Income Tax Act

Marginal note:Definitions

• 56.4 (1) The following definitions apply in this section.

  eligible corporation

  eligible corporation, of a taxpayer, means a taxable Canadian corporation of which the taxpayer holds, directly or indirectly, shares of the capital stock. (société admissible)

  eligible individual

  eligible individual, in respect of a vendor, at any time means an individual (other than a trust) who is related to the vendor and who has attained the age of 18 years at or before that time. (particulier admissible)

  eligible interest

  eligible interest, of a taxpayer, means capital property of the taxpayer that is

  • (a) a partnership interest in a partnership that carries on a business;

  • (b) a share of the capital stock of a corporation that carries on a business; or

  • (c) a share of the capital stock of a corporation 90% or more of the fair market value of which is attributable to eligible interests in one other corporation. (participation admissible)

  goodwill amount

  goodwill amount, of a taxpayer, is an amount the taxpayer has or may become entitled to receive that would, if this Act were read without reference to this section, be required to be included in the proceeds of disposition of a property included in Class 14.1 of Schedule II to the Income Tax Regulations, or is an amount to which subsection 13(38) applies, in respect of a business carried on by the taxpayer through a permanent establishment located in Canada. (montant pour achalandage)

  permanent establishment

  permanent establishment means a permanent establishment as defined for the purpose of subsection 16.1(1). (établissement stable)

  restrictive covenant

  restrictive covenant, of a taxpayer, means an agreement entered into, an undertaking made, or a waiver of an advantage or right by the taxpayer, whether legally enforceable or not, that affects, or is intended to affect, in any way whatever, the acquisition or provision of property or services by the taxpayer or by another taxpayer that does not deal at arm’s length with the taxpayer, other than an agreement or undertaking

  • (a) that disposes of the taxpayer’s property; or

  • (b) that is in satisfaction of an obligation described in section 49.1 that is not a disposition except where the obligation being satisfied is in respect of a right to property or services that the taxpayer acquired for less than its fair market value. (clause restrictive)

  taxpayer

  taxpayer includes a partnership. (contribuable)

• Marginal note:Income — restrictive covenants

  (2) There is to be included in computing a taxpayer’s income for a taxation year the total of all amounts each of which is an amount in respect of a restrictive covenant of the taxpayer that is received or receivable in the taxation year by the taxpayer or by a taxpayer with whom the taxpayer does not deal at arm’s length (other than an amount that has been included in computing the taxpayer’s income because of this subsection for a preceding taxation year or in the taxpayer’s eligible corporation’s income because of this subsection for the taxation year or a preceding taxation year).

• Marginal note:Non-application of subsection (2)

  (3) Subsection (2) does not apply to an amount received or receivable by a particular taxpayer in a taxation year in respect of a restrictive covenant granted by the particular taxpayer to another taxpayer (referred to in this subsection and subsection (4) as the “purchaser”) with whom the particular taxpayer deals at arm’s length (determined without reference to paragraph 251(5)(b)), if

  • (a) section 5 or 6 applied to include the amount in computing the particular taxpayer’s income for the taxation year or would have so applied if the amount had been received in the taxation year;

  • (b) the amount would, if this Act were read without reference to this section, be required to be included in the proceeds of disposition of a property included in Class 14.1 of Schedule II to the Income Tax Regulations, or is an amount to which subsection 13(38) applies, in respect of the business to which the restrictive covenant relates, and the particular taxpayer elects (or if the amount is payable by the purchaser in respect of a business carried on in Canada by the purchaser, the particular taxpayer and the purchaser jointly elect) in prescribed form to apply this paragraph in respect of the amount; or

  • (c) subject to subsection (9), the amount directly relates to the particular taxpayer’s disposition of property that is, at the time of the disposition, an eligible interest in the partnership or corporation that carries on the business to which the restrictive covenant relates, or that is at that time an eligible interest by virtue of paragraph (c) of the definition eligible interest in subsection (1) where the other corporation referred to in that paragraph carries on the business to which the restrictive covenant relates, and

    • (i) the disposition is to the purchaser (or to a person related to the purchaser),

    • (ii) the amount is consideration for an undertaking by the particular taxpayer not to provide, directly or indirectly, property or services in competition with the property or services provided or to be provided by the purchaser (or by a person related to the purchaser),

    • (iii) the restrictive covenant may reasonably be considered to have been granted to maintain or preserve the value of the eligible interest disposed of to the purchaser;

    • (iv) if the restrictive covenant is granted on or after July 18, 2005, subsection 84(3) does not apply to the disposition,

    • (v) the amount is added to the particular taxpayer’s proceeds of disposition, as defined by section 54, for the purpose of applying this Act to the disposition of the particular taxpayer’s eligible interest, and

    • (vi) the particular taxpayer and the purchaser elect in prescribed form to apply this paragraph in respect of the amount.

