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NOTICE

REPLACEMENT OF

NATIONAL POLICY 41-201 INCOME TRUSTS AND OTHER INDIRECT OFFERINGS

Introduction

The Canadian Securities Administrators (CSA or we), are amending National Policy 41-201 -- Income Trusts and Other Indirect Offerings (NP 41-201).

NP 41-201 first came into effect in December 2004. On January 5, 2007, we published our proposed amended policy for a 60-day comment period. The amended policy has been, or is expected to be, adopted in all jurisdictions and will replace the December 2004 version of the policy on July 6, 2007.

This notice provides a summary of the key changes to NP 41-201, the comments we received on the proposed amended policy and the additional changes we made to the policy as a result of those comments.

Substance and purpose

We have reorganized NP 41-201 to more clearly group our guidance in the areas of distributable cash, prospectus offerings and continuous disclosure. The following is a summary of the key changes to the policy:

• Part 2 now focuses the guidance specifically on distributable cash. We have added guidance on distributable cash that was previously published in CSA Staff Notice 52-306 -- Non-GAAP Financial Measures (Staff Notice 52-306) and CSA Staff Notice 41-304 -- Income Trusts: Prospectus Disclosure of Distributable Cash, as well as other guidance about distributable cash disclosure.

• We have noted that the guidance on distributable cash applies to all disclosure about cash available for distribution, regardless of the terminology used by the issuer.

• We have noted that the guidance on disclosure of stability ratings will not apply to unsolicited stability ratings.

• We have provided guidance that issuers should include in their interim and annual MD&A a comparison between the expected yield figure previously disclosed and the actual yield.

• We have provided guidance on the presentation of distributable cash figures. We believe this disclosure should accompany all disclosures of distributable cash, including those contained in sales and marketing materials.

• We have clarified the content of the undertakings we expect for insider reporting and financial information of subsidiaries and the circumstances under which we expect these undertakings to be provided.

• We have clarified our expectations of MD&A disclosure of distributed cash.

• We have clarified our guidance on the disclosure of differences between corporate law protections and those provided by an issuer's declaration of trust.

Summary of written comments

We received submissions from 12 commenters during the comment period. See Appendix A for a list of the commenters and Appendix B for a summary of their comments and our responses. We would like to thank everyone who provided us with comments.

Canadian Performance Reporting Board Interpretive Release

When we published the policy for comment, we noted that the Canadian Performance Reporting Board (CPRB) of The Canadian Institute of Chartered Accountants had published for comment a draft interpretive release to the CICA publication, Management's Discussion and Analysis: Guidance on Preparation and Disclosure. This release provided the CPRB's views on the measurement and disclosure of distributable cash in MD&A by income trusts and other flow-through entities. We noted that we were looking forward to discussing with the CPRB the comments that they received on their draft interpretive release. We have reviewed these comments and would like to thank the CPRB for their co-operation and input.

The distributable cash guidance in this policy is intended to promote transparent disclosure for investors with respect to presentations of distributable cash. We understand that the CPRB is considering changes to its draft guidance in response to comments received and it plans to provide guidance not only on disclosure but also on a standardized measure of distributable cash derived directly from historical financial statements prepared in accordance with GAAP.

We will evaluate the form and impact of the final CPRB guidance when it is published. However, based on our current understanding of the likely content of the CPRB guidance, we believe that presentation of the standardized measure of distributable cash defined in the guidance is consistent with the objectives of the policy. Further, additional disclosure in MD&A consistent with the framework provided in the CPRB guidance would contribute to achieving the disclosure objectives of the policy.

Additional changes to the policy

After considering the comments, we made some changes to the proposed policy that was published for comment in January 2007. We do not believe these changes are material and are not republishing the policy for a further comment period. These changes are summarized in Appendix C.

If you have questions, please contact any of the following:

July 6, 2007

Appendix A

List of commenters

Appendix B

Summary of comments on the proposed amended NP 41-201

Appendix C

Summary of Changes

The following summarizes the changes to the policy from the version published for comment on January 5, 2007.

