Multiple operating subsidiaries can preclude electing to avoid income treatment of non-compete proceeds

Mr. X sells Holdco, holding all of Opco 1 and 2, in an arm’s length sale and grants a non-compete covenant respecting the businesses of Opco 1 and 2.  The singular-includes-plural rule (I.A., s. 33(2); Rye) could be applied to the French version of s. 56.4 to conclude that Mr. X’s shares of Holdco qualify as deriving 90% or more of their fair market value from "a" corporation carrying on the business to which the non-compete relates – so that an election potentially could be made under s. 56.4(3)(c) to avoid income treatment of the portion of the sales proceeds allocated to the non-compete.  However, the English version more emphatically states that Holdco must derive its fmv from "one other corporation."  Without even referring to the English version, CRA concluded that the s. 56.4(3)(c) election was not available for this two-Opco reason.  No policy discussion – we just read the words.

However, if there was an agreement with Buyco not to allocate anything to the non-compete, CRA considered that the exemption in s. 56.4(7) potentially would be available – without stipulating that it would be necessary for Holdco (whose goodwill under that provision is required to be preserved by the non-compete) to continue in existence in Buyco’s hands.

Although two relieving provisions in s. 56.4 effectively refer only to non-compete covenants, the giving of a non-solicitation covenant as well would not be problematic if it were sufficiently integrated with the non-compete.

If Holdco sold Opco 1 and 2, with Mr. X still granting the non-compete covenant to Buyco, the election in s. 56.4(3)(c) would not be available as "it is Mr. X, not Holdco, who provides the restrictive clause to Buyco."

Neal Armstrong.  Summaries of 11 October 2013 APFF Roundtable Q.19, 2013-0495691C6 F under s. 56.4(3)(c) and s. 56.4(7)(f).