Conventional equity forwards likely are not DFAs, and equity derivatives may be held as investments

The definition of “synthetic equity arrangement” (which is used under the July 31, 2015 draft legislation to extend the scope of the dividend rental arrangement rules) excludes agreements that are traded on a “recognized derivative exchange,” subject to anti-avoidance provisions. Although the explanatory notes contemplate that foreign exchanges will be recognized by provincial securities commissions, the commissions instead usually exempt foreign exchanges from the requirement to be recognized or registered.

It is unlikely that the effect of prevailing interest rates on the negotiated (fixed) forward price under an equity forward causes the forward to be a derivative forward agreement, even where the taxpayer is the seller rather than purchaser.

CRA appears to assume that a derivative that is not entered into for hedging purposes is speculative and, therefore, held on income account. This is questionable where a long position under an equity derivative, e.g., a total return swap, has been acquired as an alternative to investing in the underlying equities.

Neal Armstrong. Summaries of Raj Juneja, “Taxation of equity derivatives,” draft 2015 CTF Annual Conference paper under s. 248(1) – synthetic equity arrangement, s. 248(1) – derivative forward agreement, s. 9 – capital gain v. profit – futures/forwards, s. 212(1)(b), s. 212(1)(d).