• Valuation reports: In Part 4.1 we have deleted the expectation that, if a third-party valuation is obtained in an initial public offering, the valuation report should be filed on SEDAR.

• Capital adjustments: In Part 2.6 we have clarified the guidance to note that an issuer that does not intend to sustain the business of its operating entity going-forward (for example, in the case of depleting assets) should clearly state this in its distributable cash reconciliation.

We further clarified the guidance in this part to note that capital adjustments may be based on actual capital expenditures.

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NATIONAL POLICY 41-201

INCOME TRUSTS AND OTHER INDIRECT OFFERINGS

Part 1 -- Introduction

1.1 What is the purpose of the policy?

It is a fundamental principle that everyone investing in securities should have access to sufficient information to make an informed investment decision. The Canadian Securities Administrators (the CSA or we) believe that there are distinct attributes of an investment in income trust units that should be clearly disclosed.

Within our securities regulatory framework, raising capital in the public markets results in certain rights and obligations attaching to issuers and investors. We believe that it would be beneficial to express our view in a policy about how the existing regulatory framework applies to non-corporate issuers (such as income trusts) and to indirect offering structures in order to minimize inconsistent interpretations and to better ensure that the principles underlying the requirements are preserved. Our concerns relate to the quality and nature of prospectus and continuous disclosure, accountability for prospectus disclosure and liability for insider trading. We have drafted a policy rather than a rule because we believe that the existing regulatory requirements capture the necessary regulatory outcomes relating to income trusts and other indirect offering structures. Our goal is to provide guidance and recommendations about how income trusts and other indirect offering structures fit within the existing regulatory requirements rather than create new regulatory requirements for income trusts and other indirect offering structures. We also identify factors that relate to the exercise of the regulator's discretion in a prospectus offering.

This policy provides guidance and clarification by all jurisdictions represented by the CSA. The guidance generally relates to the requirements of National Instrument 51-102 Continuous Disclosure Obligations and the prospectus requirements in each jurisdiction. Although the primary focus of this policy is on income trusts, we believe that much of the guidance and clarification that we provide is useful for other indirect offering structures. As well, the guidance may apply more generally to issuers that offer securities which entitle holders of those securities to net cash flow generated by the issuer's business or its properties. We provide guidance about prospectus disclosure and prospectus liability to minimize situations where staff might recommend against issuance of a receipt for a prospectus where it would appear that the offering may be contrary to the public interest due to insufficient disclosure, the structure of the offering, or other factors.

Although the focus of this policy is on the income trust structure in the context of offerings by way of prospectus, these principles also apply to income trust structures in other contexts, such as the reorganization of a corporate entity into a trust. Although an offering document is not prepared in a reorganization, we expect that the information circular provided to relevant security holders, and that contains prospectus-level disclosure, will follow the principles set out in this policy. In addition when we are determining whether to grant exemptive relief to an income trust issuer in connection with a reorganization or other similar transaction, we will consider the principles described in Part 3 of this policy.

This policy may also apply to income trusts in the fulfillment of their continuous disclosure obligations.

1.2 What do we mean when we refer to an income trust in this policy?

When we refer to an income trust or issuer in this policy, we are referring to a trust or other entity (including corporate and non-corporate entities) that issues securities which provide for participation by the holder in net cash flows generated by: (i) an underlying business owned by the trust or other entity, or (ii) the income-producing properties owned by the trust or other entity. This includes business income trusts, real estate investment trusts and royalty trusts. In our view, this does not include an entity that falls within the definition of "investment fund" contained in National Instrument 81-106 Investment Fund Continuous Disclosure, or an entity that issues asset-backed securities or capital trust securities.

