Pangaea - Tax Court of Canada finds that an agreement with another shareholder to enter into a share sale with a 3rd party was a restrictive covenant

A non-resident shareholder (“Pangaea”) of a Canadian corporation (“Public Mobile”) was required under the terms of the unanimous shareholder agreement to agree to any sale of the Public Mobile shares. A resident shareholder paid Pangaea a lump sum for its agreement to execute a share purchase agreement.

In confirming CRA’s view that this was a restrictive covenant payment that was subject to Part XIII tax under s. 212(1)(i), Smith J found that the agreement of Pangaea to waive its veto right was an agreement that “affected” the disposition of property (the Public Mobile shares), as contemplated under the restrictive covenant definition. He further rejected Pangaea’s submission that, as it had disposed of its veto right, the exclusion from the definition for an agreement that disposes of the taxpayer’s property applied, stating:

I find that there is no evidence of a conveyance or disposition of the Appellant’s veto right — even if it can properly be characterized as “property”. … [T]here was no evidence of an assignment of the veto right to a third party.

Neal Armstrong. Summary of Pangaea One Acquisition Holdings XII S.À.R.L. v. The Queen, 2018 TCC 158 under s. 56.4(1) – restrictive covenant.