• Marginal note:Treatment of purchaser

  (4) An amount paid or payable by a purchaser for a restrictive covenant is

  • (a) if the amount is required because of section 5 or 6 to be included in computing the income of an employee of the purchaser, to be considered to be wages paid or payable by the purchaser to the employee;

  • (b) if an election has been made under paragraph (3)(b) in respect of the amount, to be considered to be incurred by the purchaser on account of capital for the purpose of determining the cost of the property or for the purposes of subsection 13(35), as the case may be, and not to be an amount paid or payable for all other purposes of the Act; and

  • (c) if an election has been made under paragraph (3)(c), in respect of the amount and the amount relates to the purchaser’s acquisition of property that is, immediately after the acquisition, an eligible interest of the purchaser, to be included in computing the cost to the purchaser of that eligible interest and considered not to be an amount paid or payable for all other purposes of the Act.

• Marginal note:Non-application of section 68

  (5) If this subsection applies to a restrictive covenant granted by a taxpayer, section 68 does not apply to deem consideration to be received or receivable by the taxpayer for the restrictive covenant.

• Marginal note:Application of subsection (5) — if employee provides covenant

  (6) Subsection (5) applies to a restrictive covenant if

  • (a) the restrictive covenant is granted by an individual to another taxpayer with whom the individual deals at arm’s length (referred to in this subsection as the “purchaser”);

  • (b) the restrictive covenant directly relates to the acquisition from one or more other persons (in this subsection and subsection (12) referred to as the “vendors”) by the purchaser of an interest, or for civil law purposes a right, in the individual’s employer, in a corporation related to that employer or in a business carried on by that employer;

  • (c) the individual deals at arm’s length with the employer and with the vendors;

  • (d) the restrictive covenant is an undertaking by the individual not to provide, directly or indirectly, property or services in competition with property or services provided or to be provided by the purchaser (or by a person related to the purchaser) in the course of carrying on the business to which the restrictive covenant relates;

  • (e) no proceeds are received or receivable by the individual for granting the restrictive covenant; and

  • (f) the amount that can reasonably be regarded to be consideration for the restrictive covenant is received or receivable only by the vendors.

• Marginal note:Application of subsection (5) — realization of goodwill amount and disposition of property

  (7) Subject to subsection (10), subsection (5) applies to a restrictive covenant granted by a taxpayer if

  • (a) the restrictive covenant is granted by the taxpayer (in this subsection and subsection (8) referred to as the “vendor”) to

    • (i) another taxpayer (in this subsection referred to as the “purchaser”) with whom the vendor deals at arm’s length (determined without reference to paragraph 251(5)(b)) at the time of the grant of the restrictive covenant, or

    • (ii) another person who is an eligible individual in respect of the vendor at the time of the grant of the restrictive covenant;

  • (b) where subparagraph (a)(i) applies, the restrictive covenant is an undertaking of the vendor not to provide, directly or indirectly, property or services in competition with the property or services provided or to be provided by the purchaser (or by a person related to the purchaser) in the course of carrying on the business to which the restrictive covenant relates, and

    • (i) the amount that can reasonably be regarded as being consideration for the restrictive covenant is

      • (A) included by the vendor in computing a goodwill amount of the vendor, or

      • (B) received or receivable by a corporation that was an eligible corporation of the vendor when the restrictive covenant was granted and included by the eligible corporation in computing a goodwill amount of the eligible corporation in respect of the business to which the restrictive covenant relates, or

    • (ii) it is reasonable to conclude that the restrictive covenant is integral to an agreement in writing,

      • (A) under which the vendor or the vendor’s eligible corporation disposes of property (other than property described in clause (B)) to the purchaser, or the purchaser’s eligible corporation, for consideration that is received or receivable by the vendor, or the vendor’s eligible corporation, as the case may be, or

      • (B) under which shares of the capital stock of a corporation (in this subsection and subsection (12) referred to as the “target corporation”) are disposed of to the purchaser or to another person that is related to the purchaser and with whom the vendor deals at arm’s length (determined without reference to paragraph 251(5)(b)),

  • (c) where subparagraph (a)(ii) applies, the restrictive covenant is an undertaking of the vendor not to provide, directly or indirectly, property or services in competition with the property or services provided or to be provided by the eligible individual (or by an eligible corporation of the eligible individual) in the course of carrying on the business to which the restrictive covenant relates, and

    • (i) either

      • (A) the amount that can reasonably be regarded as being consideration for the restrictive covenant is

        • (I) included by the vendor in computing a goodwill amount of the vendor, or

        • (II) received or receivable by a corporation that was an eligible corporation of the vendor when the restrictive covenant was granted and included by the eligible corporation in computing a goodwill amount of the eligible corporation in respect of the business to which the restrictive covenant relates, or

      • (B) it is reasonable to conclude that the restrictive covenant is integral to an agreement in writing

        • (I) under which the vendor or the vendor’s eligible corporation disposes of property (other than property described in subclause (II)) to the eligible individual, or eligible individual’s eligible corporation, for consideration that is received or receivable by the vendor, or the vendor’s eligible corporation, as the case may be, or

        • (II) under which shares of the capital stock of the vendor’s eligible corporation (in this subsection and subsection (12) referred to as the “family corporation”) are disposed of to the eligible individual or the eligible individual’s eligible corporation,

    • (ii) the vendor is resident in Canada at the time of the grant of the restrictive covenant and the disposition referred to in clause (i)(B), and