1.3 What is an operating entity?

In the most basic income trust structure, the operating entity is: (i) a subsidiary of the income trust with an underlying business, or (ii) income-producing properties owned directly by the income trust. In more complex structures, there may be a number of intervening entities above the operating entity. Generally, the operating entity is the first entity in the structure that has an underlying business that generates cash flows. There may be more than one operating entity in the income trust structure.

In addition to identifying the operating entity, it is also important to understand the operating entity's business. In some cases, its business is to own, operate and produce revenues from its assets. In other cases, its business is to own an interest in a joint venture or to derive a revenue stream from holding a portfolio of investments or financial instruments.

1.4 How is an income trust structured?

Typically, an income trust holds a combination of debt and equity or royalty interests in an entity owning or operating a business. Net cash flows generated by the operating entity's business are distributed to the income trust. The income trust then distributes some or all of that cash flow to its investors (referred to as unitholders or investors).

1.5 What is an income trust offering?

In a typical income trust offering, an income trust is created to distribute units to the public. The income trust then uses the proceeds from the offering to acquire debt and equity or royalty interests in the operating entity, or interests in income producing properties. We view the income trust offering as a form of indirect offering. Instead of offering their securities directly to the public, the vendors sell their interests in the operating entity to the income trust. The income trust purchases those interests with proceeds that it raises through its offering of units to the public. The interests in the operating entity that the income trust acquires are thus indirectly offered to the public. Through their direct investment in units of the income trust, unitholders hold an indirect interest in the operating entity.

By issuing units under a prospectus, the income trust becomes a reporting issuer (or equivalent) under applicable securities laws. The operating entity typically remains a non-reporting issuer.

1.6 How does an indirect offering differ from a direct offering?

In a conventional direct offering, interests in the operating entity are offered to the public through a public distribution of the operating entity's securities. By contrast, in an indirect offering, interests in the operating entity are not offered directly to the public but are instead acquired by a separate entity (for example, an income trust or its subsidiary). The securities of this separate entity, such as units of a trust, are offered to the public under a prospectus. The issuer applies the proceeds of the offering to satisfy the purchase price of the interests in the operating entity.

In a direct initial public offering, an issuer may choose to finance the acquisition of another business with proceeds raised under the offering. In that scenario, the issuer and the vendors of the business are generally arm's length parties. This differs from the structure of an indirect offering, such as the initial public offering by most income trusts, where the income trust and the vendors of the business are not arm's length parties.

In an indirect offering, the vendors negotiate the terms of the purchase of the business by the income trust, and are also involved in the negotiation of the terms of the public offering with the underwriter(s).

If vendors initiate or are involved in the initial public offering process, we believe that they are effectively accessing the capital markets themselves. We consider them to be non-arm's length vendors. This fact gives rise to the concerns that we describe in Part 4. Non-arm's length vendors that are involved in a follow-on offering are also effectively accessing the capital markets through an indirect offering, and the concerns that we describe in Part 4 are equally applicable.

Part 2 -- Distributable cash

2.1 What is distributable cash?

Distributable cash is a non-GAAP measure that generally refers to the net cash generated by the income trust's businesses or assets that is available for distribution, at the discretion of the income trust, to the income trust's unitholders. Some issuers have referred to this net cash available for distribution by a non-GAAP term other than distributable cash. In this policy the guidance about "distributable cash" also applies to such other non-GAAP terms used to describe the amount available for distribution to an income trust's or other indirect offering structure's securityholders (e.g. distributable income).

The cash that is available to an income trust for distribution per unit varies with the operating performance of the income trust's business or assets, its capital requirements, debt obligations and the number of units outstanding.

Income trust distributions are, for Canadian tax purposes, composed of different types of payments that are referred to as "returns on capital" or "returns of capital." These terms are also used more generally, to make an economic rather than a tax-driven distinction. The underlying concern is that the amount of cash distributed by an income trust may sometimes be greater than what it can safely distribute without eroding its productive capacity and threatening the sustainability of its distributions. In this situation, the "excess" amount of the distribution may be regarded as an economic "return of capital." We are concerned that disclosure by income trusts has not always been sufficiently plain to allow an investor to assess whether a possible concern exists in this respect.

