXXXXXXXXX in the Partnership was set at XXXXXXXXXX% and the interests of the limited partners were set at an aggregate of XXXXXXXXXX%. Interests of the limited partners in the Partnership are represented by units (the "Units"). Since this agreement became effective, all activities relating to the XXXXXXXXXX Project have been carried on by the Partnership. The taxation year of the Partnership ends on December 31.

Upon the investment of the other limited partners into the Partnership, XXXXXXXXXX became the holder of an interest in the Partnership effectively entitling it to XXXXXXXXXX% of the equity in the Partnership, and became entitled to participate in funding tranches for the Partnership (as described below in paragraph 11). XXXXXXXXXX did in fact participate fully in the first two tranches of equity funding of the Partnership, thereby acquiring additional Units.

In XXXXXXXXXX, control of XXXXXXXXXX was acquired by a third party purchaser. The purchaser did not regard XXXXXXXXXX indirect interest in the Partnership as desirable, so prior to the acquisition of control, XXXXXXXXXX indirect interest in the Partnership (i.e. Units owned by XXXXXXXXXX) and XXXXXXXXXX shareholdings in the General Partner were ultimately sold to other participants in the Project.

Limited partners in the Partnership are herein referred to as the "Limited Partners". See XXXXXXXXXX for a current listing of the shareholders of XXXXXXXXXX and the Limited Partners.

After the formation of the Partnership and prior to the XXXXXXXXXX agreement referred to in paragraph 8 above becoming effective, applications were made, on a precautionary basis, for tax shelter registration numbers pursuant to subsection 237.1(2) of the Act for both the property to be acquired by the Partnership and for the interests in the Partnership. Tax shelter identification numbers were issued as follows:

XXXXXXXXXX

These applications were expressly made on a "without prejudice" basis, with the applicants expressing the view that the tax shelter rules did not apply to the relevant property. The purpose in registering as a tax shelter was to avoid any exposure to potential penalties under proposed subsection 237.1(7.4) of the Act.

To date, the Partnership has been funded entirely with equity contributions from its partners. The manner in which such funding has taken place is by periodic tranches under which each Limited Partner was given the opportunity to purchase additional Units based on its percentage interest in the capital of the Partnership at the relevant time. For any Limited Partner that did not exercise its rights to purchase some or all of such additional Units pursuant to one of these tranches, those Units were offered to and purchased by the other Limited Partners. With respect to each tranche, the General Partner contributed capital to the Partnership to maintain its XXXXXXXXXX% interest.

XXXXXXXXXX

As at the date hereof, XXXXXXXXXX has one class of common shares issued and outstanding, all of which are owned by the Sponsors of the Project or subsidiaries of the Sponsors. The current shareholders of XXXXXXXXXX, their shareholdings, and their corresponding Sponsor are listed in XXXXXXXXXX.

The Limited Partners are private corporations and Canadian corporations, as those terms are defined in subsection 89(1) of the Act. Each Limited Partner is, directly or indirectly, a subsidiary of one of the Sponsors. The interests of the Limited Partners in the Partnership are represented by XXXXXXXXXX

The current Limited Partners of the Partnership, their percentage interests in the XXXXXXXXXX Units of the Partnership, and their corresponding Sponsors are listed in XXXXXXXXXX.

The interests of the Limited Partners will change from time to time as additional Units of the Partnership are issued and as Limited Partners join or leave the Partnership. The direct or indirect interest of each Sponsor in the common shares of XXXXXXXXXX will, prior to the time when XXXXXXXXXX, be the same as that Sponsor's indirect percentage interest in the Partnership. The interest of XXXXXXXXXX as general partner will remain at XXXXXXXXXX%.

The Partnership is not entitled and does not expect to be entitled to any form of government assistance in connection with the Project, and the Partnership is not entitled and does not expect to be entitled to any proceeds of disposition by way of an agreement or other arrangement under which it has a right, either absolutely or contingently, to dispose of any interest in its property.

The Partnership has entered into agreements (the "XXXXXXXXXX Agreements") with XXXXXXXXXX pursuant to which, subject to certain conditions being met (i.e. XXXXXXXXXX approvals and authorizations, financing commitments, approval of the board of directors of the general partner), XXXXXXXXXX have agreed to enter into long-term XXXXXXXXXX contracts XXXXXXXXXX (the "XXXXXXXXXX Contracts" - see paragraph 39, below).

