Restrictive covenant


The topic, Restrictive covenant, is under review and the present content on this page may not reflect the accurate revised legislation.

Any amount received or receivable for a restrictive covenant will be treated as ordinary income for income tax purposes. This applies to amounts received or receivable by a taxpayer after October 7, 2003, other than to amounts received before 2005 under a grant of a restrictive covenant made in writing on or before October 7, 2003, between the taxpayer and a person with whom the taxpayer deals at arm's length.

A restrictive covenant affects or is intended to affect, in any way, the acquisition or provision of property or services by the taxpayer or by another taxpayer that does not deal at arm's length with the taxpayer. It can take the form of either:

Restrictive covenants may frequently be found in the terms of an agreement dealing with the sale or acquisition of a business, corporate shares, or a partnership interest. Such covenants usually last for a specified period of time and may apply to a specific geographic area.


There are three exceptions to the proposed general income inclusion rule. The exceptions, listed below, only apply to the seller (grantor) of a restrictive covenant who deals at arm's length with the person to whom the covenant was granted (sold):


For the second or third exception to apply, the payor and grantor must each make an election and include it in their income tax return for the tax year in which the restrictive covenant was agreed upon.

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