| 902979 | |
| C. Brown | |
| (613) 957-2097 | |
| 19(1) | |
| February 8, 1991 |
Re: Non-Competition Payments
In your letter of October 24, 1990 you requested our views concerning a shareholder with shares representing a controlling interest in a corporation. Subsequently, this individual sells all these shares and enters into a non-competition agreement.
Since your letter appears to involve an actual case we can not provide specific comments without examining all the circumstances of the particular taxpayer. However, the following general comments may be of assistance.
The typical non-competition agreement prohibits the vendor from investing in or advising a competitor, from setting up a competing business and from enticing customers or employees away from the corporation. Such an agreement requires the purchaser of the shares to pay an amount to the vendor in consideration of the vendor agreeing to be subject to the terms with respect to non-competition. You indicate that the amount paid to the vendor for such may include a premium recognizing the significance of the vendor's position in the corporation and you have asked us to assume that the agreement is to remain in force for five years even if the vendor is incapacitated or dies within that time period.
As you mention in your letter and as set out in paragraph 5 of IT-330R, the Department usually considers non-competition payments related to share acquisitions to be subject to section 42 and treated as proceeds of disposition of the shares. It is, of course, necessary to examine all the relevant facts and circumstances in a specific case to determine if the payment is a non-competition payment. Other possible tax consequences are discussed below.
When the facts and circumstances indicate the payment relates to salary or wages or is in replacement thereof the amount will be treated as employment income. Where the facts and circumstances establish that the payment is related to a business that the vendor is carrying on or might otherwise be expected to carry on in the future, the payment is viewed as a payment in respect of eligible capital property (see IT-147R paragraph 33 and IT-330R paragraph 4). Where a premium recognizing the vendor position in the company is paid the basis of the payment and how it is calculated will be relevant in determining whether it may be viewed as a non-competition payment or given tax treatment on some other basis. There may also be other unusual facts or circumstances in a specific case which will dictate alternative tax treatment.
We agree with your view that, as indicated in IT-196R2 paragraph 2, unless the non-competition payment is considered to be in respect of salary and wages it will not be subject to subsection 6(3) of the Act.
Should there be any question concerning an actual case we would be pleased to consider an advance income tax ruling on behalf of a taxpayer who proposes to enter into a non-competition agreement.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch