13 January 1984 Income Tax Severed Letter

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.

REVENUE CANADA TAXATION MEMORANDUM REVENU CANADA IMPÔT

DATE January 13, 1984

FROM-DE CORPORATE RULINGS DIRECTORATE 
        J.F. Oulton 
        Tel. 5-1787

ATTENTION J.E. Grisé
          Appeals & Referrals Division

RE

This is in reply to your memorandum dated November 23, 1983 concerning the proper tax treatment of a payment received by XXXX

                                                                       It
is your proposal to treat-the payment as proceeds from the disposition of
a capital property and possibly as an alternative position, contend that the 
payment is an amount described in clause 14(5)(a)(iv)(A). We had previously 
given the opinion to the Toronto District Office that it was the latter 
provision which described the payment and reassessments were issued on that 
basis.

We have no objection to your proceeding along the lines suggested, since we feel that the payment should be taxed somehow, and the two proposals cited are the only viable possibilities. If it is not taxed, then we have a concern that it may result in tax avoidance schemes whereby "non-competition" clauses (in which one would agree not to compete in the future in a particular business never carried on and where there was probably never any intention to carry on that business) would form part of agreements in conjunction with arm's length sales of shares. Furthermore, it was more or less recognized as a possibility in our earlier memorandum that the payment could be treated as proceeds of disposition of a capital property.

Finally, with respect to the technical aspects of the proposal, we wish to make the following observations:

(2) There is really no jurisprudence dealing with non-competition payments in respect of an agreement to not carry on a business which a taxpayer never did carry on and undoubtedly didn't intend to carry on in the future. The cases quoted by XXXX in the December 3, 1981 letter (58 DTC 41 and 59 DTC 238) dealing with "property" do not help our case since the definition of "property" in the Act is basically the same now as it was in the former Act. However, those cases are only Tax Appeal Board decisions dealing with whether or not the properties were class 14 depreciable properties and also there was no taxation of capital gains in those years. Thus, in our opinion, the wording in the preamble to subsection 39(1) is broad enough to warrant the payment being accorded capital gains treatment, since none of the exclusions apply.

We trust that the foregoing comments will be of assistance.

R.M. Beith Director General Corporate Rulings Directorate Legislation Branch