Principal Issues: [TaxInterpretations translation] Is the amount received in consideration for a non-compete clause in an agreement between an employee and his employer upon termination of employment taxable?
Position: The amount is employment income that is taxable.
Reasons: Subsection 6(3) applies in this situation (in particular paragraph 6(3)(e)) to deem the amount received to be remuneration for services rendered during the period of employment.
September 16, 2004
Ms. Sylvie Paquette Headquarters Laval Tax Services Office Sylvie Labarre, CA Technical Services (613) 957-8953
2004-008342
Amount received for a non-compete covenant
This is further to your fax of June 29, 2004 in which you requested our opinion on the tax treatment of an amount received by a taxpayer for a non-compete covenant.
The taxpayer was an employee of a corporation. On September 26, 2003, the corporation and the employee signed an agreement setting out the conditions governing the termination of the employment relationship. The agreement contained a non-compete clause stating that the taxpayer undertakes, for a certain territory and for a certain time, not to act in certain capacities and not to allow the employee’s name to be used, for the employee’s own benefit or for the benefit of any other person engaged, concerned or interested in any business that is in the same or similar field of activity as the corporation. In the agreement there were also certain confidentiality clauses.
The taxpayer received compensation from the corporation in consideration of and in return for the commitments made in the agreement.
You wish to know whether the taxpayer must include the amount of that compensation in the taxpayer’s income.
Our Comments
Subsection 6(3) of the Income Tax Act (the "Act") provides that an amount received from another person as, inter alia, payment of an obligation under an agreement between the payer and the payee immediately prior to, during or immediately after a period that the payee was in the employment of the payer is deemed, for the purposes of section 5, to be remuneration for the payee’s services rendered during the period of employment if it can reasonably be regarded as having been received, inter alia, in consideration or partial consideration for a covenant with reference to what the employee is, or is not, to do before or after the termination of the employment.
According to the agreement attached to your request, the amount received by the taxpayer was received as consideration for the non-compete and confidentiality covenants. Consequently, the amount received will be deemed to be remuneration under subsection 6(3) and must be included in the taxpayer's employment income.
The decisions of the Federal Court of Appeal in The Queen v. Fortino (2000 DTC 6060) and Manrell v. The Queen (2003 DTC 5225) have no impact on the application of subsection 6(3).
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance. If you require any further information regarding the content of this document, please do not hesitate to contact us.
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch