Non-Compete Clauses After Selling Your Business in Ontario

Buyers almost always ask the seller not to compete. They are paying for customers, relationships and know-how, and they do not want you opening across the street next year. If you are the seller, the questions are practical: how long, how wide, and will it hold up if it is ever tested?

Ontario has a rule banning non-competes in employment, with exceptions that touch business sales. This article walks through how those rules work, where a share sale differs, and how the tax works. Enforceability always depends on the exact wording and facts, so treat this as a map for your conversation with a lawyer.

The Ontario ban on non-competes

Since October 25, 2021, employers in Ontario are prohibited from entering into employment contracts or other agreements that include a non-compete. Agreements signed before that date are not caught. The ban is aimed at the employment relationship, but it matters in a sale because many sellers stay on to help with the transition.

That is why you need to know whether your covenant is an employment term or a term of the sale. The answer decides which rules apply.

The exceptions that matter in a sale

The ban does not apply where a business or part of a business operated as a sole proprietorship or a partnership is sold or leased, the seller immediately becomes an employee of the buyer, and as part of the sale the parties sign an agreement restricting the seller from competing with the buyer. The province's own guide recommends getting a lawyer to assess whether such an agreement is enforceable.

There is also an exception for executives. The ban does not prohibit non-competes with people who hold certain offices, including chief executive officer, president, chief administrative officer, operating officer, financial officer, human resources officer and any other chief executive position. The test is the office held, not the job title on a business card.

Selling shares: where the covenant often sits

The sale-of-business exception speaks of a business run as a sole proprietorship or partnership. A seller who sells shares of a corporation and then works for the buyer is therefore not clearly inside that exception unless they also fall within the executive exception. In practice, the non-compete may instead be placed in the share purchase agreement as a commercial covenant between seller and buyer rather than as an employment term.

This distinction is a reason to read where the clause appears. A restriction in your employment agreement with the buyer is treated differently from a covenant in the sale agreement. Ask your lawyer to review both documents together, since a buyer may try to put the same restriction in each.

How long and how wide?

There is no single number of years or kilometres that is safe. How a restriction is judged depends on your industry, where your customers are and how the clause is worded, so ask a lawyer to assess your specific terms.

• Time: is the period tied to how long it would take the buyer to secure the goodwill it bought?
• Area: does it match where you really did business, or is it wider?
• Activity: does it cover only the business being sold, or anything you might do?
• Who is bound: just you, or also family members and related companies?
• Remedies: what happens if the buyer says you breached it?

Tax on non-compete payments

An amount you receive for a restrictive covenant is generally included in your income. That can be a surprise if you assumed all of the price would be taxed as a capital gain.

There is a way to address this. Where the covenant is given on a sale of shares or a partnership interest to preserve the value of what was sold, you and the buyer can jointly elect on the prescribed form so the amount is added to your proceeds of disposition instead. The election is due by the filing-due date for your tax year that includes the grant date if you are resident in Canada, and otherwise six months after the grant date. Ask your accountant about the election before closing, so the agreement and the paperwork line up.

What to do next

• Find out whether the non-compete is in the sale agreement, an employment agreement, or both.
• Work out whether you are selling a sole proprietorship, a partnership interest or shares.
• Check whether you hold an executive office that could bring you under the executive exception.
• Ask whether any part of the price is allocated to the covenant, and how it will be taxed.
• Compare the time, area and activities with what you really did, and push back on anything wider.
• Have a lawyer review the clause before you sign.

Frequently asked questions