Potentially yes for a selling shareholder — ITA s.56.4(3)(c) can treat the payment as proceeds of disposition on the sale of their shares rather than as separately taxed income — but the identical payment to a non-shareholder employee has no equivalent route.
Short answer
The Income Tax Act's default rule is that a restrictive covenant payment, such as money paid for a non-compete, is fully included in the recipient's income under s.56.4(2). Section 56.4(3)(c) carves out an exception for a payment that directly relates to the taxpayer's disposition of shares or a partnership interest that is an “eligible interest” in the business the covenant protects. Whether that exception is available turns on whether the payment is genuinely proceeds of disposition to a selling owner, not a payment for a signature alone.
ITA s.56.4(1) defines an “eligible interest” as capital property that is “(a) a partnership interest in a partnership that carries on a business; (b) a share of the capital stock of a corporation that carries on a business…” ITA s.56.4(1) s.56.4(3)(c) then says the ordinary income-inclusion rule “does not apply” where, subject to the anti-avoidance rule in s.56.4(9), “the amount directly relates to the particular taxpayer’s disposition of property that is, at the time of the disposition, an eligible interest in the partnership or corporation that carries on the business to which the restrictive covenant relates.” ITA s.56.4(3)(c) A selling shareholder's payment can fall inside that carve-out because their shares ARE an eligible interest.
A non-shareholder employee has no eligible interest to dispose of — no shares the payment can be “proceeds of disposition” for. Paying that employee for a personal non-compete stays inside the general s.56.4(2) inclusion rule, with no s.56.4(3)(c) route available, however the payment is labelled. The exception tracks a real disposition of a real eligible interest, not who signs.
Even where s.56.4(3)(c) applies, s.56.4(13) requires a prescribed-form election and a filing deadline — it is not automatic on the facts alone. And s.56.4(9) can pull the exception back out of reach where an amount is, in substance, employment or business income dressed up as proceeds of disposition.
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