Does a seller’s non-compete need its own payment to be valid?

A seller may ask whether a non-compete only counts if the buyer pays for it separately. We found no source that says so. The decisions below contrast a covenant that is part of the consideration for, or negotiated as part of, the sale of a business with one in an employment contract. They do not address a covenant with no separate price, so this page cannot tell you whether yours would stand. That is a question for your lawyer, who can read your actual agreement.

What the Ontario decisions say

In Mason v. Chem-Trend, the Court of Appeal for Ontario summarized the Supreme Court’s reasoning in Shafron. A covenant in an employment contract is subjected to stricter scrutiny than one that is part of the consideration for the sale of a business. In MEDIchair v. DME Medequip, the Court of Appeal described two Supreme Court decisions, Elsley and Payette v. Guay, as addressing that difference: although the test is essentially the same, courts give more scrutiny to reasonableness in the employment context, while applying a presumption of validity where the clause was negotiated as part of the sale of a business. Neither passage mentions a separate payment.

How a sale agreement can frame it

The agreement in Martin v. ConCreate, which the Court of Appeal for Ontario decided in 2013, has the parties recognize that the covenants and restrictions in it are an inherent part of the consideration under the acquisition agreement. That is what one agreement said, quoted in a decision that declared its general non-competition and non-solicitation provisions unenforceable on other grounds, starting with their having no fixed, outside limit on their term. The court did not say that wording is required. Ask your lawyer how your agreement describes the covenant and why.

Why the allocation still matters for tax

Subsection 56.4(2) of the Income Tax Act includes in a taxpayer’s income an amount in respect of the taxpayer’s restrictive covenant that is received or receivable by the taxpayer or by a taxpayer with whom it does not deal at arm’s length, subject to the exceptions in subsection (3). Section 68 says that where an amount can reasonably be regarded as being in part consideration for a restrictive covenant, that part is deemed to be an amount received or receivable in respect of the covenant, irrespective of the form or legal effect of the contract or agreement. Section 56.4(5) switches section 68 off for a covenant only where subsection (6) or (7) applies to it, and subsection (7) is itself subject to subsection (10). So what the agreement says about price, or does not say, does not by itself settle how the tax rules treat the covenant. Our glossary entry on restrictive covenant tax rules is a plain-language start.

What to ask before you sign

• Does the agreement say whether any part of the price is for the covenant, and does your accountant agree with that treatment?
• Is the covenant described as part of the consideration for the sale, and what is the buyer’s reason for that wording?
• Who gives the covenant: you personally, your corporation, or both?

For the wider question of when a covenant is enforceable, see whether non-competes are enforceable in Canada.