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 taxpayer(s) 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 taxpayer(s) or a related person

(iii) is under objection by the taxpayer(s) 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 expired, and

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

PROPOSED TRANSACTIONS

It is proposed that the Partnership XXXXXXXXXX

XXXXXXXXXX

Commencement of XXXXXXXXXX is expected to occur in XXXXXXXXXX. The total cost of the Project is estimated at XXXXXXXXXX

The Partnership will acquire approximately $XXXXXXXXXX of the funds that will be required to XXXXXXXXXX from capital contributions to be made by the General Partner and the Limited Partners (XXXXXXXXXX% contributed by the General Partner and XXXXXXXXXX% by the Limited Partners) and approximately $XXXXXXXXXX from funds that will be borrowed by the Partnership.

All of the Limited Partners have specifically represented and warranted that they do not and will not as a result of any action taken by them have a prescribed benefit in respect of their interest in the Partnership. None of the Limited Partners or the General Partner is expected to finance the acquisition of their interest in the Partnership or capital contributions to the Partnership by way of amounts described in subsection 231(6) or draft subsection 231(6.1) of the Regulations to the Act (the "Regulations").

The $XXXXXXXXXX to be borrowed by the Partnership will be divided into two types: shorter-term full recourse debt and long-term limited recourse debt.

The shorter-term full recourse debt will consist of one or more loans under one or more credit facilities (such loans are collectively referred to herein as the "Full Recourse Debt"). Funds borrowed under the Full Recourse Debt facility or facilities will be governed by separate loan agreements from the loan agreements relating to the Limited Recourse Debt described below. The terms of the Full Recourse Debt are expected to be as follows:

the total amount to be borrowed as Full Recourse Debt will be approximately $XXXXXXXXXX;

the principal amount of each amount borrowed under the Full Recourse Debt and all interest thereon will be repaid within 10 years after the day the amount is borrowed. There will bebona fidearrangements, evidenced in writing at the time the indebtedness arises, with respect to the repayment term;

interest on the Full Recourse Debt will be payable at least annually at a rate equal to or greater than the lesser of the prescribed rates referred to in draft subparagraphs 143.2(7)(b)(i) and (ii) of the Act (as it read in Bill C-69, which received First Reading in the House of Commons on December 2, 1996) and will be paid within each taxation year of the Partnership or within 60 days thereafter;

the loan agreements for the Full Recourse Debt will specifically identify the security that would be available to the lenders in the event of a default. The exact security has not yet been negotiated, but it will include any or all of:

negative covenants of the Partnership;

floating charges on the Partnership's assets including the XXXXXXXXXX Contracts; and

the granting of fixed security and assignments over the Partnership's assets including the

XXXXXXXXXX Contracts.

Should an event of default occur under the Full Recourse Debt, the lenders would rank equally with the lenders under the Limited Recourse Debt in terms of priority against the security; and under the Full Recourse Debt, there will be no limitation of recourse by the lenders against the Partnership in the event of a default. That is to say, in addition to whatever security is granted, lenders under the Full Recourse Debt would, in an event of default, have full and unlimited recourse against all of the property and assets of the Partnership and of the General Partner.

XXXXXXXXXX

Nothing in the loan documentation, or in any other agreement, will expressly limit recourse of the lenders against the Partnership or the partners thereof.

The long-term limited recourse debt will consist of one or more debt instruments (referred to herein collectively as the "Limited Recourse Debt") with varying maturities and varying rates of interest and will be governed by one or more loan agreements. Funds borrowed under the Limited Recourse Debt will be governed by separate loan agreements from the loan agreements relating to the Full Recourse Debt. The terms of the Limited Recourse Debt are expected to be as follows:

- the total amount to be borrowed as Limited Recourse Debt will be approximately $XXXXXXXXXX;

- most of the principal amounts borrowed under the Limited Recourse Debt or under any replacement debt therefor, and interest thereon, will be repayable more than 10 years after the date the amount is borrowed;

- interest arising during XXXXXXXXXX will be compounded and added to principal. Interest payments will commence only after the XXXXXXXXXX. It is expected that compound interest will be paid by the Partnership over the life of the particular loan in respect of which the interest has been compounded;

- repayments of the Limited Recourse Debt will be made commencing in the year XXXXXXXXXX;

- the loan agreements under the Limited Recourse Debt will specifically identify the security that would be available to the lenders in the event of a default. The exact security has not yet been negotiated, but it is expected to be the same as the security listed in paragraph 28(d) above. Should an event of default occur under the Limited Recourse Debt, the lenders would rank equally with the lenders under the Full Recourse Debt in terms of priority against the security; and

- the loan agreements under the Limited Recourse Debt will specifically state that:

- in an event of default, lenders would have recourse to the specified security; and

- lenders would not have recourse against any of the Limited Partners.

