CRA finds that a non-solicitation agreement was assimilated to a non-compete for purposes of the s. 56.4(7) exemption

Where s. 56.4(7) applies to an arm’s length share sale, it prevents s. 68 from applying to deem a portion of those proceeds to be paid for a non-compete covenant as described in the preamble to s. 56.4(7)(b). When presented with an agreement for the sale of the shares of a private company under which various shareholders were required to agree to a non-compete covenant (“NCC”) and a non-solicitation covenant (“NSC”), the Directorate found that “essentially, the terms of the NCC and NSC … reflect the conditions that one might normally expect to see in a typical non-competition agreement,” so that they “could be treated as a single RC [restrictive covenant] that is in respect of a non-compete covenant.” As the other conditions of s. 56.4(7) also were met, s. 68 did not apply.

The Directorate also indicated that it previously had considered that the similar description of a non-compete in s. 56.4(3)(c)(ii) would encompass an “undertaking not to solicit the clients of the corporation that is sold, but … [not] with respect to the value of an undertaking not to solicit the employees to change employment” and also a non-competition agreement that includes “both a non-competition and a confidentiality clause.”

Neal Armstrong. Summaries of 22 August 2017 Internal T.I. 2017-0688301I7 under s. 56.4(7)(b) and s. 56.4(3)(c)(ii).