Restrictive covenant rule exemption may not apply on a sale to unrelated holdcos

Under the s. 56.4(7)(b) rule, s. 68 will not apply to allocate proceeds to a non-compete granted by a vendor to an arm’s length purchaser if the covenant is to not compete with the purchaser or a person related thereto.  Accordingly, this exemption will not apply where the purchasers are a group of unrelated holdcos (purchasing a holdco of the vendor) and the non-compete is given to the Opco owned by them.

Neal Armstrong.  Summary of Manu Kakkar, "Paragraph 56.4(7)(b ) Related-Person Problem and Arm's Length Minority Acquisitions," Tax For The Owner-Manager, Volume 14, Number 2, April 2014, p. 8  under s. 56.4(7)(b).