CRA treats exchangeable shares and units equivalently under the DFA rules

CRA considers that an exchangeable share (e.g., of a Canadian subsidiary of a foreign parent) generally is not a derivative forward agreement "because the risk of loss and opportunity for profit associated with the exchangeable shares will generally be very similar to the risk of loss and opportunity for profit associated with the second securities," e.g., of the parent – and not because the embedded exchange right might not be an "agreement." CRA also states that where there instead is a separate intermediate-term or long-term agreement to sell the shares of the subsidiary for a price based on the shares of the parent, this safe harbour test will not be satisfied, without really explaining why in the final written response.

It is difficult to develop a logically coherent and convincing rationale for this position. What CRA may be saying is: (i) we don’t want to acknowledge that embedded rights cannot give rise to DFAs, as this might provide an opening for playful taxpayers; and (ii) Finance said exchangeable shares are OK, so we will go along, albeit without any coherently articulated theory in support.

CRA will apply the same "analysis" to exchangeable partnership units.

Neal Armstrong. Summary of 2 December 2014 CTF Roundtable, Q. 1 under s. 248(1) – derivative forward agreement.