Mr. X sells all the shares of Holdco, which holds all the shares of Opco 1 and Opco 2, to Buyco, which is at arm's length. He grants a non-compete and non-solicitation covenant to Buyco respecting the business of each of Opco 1 and 2.
Q.19(a)
If it is agreed that no part of the amount received by Mr. X is attributable to the non-compete covenant, will s. 56.4(7) be satisfied so that s. 68 does not apply to the sales proceeds?
Response
Before indicating that there were insufficient facts provided to reach a conclusion and after paraphrasing the applicable requirements of s. 56.4(7), noting that s. 56.4(7)(a)(i) rather than (ii) applied, quoting only (iii) of s. 56.4(7)(f), and specifying an assumption that Holdco did not carry on any business and that its only assets were the shares of Opco 1 and 2, CRA stated (Tax Interpretations translation):
[I]t is possible that the conditions of subsection 56.4(7) are satisfied, in particular by reason that the restrictive covenant provided by Mr. X could have the effect of maintaining or protecting the fair market value of Holdco.
Q.19(d)
Would the answer change if Holdco sold Opco 1 and 2, with Mr. X still granting the non-compete and non-solicitation covenant to Buyco?
Response
CRA stated that the exception in s. 56.4(7) "could apply if all the conditions of that subsection were satisfied, taking into account that Opco 1 and Opco 2 could each be an eligible corporation."