Canco and a US resident who each held a 50% interest in a US partnership each advanced US$1 million to the partnership and then converted those advances to partnership units at a time that the Canadian dollar had depreciated (from a 1.2 to 1.4 exchange rate) relative to the exchange rate at the time of advance. CRA found that such conversion generated a capital loss to the partnership of $400,000 under s. 39(2) of which $200,000 was allocated to Canco, and that Canco realized a capital gain of $200,000 on its disposition of the advance.
Although Canco acquired an addition to the cost of its partnership interest equaling its proceeds of disposition, the ACB of its interest was reduced by the $200,000 capital loss allocated to it, so that the net effect was no change in the ACB of its overall interest in the partnership.