In 2013-0500891I7, the CRA’s Rulings Directorate reversed a proposed audit adjustment relating to a “drop and sell” transaction. The parent company in the group (Parent) had borrowed money for a capital purpose and purchased forward contracts to hedge this loan. Before closing out the forward contracts (which were in the money), the parent rolled the contracts to its subsidiary (Subco) under s. 85(1). Subco closed out the contracts, realized a capital gain, and used its capital losses to shelter the capital gain. The CRA’s local Tax Services Office (TSO) proposed to treat the gain realized by Subco as ordinary income because of the short holding period. The Rulings Directorate overruled the TSO, saying that the capital character of the forward contracts was preserved Subco’s hands pursuant to the CRA’s published policy reaching back to 1980.