the picture quality could never be better than the source
That is only true if you are using some generic S-video to RGB converter but if you make one specifically for the C64, you know the color palette in advance which makes it possible to apply a very effective noise reduction. It may still not be 100% identical to the output from an emulator (which would be the reference) but I imagine it could be close. The 'pixel clock' is also well-defined which again helps towards doing a good A/D conversion. The loose ends would be the color transitions between neighbouring pixels since they are not fully defined in the source signal (cannot always go fully from one color to another from one pixel to the next).
When I talk RGB here, I actually think digital RGB since some digital processing is required here. Converting it back from digital to analog RGB seems a bit silly if you want to send it to an OSSC or XRGB afterwards. Then it makes more sense to output the video straight as a DVI or HDMI compatible 50 Hz signal.