Headnote
MI 11-102 and NP 11-203 – relief from filing business acquisition report – using income from the continuing operations of the filer to determine the significance of certain acquisitions leads to anomalous results – filer permitted to exclude depreciation of income-producing properties from income when calculating significance under Part 8 of National Instrument 51-102 Continuous Disclosure Obligations
Applicable Legislative Provisions
National Instrument 51-102 Continuous Disclosure Obligations, s. 8.3
Date: July 8, 2008
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the “JURISDICTION”)
AND
IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF CANADIAN APARTMENT PROPERTIES REAL ESTATE INVESTMENT TRUST (the “FILER”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) granting relief to allow the exclusion of depreciation of income producing properties when applying the Income Test (as defined below) for the REIT’s continuous disclosure obligations under Part 8 of National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”) in respect of the April 30, 2008 acquisition of a 174 suite apartment complex referred to as Dolphin Square (the “Exemption Sought”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application (the “Principal Regulator”), and
(b) the Filer has provided notice that section 7.4 (1) of Multilateral Instrument 11-102 Passport System (“MI 11-102”) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined in this decision.
Representations
This decision is based on the following facts represented by the REIT:
The REIT is an internally managed unincorporated open-ended real estate investment trust owning interests in multi-unit residential properties including apartment buildings and townhouses located in major urban centres across Canada and two land lease adult lifestyle communities.
The REIT was established under the laws of the Province of Ontario by a declaration of trust and its head office is located in Toronto, Ontario.
The REIT is a reporting issuer under the securities legislation of each of the provinces and territories of Canada.
The units of the REIT are listed and posted for trading on the Toronto Stock Exchange under the trading symbol CAR.UN.
The REIT completed its initial public offering on May 21, 1997 pursuant to its final long form prospectus dated May 12, 1997.
As at June 11, 2008, the REIT had ownership interests in 26,540 residential suites well diversified by geographic location and asset class and 1267 land lease sites.
As at and for the year ended December 31, 2007 the REIT had assets in excess of $2.2 billion, income from continuing operations of approximately $531,000, and depreciation of income producing properties of $66.7 million.
As at and for the year ended December 31, 2006 the REIT had assets of approximately $2 billion, income from continuing operations of approximately $579,000, and depreciation of income producing properties of $56.9 million.
Under Part 8 of NI 51-102, the REIT is required to file a business acquisition report (“BAR”) for any completed acquisition that is determined to be significant based on the acquisition satisfying any of the three significance tests set out in subsection 8.3 (2) of NI 51-102.
For the purposes of completing its quantitative analysis of the income test (the “Income Test”) prescribed under Part 8.3 of NI 51-102, the REIT is required to compare its income from continuing operations against the proportionate share of income from continuing operations of Dolphin Square.
The application of the Income Test produces an anomalous result for the REIT in comparison to the results of the other tests of significance set out in subsection 8.3 (2) of NI 51-102, which were not triggered by the acquisition.
Excluding depreciation of income producing properties when applying the Income Test more accurately reflects the significance of this acquisition from a business and commercial perspective and its results are generally consistent with the other tests of significance set out in subsection 8.3 (2) of NI 51-102.
The application of the Income Test with depreciation of income producing properties excluded results in Dolphin Square representing approximately 0.48% of the REIT’s income from continuing operations for the fiscal year ended December 31, 2007. However, based on the application of the Income Test, pursuant to paragraph (1) of Part 8.2 of NI 51-102, the REIT is required to file a BAR with respect to its acquisition of Dolphin Square on or before July 14, 2008.
Decision
The Principal Regulator is satisfied that the decision meets the test set out in the Legislation for the Principal Regulator to make the decision.
The decision of the Principal Regulator under the Legislation is that the Exemption Sought is granted.
“Erez Blumberger”
Manager, Corporate Finance
Ontario Securities Commission