Taxation of non-competition payments

If you receive an amount in exchange for agreeing not to compete (for example, on the sale of shares or assets of your business), the amount received must be treated as ordinary income, subject to two main exceptions:

1. You and the purchaser jointly elect to have the amount treated as eligible capital property; or
2. You sell shares of a corporation or an interest in a partnership to an arm’s-length person. In this case, the amount will be treated as additional proceeds of disposition, unless the covenant has value over and above this amount. If so, the excess will be reported as income. You and the purchaser must also jointly elect to have this exception apply.

Tax tip: If you’re thinking of entering into a non-competition agreement on the sale of your shares or your business, you should consult your tax adviser to determine the tax consequences.