With regard to all of the Full Recourse Debt, for all purposes, but in particular for purposes of subsection 231(6) of the Regulations:

- the liability of the Partnership to pay the debt is not contingent;

- there is no guarantee, security or indemnity provided by a promoter, a person with whom the promoter does not deal at arm's length or a person who is to receive a payment (other than a payment made by the Partnership) in respect of the guarantee, security or indemnity;

- the debt will be denominated in Canadian dollars or in U.S. dollars; and

- the debt will not be owed to a promoter or to a person with whom the promoter does not deal at arm's length.

The lending group for both the Full Recourse Debt and the Limited Recourse Debt will, at the outset, likely consist of the same lenders, but this will not necessarily be the case thereafter to the extent that particular lenders assign their positions in any particular loan. Presently the Partnership is still in the preliminary stages of discussions with potential lenders. It is likely that financing will come from XXXXXXXXXX.

If the Partnership can obtain a satisfactory credit rating for use during construction, then a portion of the lenders under the Limited Recourse Debt may from the outset be different from the lenders under the Full Recourse Debt.

In order to ensure the maximum reduction of the Limited Recourse Debt and the corresponding prescribed benefit (for the purposes of the revised calculation reflected in Schedule "B", referred to below in paragraph 33), it is proposed that all repayments of Limited Recourse Debt in XXXXXXXXXX will be allocated to principal amounts borrowed to acquire property in XXXXXXXXXX and that all repayments of Limited Recourse Debt in XXXXXXXXXX will be allocated to principal amounts borrowed to acquire property in XXXXXXXXXX.

Since the original analysis was prepared (see the reference to Schedule "A", noted above in paragraph 3), the economics of the Project have been refined and revised to take into account changes in the financial structuring of the Project and changes to the XXXXXXXXXX design of the XXXXXXXXXX. As a result, a new analysis has been prepared that reflects updated estimates of the capital and operating expenditures that are expected for the Partnership in respect of the XXXXXXXXXX, the deductibility for purposes of the Act of those expenditures, and the anticipated funding of those expenditures. A copy of this updated analysis was contained in Schedule "B", attached to your XXXXXXXXXX letter, and was last amended in your XXXXXXXXXX letter to us (the amended version of Schedule "B" which was attached to your XXXXXXXXXX letter to us is referred to hereinafter as Schedule "B"). In Schedule "B", the numerical analysis shows that for property acquired by the Partnership in each of the years XXXXXXXXXX, the amount, if any, by which the cost of the property acquired would exceed the total amounts of any prescribed benefits in respect of the property (which amount is calculated in draft paragraph (b) of the definition of "tax shelter" in subsection 237.1 of the Act, as proposed in Bill C-69 and is hereinafter referred to as the "net cost" of the property) will in all cases exceed the cumulative deductions calculated in draft paragraph (a) of the definition of "tax shelter" in subsection 237.1(1) of the Act, as proposed in Bill C-69. No prescribed benefits (within the meaning of that term in subsection 231(6) or draft subsection 231(6.1) of the Regulations) were included in the calculation of the net cost, noted above, except for the outstanding balance of the Limited Recourse Debt. Shortly after the date of this letter, XXXXXXXXXX proposes to distribute the analysis contained in Schedule "B" to the Partnership, to all of the Limited Partners of the Partnership, and to all of the Sponsors. Appendix 'B', attached to and incorporated in this letter contains a summary and discussion of the data in XXXXXXXXXX.

The Partnership has incurred, and will incur, the following costs:

(a) start-up costs incurred to determine whether or not the Project can feasibly be undertaken, and incurred in preparing applications for XXXXXXXXXX approvals; (b) capital cost of XXXXXXXXXX; (c) eligible capital expenditures; (d) land; (e) XXXXXXXXXX; (f) interest expense on Full Recourse Debt and Limited Recourse Debt; (g) compound interest on Limited Recourse Debt; (h) financing costs; and (i) operating and maintenance expenses incurred to XXXXXXXXXX.

