Vendor partnerships may not be able to access a safe harbour from application of the restrictive covenant rules – but this may not matter as it very well may be reasonable to allocate nil to a restrictive covenant under general principles

A safe harbour from the potential application of s.68 to a non-compete may require that consideration be received by either the "taxpayer" (defined to include a partnership) or an "eligible corporation" of the taxpayer. This requirement will not be satisfied if the taxpayer is a trust and beneficiaries, or the trustees in their personal capacities, are expected to grant the covenant.  If partners of a partnership grant the covenant, issues arise under a potential requirement to allocate to each partner that portion of "goodwill amount" proceeds that is consideration for the non-compete covenant granted by that partner. For example, if a $1 million goodwill amount received by a partnership with three equal partners is allocated equally to them, will this requirement be satisfied if 90% of the goodwill amount is actually attributable to only one partner’s non-compete?

A further safe harbour requirement, that no proceeds be received for the non-compete covenant, should not be violated by virtue of a sale agreement reciting that the restrictive covenant is integral to the agreement and was granted to maintain the value of the sold assets. Not allocating any portion of the sales proceeds to the covenant should not detract from its enforceability.

An exclusion from the safe harbour where s. 84(3) "applies" to the transaction can be engaged in a hybrid transaction (including one not giving rise to a deemed dividend) or a safe income strip.

If the safe harbour is not available, "there would appear to be significant support for the position that two reasonable business persons would agree to allocate nil or nominal consideration to a restrictive covenant." The reasonableness of a nil allocation may be buttressed if the parties could (had they made an election) have achieved the same effective result under s. 56.4(3).

Neal Armstrong. Summaries of Michael Coburn, "Practical Strategies for Dealing with the Restrictive Covenant Provisions," draft version of paper for CTF 2014 Conference Report under s. 56.4(7)(b), s. 56.4(7)(d), s. 56.4(7)(e), s. 68(c), s. 56.4(3)(b), s. 56.4(2) and s. 56.4(1) – restrictive covenant.