2014-0547251C6 Q.3 - RESTRICTIVE COVENANTS

Principal Issues: Final answer to question 3 (Restrictive Covenants) of the November / December CRA National CTF Roundtable.

Position: See response.

Reasons: Administrative Position.

Author: D'Angelo, Sandro
Section: 56.4(2), 56.4(3), 56.4(6), 56.4(7), 68

2014 National CTF Canada Roundtable: November 30 – December 2, 2014

QUESTION 3. Restrictive Covenants

Question:

Would the CRA reconsider the position set out in 2014-0522961C6 to the effect that the allocation in an agreement of $1 of consideration to a restrictive covenant, merely to ensure that the agreement constitutes a legally binding contract, does not constitute proceeds for the purpose of paragraphs 56.4(6)(d) and (7)(e)?

CRA Response:

We have reconsidered our earlier response to this question as set out in 2014-0522961C6. The CRA is now prepared to accept that where a contract relating to granting a restrictive covenant uses words such as “$1 and other good and valuable consideration” simply to ensure that the contract is legally binding, and means in effect that “no more than a $1 worth of consideration” is conveyed by a purchaser for the restrictive covenant, such consideration will not, in and of itself, constitute proceeds received or receivable by the particular party for granting the RC for purposes of paragraph 56.4(6)(e) and paragraph 56.4(7)(d). However, this treatment is subject to the potential application of anti-avoidance rules such as subsection 56.4(10) of the Act where warranted.

If more than nominal consideration of $1 is paid for a restrictive covenant under the wording “$1 and other good and valuable consideration”, the exceptions set out in subsections 56.4(6) and (7) would not apply because the respective conditions in paragraph 56.4(6)(e) and paragraph 56.4(7)(d) would not be met. In such cases, the amount of proceeds (or any additional amount deemed to be proceeds by paragraph 68(c)) received or receivable by the taxpayer for the RC would be taxable as ordinary income under subsection 56.4(2) unless one of the three exceptions in subsection 56.4(3) otherwise applies.

Sandro D'Angelo
2014-054725

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