Please refer to subsection 6.5.2 for guidance on how issuers can address these concerns.

2.2 Do income trusts provide investors with a consistent rate of return?

No. In many ways, investing in an income trust is more like an investment in an equity security rather than in a debt security. A fundamental characteristic that distinguishes income trust units from traditional fixed-income securities is that the income trust does not have a fixed obligation to make payments to investors. In other words, it has the ability to reduce or suspend distributions if circumstances warrant (see section 2.3 below for further details). In contrast to a traditional fixed-income security, the trust's ability to consistently make distributions to unitholders is closely tied to the operations of the operating entity or the performance of the income trust's assets. The performance of the operating entity may fluctuate from period to period, which might impact both the distributions paid and value of the issuer's units.

Unlike an issuer of a fixed-income security, an income trust does not promise to return the initial purchase price of the unit bought by the investor on a certain date in the future. Investors who choose to liquidate their holdings would generally do so by selling their unit(s) in the market at the prevailing market price.

In addition, unlike interest payments on an interest-bearing debt security, income trust cash distributions are, for Canadian tax purposes, composed of different types of payments (portions of which may be fully or partially taxable or may constitute tax-deferred returns of capital). The composition for tax purposes of those distributions may change over time, thus affecting the after-tax return to investors. Therefore, a unitholder's rate of return over a defined period may not be comparable to the rate of return on a fixed-income security that provides a "return on capital" over the same period. This is because a unitholder in an income trust may receive distributions that constitute a "return of capital" to some extent during the period. Returns on capital are generally taxed as ordinary income or as dividends in the hands of a unitholder. Returns of capital are generally tax-deferred (and reduce the unitholder's cost base in the unit for tax purposes).

2.3 How do the distribution policies of the income trust and the operating entity affect an investor's rate of return?

The distribution policy of the income trust generally stipulates that payments that the income trust receives from the operating entity (such as interest payments on the debt and dividends paid to common shareholders) will be distributed to unitholders. The distribution policy of the operating entity will generally stipulate that distributions to the income trust will be restricted if the operating entity breaches its covenants with third-party lenders (such as covenants requiring the operating entity to maintain specified financial ratios or to satisfy its interest and other expense obligations). Other operating entity obligations such as funding employee incentive plans or funding capital expenditures will frequently rank in priority to the operating entity's obligations to the income trust. In addition, the operating entity, or the income trust, might retain a portion of available distributable cash as a reserve. Funds in this reserve may be drawn upon to fund future distributions if distributable cash generated is below targeted amounts in any period.

2.4 What prospectus cover page disclosure do we expect about distributable cash?

To ensure that the information described in sections 2.1, 2.2 and 2.3 is adequately communicated to investors, we recommend that issuers consider including language substantively similar to the following on the prospectus cover page:

A return on your investment in • is not comparable to the return on an investment in a fixed-income security. The recovery of your initial investment is at risk, and the anticipated return on your investment is based on many performance assumptions. Although the income trust intends to make distributions of its available cash to you, these cash distributions may be reduced or suspended. The actual amount distributed will depend on numerous factors including: [insert a discussion of the principal factors particular to this specific offering that could affect the predictability of cash flow to unitholders]. In addition, the market value of the units may decline if the income trust is unable to meet its cash distribution targets in the future, and that decline may be significant.

It is important for you to consider the particular risk factors that may affect the industry in which you are investing, and therefore the stability of the distributions that you receive. See, for example, ***, under the section "Risk Factors" [insert specific cross-reference to principal factors that could affect the predictability of cash flow to unitholders]. That section also describes the issuer's assessment of those risk factors, as well as the potential consequences to you if a risk should occur.

