Safe harbours in restrictive covenant rules do not accommodate the giving of a non-compete covenant by a terminated executive to corporate purchasers who are not a related group

The other two equal arm’s length shareholders of a corporation agree to pay $1 million to an executive who holds the other 1/3 of the shares, and who provides a covenant to them not to compete with the corporation and to sell his 1/3 shareholding to them equally.  That payment will not be exempted under s. 56.4(6) or (7) from the requirement under s. 68 to allocate a reasonable portion thereof to the non-compete because inter alia he deals at arm’s length with them and the corporation is unrelated to them.  The exemption in s. 56(2) will not be available for similar reasons.

Neal Armstrong.  Summary of Kenneth Keung and Riaz S. Mohamed, "Restrictive Covenants for Departing Executives," Taxation of Executive Compensation and Retirement, Volume 23 Number 4, November 2012, p. 1604 under s. 56.4(6).