QSBC shares are shares in certain types of small business corporations. Among other things, the following criteria must be met: 1) the corporation must be a Canadian-controlled private corporation; 2) at the time of disposition of the shares, 90% or more of the corporation’s assets must be assets that are used principally in an active business carried on primarily in Canada, shares or debt in small business corporations, or a combination of the two; and 3) normally you have to own the shares for at least two years.
Obviously, a Canadian-controlled private corporation does not include a public corporation. So what happens if you own QSBC shares and the corporation goes public? From that point on, the shares will no longer qualify as QSBC shares and therefore will no longer qualify for the capital gains exemption.
Fortunately, you can access your capital gains exemption on your accrued QSBC capital gains up to the time that the corporation goes public. You can elect, under section 48.1 of the Income Tax Act, to be deemed to have sold your QSBC shares immediately before that time for proceeds equal to any amount between your cost of the shares and their fair market value. Therefore, you can elect to trigger the entire accrued gain or only part of it, depending on how much capital gains exemption you have available. You will be deemed to reacquire the shares at the same elected amount.