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A tax-free benefit on the sale of a business
It is normal on the sale of a business that the vendor will agree with the purchaser that the vendor will not set up or operate a business in competition with the purchaser.
A recent ruling by the Federal Court of Canada has confirmed that the price obtained by the vendor for the Non-Competition Agreement does not constitute proceeds from the sale of “property” and as such, is not subject to taxation.
Where a vendor would be subject to recapture or a capital gains tax on the sale of a business, the vendor would be well advised to provide in the agreement of purchase and sale that a specified (and reasonable) portion of the sale price will be attributed to the Non-Competition Agreement.
On the other hand, the purchaser should be well aware that whatever portion of the sale price is attributed to the Non-Competition Agreement will not be subject to depreciation and as such, will not be available to reduce the purchaser’s future taxable income.