    • (iii) the vendor does not, at any time after the grant of the restrictive covenant and whether directly or indirectly in any manner whatever, have an interest, or for civil law a right, in the family corporation or in the eligible corporation of the eligible individual, as the case may be;

  • (d) no proceeds are received or receivable by the vendor for granting the restrictive covenant;

  • (e) subsection 84(3) does not apply in respect of the disposition of a share of the target corporation or family corporation, as the case may be;

  • (f) the restrictive covenant can reasonably be regarded to have been granted to maintain or preserve the fair market value of any of

    • (i) the benefit of the expenditure derived from the goodwill amount referred to in subparagraph (b)(i) or clause (c)(i)(A) and for which a joint election referred to in paragraph (g) was made,

    • (ii) the property referred to in clause (b)(ii)(A) or subclause (c)(i)(B)(I), or

    • (iii) the shares referred to in clause (b)(ii)(B) or subclause (c)(i)(B)(II); and

  • (g) a joint election in prescribed form to apply subsection (5) to the amount referred to in subparagraph (b)(i) or clause (c)(i)(A), if otherwise applicable, is made by

    • (i) in the case of subparagraph (b)(i), the vendor, or the vendor’s eligible corporation if it is required to include the goodwill amount in computing its income, and the purchaser, or the purchaser’s eligible corporation if it incurs the expenditure that is the goodwill amount to the vendor or the vendor’s eligible corporation, as the case may be, or

    • (ii) in the case of clause (c)(i)(A), the vendor, or the vendor’s eligible corporation if it is required to include the goodwill amount in computing its income, and the eligible individual, or the eligible individual’s eligible corporation if it incurs the expenditure that is the goodwill amount to the vendor or the vendor’s eligible corporation, as the case may be.

• Marginal note:Application of subsection (7) and section 69 — special rules

  (8) For the purpose

  • (a) of applying subsection (7), clause (7)(b)(ii)(A) and subclause (7)(c)(i)(B)(I) apply to a grant of a restrictive covenant only if

    • (i) the consideration that can reasonably be regarded as being in part the consideration for the restrictive covenant is received or receivable by the vendor or the vendor’s eligible corporation, as the case may be, as consideration for the disposition of the property, and

    • (ii) if all or a part of the consideration can reasonably be regarded as being for a goodwill amount, subsection (2), paragraph (3)(b), subparagraph (7)(b)(i) or clause (7)(c)(i)(A) applies to that consideration; and

  • (b) of determining if the conditions described in paragraph (7)(c) have been met, and for the purpose of applying section 69, in respect of a restrictive covenant granted by a vendor, the fair market value of a property is the amount that can reasonably be regarded as being the fair market value of the property if the restrictive covenant were part of the property.

• Marginal note:Anti-avoidance rule — non-application of paragraph (3)(c)

  (9) Paragraph (3)(c) does not apply to an amount that would, if this Act were read without reference to subsections (2) to (14), be included in computing a taxpayer’s income from a source that is an office or employment or a business or property under paragraph 3(a).

• Marginal note:Anti-avoidance — non-application of subsection (7)

  (10) Subsection (7) does not apply in respect of a taxpayer’s grant of a restrictive covenant if one of the results of not applying section 68 to the consideration received or receivable in respect of the taxpayer’s grant of the restrictive covenant would be that paragraph 3(a) would not apply to consideration that would, if this Act were read without reference to subsections (2) to (14), be included in computing a taxpayer’s income from a source that is an office or employment or a business or property.

• Marginal note:Clarification if subsection (2) applies — where another person receives the amount

  (11) For greater certainty, if subsection (2) applies to include in computing a taxpayer’s income an amount received or receivable by another taxpayer, that amount is not to be included in computing the income of that other taxpayer.

• Marginal note:Clarification if subsection (5) applies

  (12) For greater certainty, if subsection (5) applies in respect of a restrictive covenant,

  • (a) the amount referred to in paragraph (6)(f) is to be added in computing the amount received or receivable by the vendors as consideration for the disposition of the interest or right referred to in paragraph (6)(b); and

  • (b) the amount that can reasonably be regarded as being in part consideration received or receivable for a restrictive covenant to which clause (7)(b)(ii)(B) or subclause (7)(c)(i)(B)(II) applies is to be added in computing the consideration that is received or receivable by each taxpayer who disposes of shares of the target corporation, or shares of the family corporation, as the case may be, to the extent of the portion of the consideration that is received or receivable by that taxpayer.

• Marginal note:Filing of prescribed form

  (13) For the purpose of paragraphs (3)(b) and (c) and subsection (7), an election in prescribed form filed under any of those provisions is to include a copy of the restrictive covenant and be filed

  • (a) if the person who granted the restrictive covenant was a person resident in Canada when the restrictive covenant was granted, by the person with the Minister on or before the person’s filing-due date for the taxation year that includes the day on which the restrictive covenant was granted; and

  • (b) in any other case, with the Minister on or before the day that is six months after the day on which the restrictive covenant is granted.

• Marginal note:Non-application of section 42

  (14) Section 42 does not apply to an amount received or receivable as consideration for a restrictive covenant.