It is expected that 97% of all pre-operation costs incurred by the Partnership (other than financing costs) will be in respect of XXXXXXXXXX and related installation costs.

The timing of expenditure of funds and acquisition of property can be described as follows:

- in XXXXXXXXXX the Partnership incurred $XXXXXXXXXX on start-up costs as part of the XXXXXXXXXX study and XXXXXXXXXX process that the Partnership continued after the XXXXXXXXXX Study was completed. The Partnership also expended funds on capital costs pertaining to establishing an office (furniture, computers, office leasehold improvements, etc.), XXXXXXXXXX, and paid a small financing fee;

- in XXXXXXXXXX, the Partnership expects to incur an additional $XXXXXXXXXX of start-up costs and, assuming the Project continues, will start to acquire XXXXXXXXXX and to secure the necessary land XXXXXXXXXX;

- in XXXXXXXXXX, assuming the Project continues, the Partnership will incur further start-up costs of $XXXXXXXXXX, and will make XXXXXXXXXX acquisitions of XXXXXXXXXX, will acquire the balance of the necessary land XXXXXXXXXX, and will XXXXXXXXXX. Start-up of XXXXXXXXXX is expected in XXXXXXXXXX and completion of XXXXXXXXXX is expected in XXXXXXXXXX; and

- funds generally will be borrowed first under the Limited Recourse Debt and then under the Full Recourse Debt. The bulk of the funds borrowed under the Full Recourse Debt will be borrowed in XXXXXXXXXX, but some portion of the Full Recourse Debt will be incurred in XXXXXXXXXX. The Full Recourse Debt will be the last debt incurred. Interest will be incurred by the Partnership starting in XXXXXXXXXX. As noted above, interest arising under the Limited Recourse Debt and incurred during XXXXXXXXXX will not be paid as incurred but will be added to the Limited Recourse Debt and compound interest thereon will be deducted, as paid, pursuant to paragraph 20(1)(d) of the Act. Financing fees are anticipated to be payable in XXXXXXXXXX.

It is presently anticipated that the Partnership will earn gross revenues from XXXXXXXXXX of approximately $XXXXXXXXXX in each of the years XXXXXXXXXX, and net income in excess of $XXXXXXXXXX in each year.

The Partnership proposes to complete the design XXXXXXXXXX, arrange for the financing of the XXXXXXXXXX, complete the XXXXXXXXXX Contracts with the XXXXXXXXXX, obtain XXXXXXXXXX approval for the XXXXXXXXXX, and then XXXXXXXXXX and ultimately XXXXXXXXXX. Commencement of XXXXXXXXXX is conditional on, among other things, XXXXXXXXXX.

XXXXXXXXXX

The Partnership will XXXXXXXXXX from time to time distribute projected economic analyses to the partners, but, except for the analysis contained in Schedule "B" (referred to above in paragraph 33), will state no assumptions and make no representations as to deductibility of amounts for purposes of the Act.

As noted above in paragraph 21, subject to certain conditions precedent being met, the XXXXXXXXXX will enter into the XXXXXXXXXX Contracts XXXXXXXXXX. Additional XXXXXXXXXX will enter into XXXXXXXXXX Contracts from time to time. All such XXXXXXXXXX are referred to hereinafter as XXXXXXXXXX. The relevant terms of the XXXXXXXXXX Contracts that will be entered into by the

XXXXXXXXXX can be summarized as follows:

XXXXXXXXXX

XXXXXXXXXX

Each XXXXXXXXXX Contract will be for a term of XXXXXXXXXX years after the commencement of XXXXXXXXXX, subject to a right of extension by the XXXXXXXXXX;

If the XXXXXXXXXX defaults in payment XXXXXXXXXX, the Partnership may terminate the XXXXXXXXXX and may commence an action against the XXXXXXXXXX to recover unpaid XXXXXXXXXX. Generally, the XXXXXXXXXX Contracts are unsecured obligations of the XXXXXXXXXX. That is to say, if a XXXXXXXXXX defaults and the Partnership obtains a judgment against the XXXXXXXXXX, the Partnership will be an unsecured creditor in terms of its ability to enforce the judgment.

