What happens if the allocation of price to a non-compete payment is challenged by the CRA?

If the CRA doesn't accept that an amount allocated to a non-compete or other restrictive covenant reflects genuine value for a real restriction, it can reallocate that amount back into the price for the shares, assets, or goodwill actually being sold. Because restrictive covenant payments and capital gains are taxed so differently, a reallocation in either direction can meaningfully change the seller's tax bill, and potentially the buyer's cost base in whatever it was supposedly paying for instead.

This kind of challenge tends to arise where the amount allocated to the covenant looks disproportionate to any standalone value the restriction genuinely provides the buyer — for instance, a large non-compete payment attached to a covenant that wouldn't realistically be worth much on its own, suggesting the allocation was chosen mainly for its tax effect rather than reflecting a real negotiation over what not competing is actually worth to the buyer.

Because the rules around restrictive covenant allocations are more technical than the general goodwill-versus-equipment split, and because a challenge can affect both parties' filings simultaneously, documenting the genuine commercial reasoning behind the covenant amount at the time the deal is negotiated, with a tax advisor's input, is the practical protection against a challenge showing up later.