Don't forget that the advice from the CAA is only that - advice. Their opinion does not have the force of law. Only the courts can interpret the Regulation and while they will listen to the CAA's view they will likely rule based on precedence.
To my knowledge an obligation to interline a passenger to their destination has not been sustained by the courts and seeing as VS has offered you alternate flights (although not to your liking) to your final destination or a full refund I wouldn't bet the courts would rule that VS is not in compliance with the regulation.
Don't forget that one of your options is a reroute at a 'later date' (i.e. not just the dates offered to you) Can you delay your trip by a week, fortnight, month?
If not, then I would go with the SFO option. But once you are home to send them copies of the receipts and ask them to reimburse you. And take the lounge option as well!! That alone could cover your extra costs.