27 March 2000 GST/HST Interpretation 8293 - Non-Competition Agreement

Dear XXXXX

Thank you for your letter of July 22, 1999 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a non-competition agreement.

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

Our understanding is that X is an individual who until very recently held the position of XXXXX of XXXXX ("ABC"). X was also the controlling shareholder of ABC. XXXXX ("DEF") has recently purchased XXXXX of the shares of ABC from X. X is not registered for GST/HST purposes, nor is XXXXX engaged in commercial activities. Both ABC and DEF are engaged in commercial activities and registered for GST/HST purposes.

X will not be employed by DEF. DEF and X have entered into a non-competition agreement under whose terms X agrees not to compete with DEF's business in a given geographical area for a specified period of time. X has entered into the agreement in XXXXX capacity as an individual. DEF will pay XXXXX XXXXX X is now acting in the capacity of XXXXX of another entity; that is, as an employee/officer for GST/HST purposes, and is not engaged in making taxable supplies in the course of commercial activities in XXXXX own right.

Interpretation Requested

You have inquired whether the payment by DEF to X would attract GST/HST; that is, whether the entering into, or abiding by the terms of, the non-competition agreement constitutes a supply made by X in the course of a commercial activity.

Interpretation Given

Based on the information provided, the payment by DEF to X will not attract GST/HST; that is, the entering into, or abiding by the terms of, the non-competition agreement does not constitute a supply made by X in the course of 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 X, an individual shareholder, is agreeing not to compete. XXXXX was not engaged in the business. It was ABC that was carrying on the business. XXXXX has no commercial activity either before or after the sale of the shares. Therefore X, by agreeing not to carry on a business, cannot be considered as making a supply in the course of a commercial activity. On the contrary, XXXXX is agreeing not to carry on a business and in fact has become an employee/officer of another company.

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.

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
GST/HST Rulings and Interpretations Directorate