Comments on: Non-competes, again http://blog.simpsonwigle.com/2008/11/non-competes-again/ Tax News for Owner/Managers and Their Advisers Tue, 07 Feb 2012 15:27:50 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: John Loukidelis http://blog.simpsonwigle.com/2008/11/non-competes-again/comment-page-1/#comment-54998 John Loukidelis Tue, 25 Nov 2008 12:15:40 +0000 http://blog.simpsonwigle.com/?p=295#comment-54998 > Because I do not understand the new section (and have yet to speak > with anyone who confidently feels that he or she does) I have > reverted to my pre Fortino world in which I do not carve out > non-compete payments, take the position that a non-compete > obligation is only one of many obligations in the agreement and > cannot be valued in $ by CRA more readily than any other individual > obligation in the agreement, and hence all monies are received by > the vendor/shareholders as proceeds of disposition. If anyone > believes this to be wrong, naive or for any other reason will get me > in trouble, please set me straight. Pat, I think many or most lawyers are taking this approach. At the HLA seminar, several of the lawyers present volunteered that they are not receiving any instructions from accountants on how to work with the rules. The fact is that section 56.4 could be one of the biggest game- changers to come along in years, or it might be something that comes up only rarely, relatively speaking. The question is whether the CRA wants to start picking fights with taxpayers over non- competes. What is clear from the draft legislation is that the CRA will have the power to do so: the legislation amends section 68 of the Income Tax Act to allow the CRA to second-guess the allocation of the purchase price arrived at by arm’s-length parties so that a portion of the price is allocated to a restrictive covenant. > Because I do not understand the new section (and have yet to speak
> with anyone who confidently feels that he or she does) I have
> reverted to my pre Fortino world in which I do not carve out
> non-compete payments, take the position that a non-compete
> obligation is only one of many obligations in the agreement and
> cannot be valued in $ by CRA more readily than any other individual
> obligation in the agreement, and hence all monies are received by
> the vendor/shareholders as proceeds of disposition. If anyone
> believes this to be wrong, naive or for any other reason will get me
> in trouble, please set me straight.

Pat, I think many or most lawyers are taking this approach. At the HLA
seminar, several of the lawyers present volunteered that they are not
receiving any instructions from accountants on how to work with the
rules.

The fact is that section 56.4 could be one of the biggest game-
changers to come along in years, or it might be something that
comes up only rarely, relatively speaking. The question is whether the
CRA wants to start picking fights with taxpayers over non-
competes. What is clear from the draft legislation is that the CRA
will have the power to do so: the legislation amends section 68 of the
Income Tax Act to allow the CRA to second-guess the allocation of the
purchase price arrived at by arm’s-length parties so that a portion of
the price is allocated to a restrictive covenant.

]]> By: Pat Corless http://blog.simpsonwigle.com/2008/11/non-competes-again/comment-page-1/#comment-54997 Pat Corless Mon, 24 Nov 2008 20:02:11 +0000 http://blog.simpsonwigle.com/?p=295#comment-54997 I am not a tax guy but I have tried to read the section and just get bogged down as well. It occurs to me however that if, as you suggest, the effect of the exception is having the $ treated as proceeds of disposition (but for some reason not calling them that) then CRA must feel they need to graft on the rules which restrict the enhanced capital gains exemption to prevent anyone who got a non-compete from sheltering it. Otherwise you could create more exemptions without complying with the 2 year rule. Hence you see the 90% rule, bias against passive assets etc. Because I do not understand the new section ( and have yet to speak with anyone who confidently feels that he or she does) I have reverted to my pre Fortino world in which I do not carve out non-compete payments, take the position that a non-compete obligation is only one of many obligations in the agreement and cannot be valued in $ by CRA more readily than any other individual obligation in the agreement, and hence all monies are received by the vendor/shareholders as proceeds of disposition. If anyone believes this to be wrong, naive or for any other reason will get me in trouble, please set me straight. I am not a tax guy but I have tried to read the section and just get bogged down as well. It occurs to me however that if, as you suggest, the effect of the exception is having the $ treated as proceeds of disposition (but for some reason not calling them that) then CRA must feel they need to graft on the rules which restrict the enhanced capital gains exemption to prevent anyone who got a non-compete from sheltering it. Otherwise you could create more exemptions without complying with the 2 year rule. Hence you see the 90% rule, bias against passive assets etc.

Because I do not understand the new section ( and have yet to speak with anyone who confidently feels that he or she does) I have reverted to my pre Fortino world in which I do not carve out non-compete payments, take the position that a non-compete obligation is only one of many obligations in the agreement and cannot be valued in $ by CRA more readily than any other individual obligation in the agreement, and hence all monies are received by the vendor/shareholders as proceeds of disposition. If anyone believes this to be wrong, naive or for any other reason will get me in trouble, please set me straight.

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