XXXXXXXXXX

XXXXXXXXXX

Certain XXXXXXXXXX propose to enter into their XXXXXXXXXX Contract through a subsidiary corporation (e.g. a sole purpose XXXXXXXXXX subsidiary).

XXXXXXXXXX

and

The obligations of both the XXXXXXXXXX and the Partnership to enter into the XXXXXXXXXX Contract are subject to certain conditions (as noted above in paragraph 21), and a XXXXXXXXXX may terminate its XXXXXXXXXX Contracts if less than a specified portion of the Project is XXXXXXXXXX by a specified date.

Future XXXXXXXXXX contracts may have different terms or conditions.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to XXXXXXXXXX.

RULINGS

Provided that the statement of facts, the proposed transactions and the purposes thereof, all as described herein (including the appendices), 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 proposed transactions are carried out as described above, we confirm the following:

A. Provided

(i) the terms of the Full Recourse Debt are as described above in paragraphs 28 and 30, and

(ii) that, as of the date of this letter, the only statements and representations (as contemplated in subsection 237.1(1) of the Act at the definition of "tax shelter") proposed to be made in connection with the interests acquired in the Partnership after the date of this letter, or in connection with the Partnership's investment in the property relating to the XXXXXXXXXX after the date of this letter, are those in Schedule "B" neither the interests acquired in the Partnership after the date of this letter, nor the Partnership's investment in the property relating to the XXXXXXXXXX acquired after the date of this letter, will be a tax shelter within the meaning of subsection 237.1(1) of the Act.

However, nothing in this ruling should be construed as implying that the Partnership interests or the XXXXXXXXXX will not become tax shelters upon the happening of a future event or a future statement or representation, including any revised Schedule "B".

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada December 30, 1996 and is binding subject to the provisos contained herein, and provided the analysis contained in Schedule "B" is distributed to the Partnership, to all of the Limited Partners of the Partnership, and to all of the Sponsors, as contemplated above in paragraph 33, on or before XXXXXXXXXX.

B. The XXXXXXXXXX Contracts, as described above in paragraphs 21 and 39, will not constitute an amount or benefit granted for the purpose referred to in paragraph 96(2.2)(d) of the Act.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada December 30, 1996 and is binding provided the XXXXXXXXXX Contracts are entered into by XXXXXXXXXX.

These rulings 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 income tax implications of the
XXXXXXXXXX
referred to above in paragraphs 15(b) to 20; or

(b) the deductibility, reasonableness or fair market value of any expenditures referred to in this letter.

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. Accordingly, no rulings have been provided in respect of any future XXXXXXXXXX contracts which may be entered into (as contemplated above in paragraph 39), other than the XXXXXXXXXX Contracts.

OPINIONS

It is our opinion that neither the interests acquired in the Partnership prior to the date of this letter, nor the Partnership's investment in the property relating to the XXXXXXXXXX acquired prior to the date of this letter, will be a tax shelter within the meaning of subsection 237.1(1) of the Act.

However, nothing in this opinion should be construed as implying that these Partnership interests, or the Partnership's investment in the property relating to the XXXXXXXXXX, will not become tax shelters upon the happening of a future event or a future statement or representation.

If paragraph 96(2.2)(d) of the Act and subsection 237.1(1) of the Act, as first proposed in Bill C-69, are re- introduced and enacted as then proposed, it is our opinion that the rulings and opinion previously given in this letter will remain unchanged.

The opinions expressed above are provided in accordance with paragraph 22 of Information Circular 70-6R3. These opinions do not constitute advance income tax rulings and are not binding on the Department.

For greater certainty, the rulings and opinions have been given without our knowledge of the source of funding used by each partner to acquire their interest in the Partnership. Notwithstanding the comments above in paragraph 26, if one or more partners did acquire, or do acquire, their interest in the Partnership using borrowed amounts, the interest(s) in the Partnership may be a tax shelter within the meaning of subsection 237.1(1) of the Act. If one or more interests in the Partnership is a tax shelter, and if section 143.2 of the Act, as first proposed in Bill C-69, is re-introduced and enacted as then proposed, not only would that interest be a tax shelter investment, as defined in subsection 143.2(1) of the Act, but all of the interests in the Partnership would be tax shelter investments by virtue of the application of subparagraph (b)(ii) of the definition of that term in subsection 143.2(1) of the Act.

Yours truly

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