When you place a withdrawal request after the seven-year period, the value of the basket of shares distributed to you will match your pro-rata ownership in the exchange fund. This basket of shares will have an aggregate cost basis equal to the cost basis of your original contribution. The cost basis will be reported to your Cache brokerage account.
For example, say you contributed stock worth $500,000 with a cost basis of $50,000, and seven years later your share of the fund is worth $800,000. The basket you receive is worth $800,000 and carries about $50,000 of total cost basis, spread across the positions in it. That basis is adjusted for the income, gains and losses reported on your K-1s while you were in the fund. You owe tax only on the positions you sell.
To be clear, capital gains will not be realized until you sell the shares you withdraw from the exchange fund. Continuing to hold the shares (or keeping them in the fund past the 7-year anniversary date) can extend the benefits of tax deferral.
See the potential benefits of avoiding tax drag in our exchange fund calculator.