27 March 2000 GST/HST Interpretation 7940 - Non-Competition Payment

Dear Sir:

Thank you for your letter of December 30, 1998 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a non-competition payment.

Please note that as of November 1, 1999 Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

Our understanding is that an individual who owns 100 per cent of the shares in XYZ company sells them to an unrelated third party for a specified amount of consideration. In addition to the payment for shares, the individual receives a specified sum of money from XYZ company as consideration for agreeing to not compete with XYZ company.

Interpretation Requested

You have asked for our confirmation as to whether this non-competition payment is consideration for a supply.

Interpretation Given

Based on the information provided, we consider the non-competition payment to be consideration for a supply. However, in the circumstances described, the supply is not a taxable supply to the extent that the person is not otherwise involved in a commercial activity.

A non-competition agreement where a person agrees not to compete in a given business for a certain period of time is considered to be a supply, since a supply is defined in subsection 123(1) of the Excise Tax Act (the "Act") as the provision of property or a service in any manner. However, given the facts you have presented, the supply is not a taxable supply. A taxable supply, as defined in subsection 123(1) of the Act, means a supply that is made in the course of a commercial activity. A commercial activity of a person, as defined in subsection 123(1) of the Act, means, in part, a business carried on by the person or an adventure or concern of the person in the nature of trade. Here, the individual shareholder is agreeing not to compete. The individual was not engaged in the business; rather, it was XYZ that was carrying on the business. Therefore, by agreeing not to carry on a business, the individual cannot be considered as making a supply in the course of a commercial activity. On the contrary, the individual is agreeing not to carry on a business.

Furthermore, the supply under the non-competition agreement is not an adventure or concern in the nature of trade.

This is not to say that a non-competition agreement cannot be a taxable supply in all cases. Generally, a non-competition payment made in circumstances other than those described in the question could be subject to tax to the extent that it is for a supply made in the course of a commercial activity (e.g., payment made to a corporation or a sole proprietor involved in a commercial activity). Whether a person provides a non-competition agreement in the course of a commercial activity and whether he/she would be required to register and collect GST/HST can only be decided on a case-by-case basis and upon full disclosure of all the relevant facts.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the CCRA with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-7841.

Yours truly,

Gunar Ozols
Senior Technical Analyst
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate