25 October 1994 External T.I. 9426485 - HAA 7781-4

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

XXXXXXXXXX			5-942648

Attention: XXXXXXXXXX

October 25, 1994

Dear Sirs:

Re: Section 42 of the Income Tax Act (the "Act")

This is in reply to your letter dated October 14, 1994, wherein you requested our opinion with respect to the application of section 42 of the Act in a particular fact situation.

The particular circumstances outlined in your letter appear to be actual transactions involving specific taxpayers. As mentioned in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, as amended by Special Release dated September 30, 1992, it is not the practice of this Department to provide opinions with respect to proposed transactions other than in the form of advance income tax rulings. On the other hand, the tax consequences of completed transactions are best determined by our District Offices in the course of tax audits. This Directorate is therefore not in a position to give a definitive response to your inquiry. However, we are prepared to offer you the following general comments which may be of some assistance.

As mentioned in paragraph 6 of Interpretation Bulletin IT-330R, this Department is of the view that section 42 of the Act apply when a taxpayer receives an amount for a non-competition covenant upon the disposition of shares of a corporation. When a taxpayer is disposing of the shares of a corporation as well as land and building held personally and used in the business of the corporation, we are of the opinion that a non-competition covenant will generally be given with respect to the sale of the shares and, if this is the case, section 42 of the Act should apply. This situation is different than the one described in paragraph 5 of Interpretation Bulletin IT-330R where a taxpayer is disposing of the assets of an unincorporated business. In such circumstances, this Department considers the non-competition covenant to be in respect of the disposition of goodwill and, accordingly, subject to the application of section 14 of the Act rather than section 42 of the Act. It is, of course, necessary to examine all the relevant facts, circumstances and documents to determine in a specific case whether a non-competition covenant relates to a specific property which has been disposed.

If an amount received by a taxpayer in respect of a non-competition covenant is included in the proceeds of disposition of shares in accordance with section 42 of the Act, it is our opinion that the taxpayer shall be entitled to claim a deduction under subparagraph 40(1)(a)(iii) of the Act if a portion of that amount is not due before the end of the relevant taxation year.

In our opinion, the amount paid by a taxpayer with respect to a non-competition covenant, in circumstances similar to those described in your letter, will generally be considered to be incurred in respect of the acquisition of shares and should therefore be included in the cost of the shares.

As mentioned in paragraph 21 of Information Circular 70-6R2, the above opinions are not rulings and, accordingly, they are not binding on this Department.

Yours truly.

for Acting Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Policy and Legislation Branch