Must a "replacement share" continue to be a share of an eligible small business corporation after its issue in order for the capital gain deferral under s. 44.1 to continue to apply? CRA responded:
The definitions "qualifying disposition" and "replacement share" require, among other things, that each share that has been disposed of or acquired, as the case may be, is an "eligible small business corporation share". That expression provides, among other things, that "at the time the share was issued, the corporation was an eligible small business corporation”. The words in bold emphasize that the determination of a corporation's status is made at the time the shares are issued. Therefore, regardless of whether a corporation's status changed after the time of issuance of the eligible small business corporation share, the effect of subsection 44.1 remains.
… Thus, the deferred gain, which results in a reduction in the adjusted cost base, will be realized when the taxpayer sells the replacement shares, to the extent that the proceeds of disposition exceed the adjusted cost base.