The after-tax return from an investment in units to unitholders subject to Canadian income tax can be made up of both a return on and a return of capital. That composition may change over time, thus affecting your after-tax return. [If a forecast has been prepared, include specific disclosure about the estimated portion of the investment that will be taxed as a return on capital and the estimated portion that will be taxed as return of capital. If the issuer cannot estimate the portion that will be a return of capital, state that it is unable to reasonably estimate the return of capital on anticipated distributions, and that this amount might vary materially from period to period.] Returns on capital are generally taxed as ordinary income or as dividends in the hands of a unitholder. Returns of capital are generally tax-deferred (and reduce the unitholder's cost base in the unit for tax purposes).

2.5 What disclosure do we expect about non-GAAP financial measures such as distributable cash?

Under GAAP, an income trust must disclose the cash distributed to unitholders in its financial statements. In addition to GAAP disclosure, income trusts generally also include disclosure about historical distributable cash figures in continuous disclosure documents and estimated distributable cash in their prospectuses. Because distributable cash is a non-GAAP financial measure, an income trust's distributable cash disclosure should include a reconciliation to the most directly comparable measure calculated in accordance with GAAP.

We have concluded that distributable cash is a cash flow measure, not an income measure. Therefore, distributable cash is fairly presented only when reconciled to cash flows from operating activities as presented in the income trust's financial statements. For clarity, cash flows from operating activities includes changes during the period in non-cash working capital balances.

Issuers should define any non-GAAP financial measure and explain its relevance to ensure it does not mislead investors. Issuers presenting non-GAAP financial measures should present those measures on a consistent basis from period to period. Specifically, in respect of distributable cash, income trusts should:

(i) state explicitly that distributable cash does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers;

(ii) present cash flows from operating activities with equal or greater prominence than distributable cash;

(iii) explain why distributable cash provides useful information to investors and how management uses distributable cash as a financial measure;

(iv) provide a clear quantitative reconciliation from distributable cash to cash flows from operating activities, and refer to the reconciliation where distributable cash first appears in the disclosure document; and

(v) explain any changes in the composition of distributable cash when compared to previously disclosed measures.

2.6 What are our expectations about the format of the distributable cash reconciliation?

When presenting a reconciliation of distributable cash, income trusts should discuss any adjustments included in the reconciliation and these adjustments should be grouped separately based on the nature of the adjustment. In addition, income trusts should avoid the use of non-GAAP income measures in the reconciliation of distributable cash. For example, it is inappropriate to include non-GAAP measures such as EBITDA, Adjusted EBITDA, and Pro Forma Net Income in the distributable cash reconciliation.

An issuer might group adjustments to cash flows from operating activities included in a reconciliation of distributable cash as follows:

a. Capital adjustments -- Adjustments for capital expenditures, whether to maintain productive capacity of the issuer or otherwise, should be included here and may be based on actual capital expenditures. An issuer that does not intend to maintain productive capacity (for example, in the case of depleting assets) should clearly state this in its distributable cash reconciliation.

Other examples of adjustments that might be included in this section include provisions for maintaining or replacing mineral reserves.

An issuer may include within this grouping a sub-total of cash flows from operating activities after deducting capital expenditures incurred during the period.

b. Non-recurring adjustments -- Generally, an item is considered non-recurring if a similar charge or gain is not reasonably likely to occur within the next two years or if it has not occurred during the prior two years. An example of a non-recurring item is a payment in connection with litigation or a penalty that was levied in the current year and is not expected to be incurred going forward.

c. Other adjustments including discretionary items -- We recognize that, in limited circumstances, certain adjustments may not properly be classified as non-recurring or capital adjustments. Some examples of such adjustments include amounts for asset retirement obligations or external restrictions imposed on the issuer that limit their ability to pay distributions. Where an adjustment is discretionary in nature, we expect income trusts to clearly explain the basis for inclusion of the adjustment and any underlying assumptions which are being relied upon.

2.7 What disclosure do we expect about the adjustments and assumptions underlying distributable cash?

Income trusts should consider how best to provide transparency about the presentation of each adjusting item included in a reconciliation of distributable cash, including a discussion of the work that was done by the issuer to ensure the completeness and reasonableness of the information.

Generally, to achieve acceptable transparency, the reconciliation of distributable cash to cash flows from operating activities should be accompanied by detailed disclosure that:

(i) explains the purpose and relevance of the distributable cash information;

(ii) describes the extent to which actual financial results are incorporated into the reconciliation;

(iii) explicitly states that the reconciliation has been prepared using reasonable and supportable assumptions, all of which reflect the income trust's planned courses of action given management's judgment about the most probable set of economic conditions; and

(iv) cautions investors that actual results may vary, perhaps materially, from the forward-looking adjustments.

Further adjustments made in the reconciliation of distributable cash to cash flows from operating activities should be supported by:

(i) a detailed discussion of the nature of the adjustments;

(ii) a description of the underlying assumptions used in preparing each element of the forward-looking information and the forward-looking information as a whole, including how those assumptions are supported; and

(iii) a discussion of the specific risks and uncertainties that may affect each individual assumption and that may cause actual results to differ materially from the distributable cash figure.

For assumptions to be supportable, they should take into account the past performance of the underlying operating entity, the performance of other entities engaged in similar activities, and any other sources that provide objective corroboration of the assumptions used. Further, for assumptions to be considered reasonable, we believe that they should be consistent with the anticipated plans of the income trust.

In some circumstances, assumptions may be consistent with the issuer's anticipated plans but may not provide an adequate level of transparency about the sustainability of distributable cash. It is important for income trusts to disclose all factors, events or conditions that are likely to occur in the future that may impact the sustainability of future distributions.

For example, capital expenditures to replace productive capacity may be relatively low in initial years but may rise significantly in later years. In these instances, adequate disclosure of the adjustment for estimated future capital maintenance expenditures might include a discussion of the time period over which the income trust anticipates incurring capital maintenance expenditures at the level disclosed and any expected long-term plans to replace productive capacity. A clear and complete explanation should be provided of the reasons why these provisions will be adequate to cover future capital requirements and why these amounts vary from historical amounts, if applicable.

Another example of providing adequate transparency about the sustainability of distributable cash relates to instances where an issuer makes prior arrangements with investors. For example, for some income trusts, the original vendors' entitlement to cash distributions based on their continuing interest is subordinated to that of other investors. The original vendors will not receive cash distributions for a defined period of time if the estimated level of distributable cash disclosed in the prospectus is not achieved. Distributable cash available for distribution to other investors may be higher in the short term while cash distributions are not paid to the original vendors, but may decrease once the subordination conditions are satisfied. In these instances, the key terms and impact of these arrangements should be summarized in proximity to the distributable cash information.

2.8 When should the estimate of distributable cash be derived from a forecast?

If estimated distributable cash information contained in a prospectus includes forward-looking adjustments that are based on significant assumptions, as defined in the CICA Handbook, and those adjustments materially affect estimated distributable cash, the quantitative reconciliation should begin with cash flows from operating activities derived from a forecast prepared in accordance with CICA Handbook section 4250 -- Future-Oriented Financial Information (S.4250 forecast). These forward-looking adjustments should be integrated into the S.4250 forecast, and the S.4250 forecast should be included in the prospectus.

A S.4250 forecast may not be necessary if the adjusting items are derived from historical amounts and the adjusting items can be adequately explained by alternative disclosures. Alternative disclosures may include:

(i) historical financial statements that support the adjustments. In some cases, a recent acquisition may not be considered significant under the significant acquisition tests set out in OSC Rule 41-501 General Prospectus Requirements (Rule 41-501) (or its successor) or the equivalent rule in the applicable jurisdiction for purposes of providing financial statements of the acquired entity. However, the acquisition's anticipated impact on distributable cash may be material. In these case